Courtesy navigation

Employment law - a guide for start-up businesses

Although the laws covering employment are extensive, the main issues for small and start-up businesses are fairly straightforward. 

By sticking to a few rules, you can avoid most of the pitfalls and prevent problems arising. This briefing focuses on four key areas:

  1. Employment contracts.

  2. Discrimination.

  3. Sickness.

  4. Dismissals.

1 Employment contracts

1.1 Every employee has a contract of employment, either in writing, oral or implied. You should assume that everyone who works for you is an employee, unless you have good reason to think otherwise.

  • Partners in a partnership are not employees, but salaried partners may be.

  • Consultants and sub-contractors may not be employees, even if taxed under PAYE.

1.2 The terms of the contract are governed by what you have agreed with the employee. 

The terms will usually be covered by:

  • The letter you send making a job offer.

  • The written statement you give an employee.

  • The implied terms of the contract.

1.3 You need to seek agreement with employees if you want to make significant changes to their contracts.

  • Terms and conditions of employment cannot usually be changed to the employee’s detriment if all or part of a business is sold or contracted out.

2 Terms and technicalities

2.1 You must give every full-time or part-time employee a written statement of their terms of employment. 

  • A new employee must be provided with a written statement of employment within two months, as must any existing employee who asks for one.

2.2 The written statement must include a number of specific details.

  • Names of employer and employee.

  • Employment start date and end date if the employment is not permanent.

  • Job title and description of main duties.

  • Place of work.

  • Pay rate and how often paid.

  • Hours of work and holiday entitlement.

  • Notice periods.

  • Sick pay and pension arrangements.
  • Grievance and disciplinary procedures.

  • Details of any collective agreements.

2.3 The written statement can refer to other documents (eg a disciplinary manual).

  • These other documents must be made available for the employee to read.

2.4 Some common sense terms are implied.

  • The employer must ensure employees’ health and safety at work, have a safety policy and carry out risk assessments. You must treat employees with respect. Harassment, bad language or humiliating treatment may lead to claims for constructive dismissal and discrimination.

  • Employees must obey reasonable instructions, use skill and care in their work, and act faithfully and honestly.

2.5 Put all the important terms in writing. Without a written agreement, you will lose three advantages:

  • Flexibility (eg the ability to move an employee to a different job).

  • Certainty (eg if anything is unclear, this could lead to disputes).

  • Protection when an employee leaves (eg terms preventing former employees from revealing confidential information).

Hours and leave

Most employees have the right to a maximum 48-hour working week, averaged over 17 weeks.

  • Workers who agree to work more than 48 hours must sign a written agreement.
  • Employers must keep records and must not press workers to sign opt-out forms.

  • Travel to and from the first and last client of the day may count as working time for workers who have no fixed place of work. You should check if this affects any of your workers.

All workers are entitled to 5.6 weeks’ annual leave pro rata.

New parents are entitled to take time off for the birth and care of their children.

  • Mothers have a right to ordinary and additional maternity leave, regardless of length of service.
  • Fathers (or those with responsibility for bringing up children) who have worked continuously for at least 26 weeks by the end of the 15th week before the baby is due can take up to two weeks’ paid paternity leave.

  • One member of an adopting couple can take up to 39 weeks’ paid ordinary adoption leave and 13 weeks’ unpaid additional adoption leave, if they have worked the qualifying period by the time the child is matched.

  • Qualifying parents can opt to take Shared Parental Leave and Shared Parental Pay. The child’s mother (or adoptive parent) must be eligible for either maternity leave or pay; maternity allowance; or adoption leave or pay and have returned to work. Eligible employees can take the remaining leave (up to a maximum of 50 weeks) as SPL and the remaining pay (up to a maximum of 37 weeks) as ShPP.
  • Fathers, parents and partners are entitled to take unpaid time off to attend up to two ante-natal appointments.

All employees with at least 26 weeks’ service are entitled to make one flexible working request per year.

  • You must consider any request and may only refuse for clear business reasons.

All employees are entitled to dependant care leave.

  • Workers can take ‘reasonable’, unpaid time off to deal with an emergency involving a dependant.

3 Discrimination

3.1 It is illegal to treat someone less favourably on the basis of their race, sex or gender reassignment, age, disability, sexual orientation, religion, philosophical belief, membership or non-membership of a trade union, marital or civil partnership status, pregnancy, maternity care responsibilities or part-time status.

3.2 Requirements or conditions of employment should not discriminate against any group.

Do not advertise or ask interview questions in a manner that discriminates.

3.3 Men and women are entitled to equal pay for similar work, or work of the same value.

  • Promotion and training opportunities must also be non-discriminatory.

3.4 Positive discrimination (eg in favour of women) is also likely to be illegal, because it is discriminating against someone else.

Training may be an exception.

3.5 You can be responsible for discrimination practised by employees, including sexual harassment or racial abuse.

3.6 Employment tribunals can award unlimited compensation to victims of discrimination.

Handle with care

A pregnant woman has a number of rights:

Paid time off for ante-natal care.

26 weeks’ statutory ordinary maternity leave and 26 week’s additional maternity leave (AML), during which all her contractual rights (except remuneration) continue.

  • It is illegal to let a woman return to work within two weeks of childbirth (four weeks for factory workers).

Statutory maternity pay (SMP), if she has completed 26 weeks’ service by the end of the 15th week before the expected week of childbirth.

  • SMP is payable for 39 weeks.

