4: The New Hire: obligations and liabilities

As an employer, you will have many legal obligations towards your employees. Unfortunately, many startups or small businesses overlook these and unnecessarily expose themselves to potential liabilities and penalties. These liabilities may even affect the valuation of the company in a sale or financing transaction.

Here are some of important issues to consider:

The employment contract

The employment relationship should be documented right from the outset. An Employment Contract sets the obligations and expectations of the company and the employee in order to minimise potential disputes. The document is useful if you want to dissuade certain new hires from leaving your company too soon, disclosing confidential information about your business, or going to work for a competitor.

Regulatory issues

There is a whole raft of legislation that companies have to comply with when employing individuals, including obligations with respect to:

• Employee rights and benefits
• Health and safety of employees
• Complying with various discrimination legislation
• Reporting employee remuneration for tax purposes

Employers need to be aware of their obligations under these regulations.

Mischaracterising employees and consultants

Employee benefits can account for a significant part of their total remuneration package. Because of this, many businesses choose to hire workers with the status of “independent contractors” or “consultants”, rather than “employees”.

This is intended to save costs, since many statutory benefits only apply to individuals who are classified as employees. Consultants or independent contractors do not get these benefits.

However, if a dispute arises, it makes no difference what the parties have chosen to call themselves in a contract. The law looks into the substance of the relationship to determine whether that individual is a true consultant or, in substance, an employee.

A company may face significant liabilities if it is not meeting its obligations as an employer if it is determined that a consultant is in reality an employee. Therefore it is imperative to know the difference!

Common issues that startups usually overlook when hiring a new employee:

• Specifics of any benefits.
• Limitation of entitlements upon termination of employment.
• Limitation on the employee’s ability to compete with the employer’s business once the employee leaves their employment.
• Protection of the employer’s intellectual property, client lists, and other confidential information.
• Ownership of the employee’s work product.