Five FAQ on employment law for startup companies

Blogs May 14, 2019

Employment Law

Startup businesses are often busy with putting their core business idea out there and gathering funding for it. At the time, employment law might seem like a boring aspect even though it is a very important part of the daily life of a business. Especially in a startup, employment law should be payed attention to, because finding the right people (and keeping them) plays a key role and even small mistakes can become very expensive for the company in the long run.

Taking into account a few employment law issues will take you far. We have gathered a list of things you should take into consideration when you are recruiting your first employees.

1. Employee, independent contractor or something in between?

Many startups can find it tempting and more flexible to make a contract with an independent contractor rather than hiring employees of their own. In this way it is possible to test if the co-operation works and if everything goes as planned the person could later be hired by the company. Even though this might seem like a good idea, it includes some risks. Work that seems like a subcontract or freelance job or a job that is being agreed as this can in fact constitute an employment relationship if the characteristics of an employment are filled. Especially subcontracting from a sole trader or from a so called one-person company contains a risk that the co-operation will later be seen as an employment by the tax or occupational safety authorities or the court.

It is important to take into consideration from the beginning if it is genuinely a case of an independent contractor or is the job being executed under the direction and supervision of the employer. The evaluation must always be done case-by-case. Sometimes some of the determining factors can be only seen at a later stage of the co-operation. It is good to be aware that a situation where a person is operating with a trade name and employing him or herself as the only employee by offering the service for one employer (who also for instance defines the working hours or supervises the work specifically) is easily seen as an employment.

The commission of the work and the nature of it must always be considered altogether . Before starting an employment, it is important to choose the right form of contract for each occasion.

2. Use a good employment contract

The composition of an employment contract may seem simple. Even though you can find templates for nearly everything on the internet, an employment contract custom-made for a specific company is something worth investing in right from the beginning. A contract made in the beginning of an employment obligates the employer, and the employee primarily does not have an obligation to make another employment contract during the employment. At the latest, when the company is expanding its business, it usually needs to update its employment contract templates. From the very beginning it is necessary for the company to protect its trade secrets and intellectual property rights. If the employee does not accept the new employment contract, the possibilities for the employer to change the terms of the contract unilaterally are very limited.

Managing Directors are an exception to this. The Employment Contracts Act is not applied to Managing Directors and he or she is not therefore an employee with an employment. If an employee of a company is appointed Managing Director, there should be a Managing Director Contract done with him or her, instead of continuing with the old employment contract. Otherwise there might be disagreements in the interpretation of both the terms and the termination of the contract and rights and obligations regarding this.

Therefore, it is important to right from the beginning invest in a good and comprehensive employment agreement template where the post-employment confidentiality obligation and the transferring of intellectual property rights to the employer are taken into account.

3. Within the scope of the Working Hours Act or not?

One important question when it comes to startups is the monitoring of working hours. The most essential employment legislation, e.g. the Employment Contracts Act, the Working Hours Act and the Occupational Safety and Health Act, is mandatory. This means that it is not possible to agree on terms that reduces the ones in the legislation. This kind of a clause is null and void and the employee can seek for compensation based on this. Employees of a startup often work very independently, and their working hours are rarely monitored. The Working Hours Act is however very strict when it comes to this. Because most employees are within the scope of the Working Hours Act, their working hours should be monitored. It is therefore important to be precise with the working hours right from the beginning.

4. What is a collective agreement?

In addition to employment legislation, the collective agreement sets out the basic employment standards for that sector, such as the minimum rates of pay and various bonuses. . Many collective agreements are generally binding, meaning that the terms must be followed at every workplace in the sector or industry in question . This means that a startup must respect the minimum employment standards that are guaranteed under the collective agreement, even when the employer does not belong to an employer organization. For instance, in the technology and IT sector collective agreements must be followed.. Preconditions should be evaluated strictly and by taking into account the business of the company.

5. Preparing for incovenient matters

Unfortunately, things don’t always go as planned. It turns out that the hired employee isn’t after all abreast to his or her tasks, new funding round doesn’t bring results and conflicts are formed between the employees. Even though these matters are inconvenient, one must be prepared for them and interfere with them fast enough. It might feel unnecessary to form instructions for example warnings and layoffs when everything is going great and everyone is getting along with each other, However, these matters should be thought off beforehand and not when the situation is already on. Especially when the business of a company is growing it is important to remember that the employer has a right and anobligation to interfere with faults and treat all employees equally.

More information about the content and working hours of an employment agreement and other responsibilities of an employer can be found from the site of Fondia’s VirtualLawyer. Fondia’s lawyers can help you compose agreements and instructions that are suitable for your company.

These matters are also covered on the FIBAN’s Nordic Angel Program Training at Fondia on Thursday. Read more here!