Hiring 101 — Employment Contracts

As soon as someone has accepted a job offer from you, a contract exists between the two parties.

The terms and conditions of employment can be agreed in more detail at a later stage in a more detailed document that we define here as “written employment terms”. (It could equally be called a “service agreement” or an “employment contract”).

1: When making a job offer, do so in writing

It’s best to make the offer verbally at first to gauge the reaction of the candidate. If they hesitate, you’ve then got a chance to adapt your offer. It allows the candidate to ask questions and make a decision quickly. It’s also more personal and shows that you care.

It’s important to then follow up in writing to avoid any confusion at a later date.

In a written offer, be sure to include;

• Their job title
• Their location
• Who they’re reporting to
• Their gross salary
• Their probation period
• Their notice period (during and after probation)
• Number of days holiday per year
• Any benefits

Do say that the offer is “subject to satisfactory references and background checks”, because this gives you a get out clause if you uncover something problematic.

On stock options, it depends on the company and what has been agreed with the board as to whether or not you can commit to these in the written offer. It may be that board’s approval is required.

If you are able to mention stock options, mention the actual number of options and how this presently translates to a percentage of the fully diluted stock and the vesting period. The number is important and is what you are committing to, because percentages are more easily open to misinterpretation.

2: Make sure every employee has written employment terms

This is rule number one. There are lots of different reasons why, here’s a few.

Firstly, it’s the law. In addition…

• Intellectual property needs to be assigned to the company. In a startup this is crucial. You’re nothing without your IP and if a rogue employee can claim they own the product because you didn’t assign the rights in the written terms, you’ve only yourself to blame.
• Where people work after leaving you (yes, some do leave unfortunately) can be important. You might want to have some restrictions. These are increasingly difficult to enforce but important to put in.
• When you raise another funding round, your investors will want to see a data room as part of the due diligence. They will expect to see all your employees with written terms (for the two reasons above) and if you don’t want to derail the investment process, get your house in order from day one.

3: You don’t need to provide written employment terms prior to the start date (but it’s a good idea to do so)

By law you need to provide the written employment terms no later than 2 months after the start date. However, most candidates will be nervous about resigning from their current role to join you unless they’ve seen and agreed to the detailed terms.

4: Keep your written terms locked away

Written employment terms contain personal data. Data protection legislation means that you are allowed to store personal data but you are required to keep the data secure. See: Data privacy issues to be aware of

“Keep employment records secure. Keep paper records under lock and key and use password protection for computerised ones. Make sure that only staff with proper authorisation and the necessary training have access to employment records.” — from the Quick Guide to the Employment Practices Code by the Information Commissioner’s Office

5: Do not includes sales commissions, put these in a schedule

Sales commission structures will change from time to time. If you put them in the employment terms they will be contractually binding and therefore difficult to change without consent from the sales person.

It’s better to set out a schedule to the written terms which states clearly that the commission scheme details are indicative and are subject to chance without notice at any time.

6: Do not include stock options in the employment terms

These should be referenced in an Option Granting Agreement.

7: Create a body of policies and procedures that are separate from the written employment terms.

In the UK, a company has a certain degree of freedom to determine policies and procedures that are relevant for their organisation.

There are certain obligations foreseen by law that must be adhered to and then some companies choose to offer a more favourable set of policies above and beyond what is required by law.

If you put the policies into the written employment terms, they are more difficult to change at a later date. Keeping them separate, perhaps in an Employee Handbook, is the more practical solution.

In terms of what policies to cover, this is a minimum set to get started with;

• Disciplinary procedure
• Anti-harassment
• Business ethics / anti-bribery
• Equality and diversity
• Sickness absence

There are many more policies that you probably will need to add as the company gets larger, but to get started these are the essential ones.

Once done, they’re a very useful set of tools as you grow and scale the business.