  • Some SMP may be deductible from your employer’s NI contributions. Phone the HMRC employers’ helpline for details (0300 200 3200).
  • Women who are ineligible for SMP may be eligible for maternity allowance from Jobcentre Plus.

The right to claim unfair dismissal, if she is dismissed for any reason to do with the pregnancy or childbirth.

  • If she is dismissed, you must give written reasons, without having to be asked.

4 Sickness

Workers are entitled to statutory sick pay (SSP), usually after four or more days’ sickness.

4.1 SSP is the minimum level of payment you must make to any qualifying worker.

  • SSP is payable for up to 28 weeks for any one period of sickness.

  • The current payment is £88.45 per week subject to income tax and employee’s NI.

  • Many employers pay higher sick pay.

4.2 Most workers who are unfit to work will qualify for SSP.

  • They must earn more than the NI lower earnings limit (£112).

  • Part-timers, full-timers and agency workers qualify, as length of service is irrelevant.

4.3 The ‘fit note’ is issued by doctors and indicates whether an individual is:

  • Not fit for work.

  • May be fit for work.

A ‘may be fit for work’ statement would be given if the doctor believes your worker’s health condition may allow them to work, if you give them appropriate support.

Employees who have been off work for four weeks or more can now be referred to Fit for Work ( The scheme offers free, practical occupational health advice to help the employee return to work.

4.4 You can withhold SSP if you reasonably suspect the worker is not ill.

  • A worker who has recently drawn a statutory benefit (eg incapacity or maternity benefit) may not qualify.

4.5 If you want to stop paying SSP to someone who has been away more than four times in a year, seek an adjudication from HMRC Medical Services.

  • You need the worker’s written consent. A refusal may justify stopping SSP.

5 Dismissals

5.1 If the contract does not specify a notice period, an employee is entitled to a ‘reasonable period of notice’. Employees’ are entitled to at least the statutory minimum of one week after one month’s employment increasing at the rate of one extra week per year, to a maximum of 12 weeks’ notice.

5.2 If you dismiss an employee without the right notice, this will be wrongful dismissal.

  • The employee is usually entitled to normal remuneration (both salary and benefits) during the notice period. This applies even if you wish to end the employment immediately, unless there was gross misconduct or the employee suffers no financial loss (eg by immediately starting a new job at a better rate of pay) or if you have reserved the contractual right to pay salary in lieu of notice without benefits.

5.3 If an employer breaches the contract, the employee may be able to resign immediately and claim constructive dismissal if the breach was material, going to the root of the contract.

  • For example, if you reduce pay without agreement, or tell the employee to resign.

5.4 An employee with two years’ continuous service who is dismissed without a fair reason and reasonable treatment can claim unfair dismissal.

  • You are required to act ‘fairly and reasonably’ when dismissing an employee (or carrying out any other disciplinary procedure).

    See the Acas Code of Practice on Disciplinary and Grievance Procedures.

  • If a dismissal is unfair, an employee can ask the tribunal to order re-employment or award compensation. The basic award is £14,370 (depending on age and length of service) and compensation for financial loss up to a maximum of £78,962.
  • If you unreasonably failed to follow the Acas Code, the compensation awarded against you can be increased by 25%.

    Equally an employee that unreasonably failed to follow the code could have any compensation reduced by 25%.

Where possible, seek professional advice before dismissing an employee.

5.5 If an employee decides to leave your business, you can usually require him or her to work out the full notice period.

  • If the employee refuses to work out the notice period, he or she will not be entitled to be paid for it.

  • If you insist the employee must stop work immediately, or before the notice period ends, you must still pay what would have been earned during the notice period.

  • If you both agree that the employment should end straight away, no further payment needs to be made.

5.6 Employees with less than two years’ service are not entitled to redundancy pay.

  • Tax is not payable in respect of statutory redundancy pay. 

  • Payments to an employee in lieu of notice are tax-free in some circumstances (under £30,000). Check with your accountant. From April 2018, employer’s National Insurance will be payable on pay-offs above £30,000 where tax is also due.

  • Avoid claims that a redundancy is unfair dismissal by ensuring that it is genuine. In general, the job must have disappeared.

  • The employer must select employees on a fair and objective basis, after reasonable consultation, with adequate notice and a fair appeals procedure.

  • You are no longer entitled to ‘retire employees’ and you can only make them redundant after a fair procedure.

6 Other rights

6.1 Employees have the right to a minimum wage which stands at £7.20 for employees aged over 25 (under the new National Living Wage) and £6.70 for employees aged 21 to 24.

  • There are lower rates of national minimum wage (NMW) of £5.30 for those aged 18 to 20, £3.87 for those aged 16 and 17 and £2.30 for apprentices under the age of 19, or older but in the first year of their apprenticeship.
  • NMW rates will increase to £6.95, £5.55, £4.00 and £3.40 respectively from October 2016.
  • Casual staff, agency staff and home workers also have a right to this wage.
  • Service charges, tips, gratuities and cover charges paid to a worker through payroll do not count towards NMW.

6.2 Each employee must get a pay statement.

  • This must show total gross pay, deductions and net pay.

  • Deductions must be itemised. Apart from income tax and National Insurance (NI), deductions can only be made with the employee’s agreement or to correct previous overpayments.

6.3 When a business is transferred to a new owner, all employee rights usually remain.

6.4 Trade unions and their members have extra rights (eg time off for union duties).