November 6, 2025
Bringing on your first employee is one of the most exciting milestones in a startup’s journey. It signals growth, momentum, and the beginning of building something bigger than yourself. But while the decision to hire often comes from enthusiasm and vision, it can also introduce unexpected legal challenges. Many first-time employers make mistakes not out of negligence but out of inexperience. Understanding your legal obligations early can save you from costly and time-consuming errors later on.
This guide explores the most common legal pitfalls startups face when hiring their first employee and how to avoid them.
One of the biggest mistakes new employers make is relying on verbal agreements or informal arrangements. Even if your new hire is a friend or a former colleague, failing to put things in writing can create confusion over responsibilities, pay or notice periods.
By law, employees are entitled to a written statement of employment particulars within two months of starting work. This document outlines essential terms such as job title, hours, pay, holiday entitlement and notice periods. A comprehensive employment contract goes a step further, detailing confidentiality clauses, intellectual property rights and post-employment restrictions.
Consulting professionals like Sherborne Solicitors for Employment Law ensures that your contracts meet legal requirements and protect both parties fairly.
Another common error is misclassifying workers as self-employed contractors when they are, in reality, employees. While hiring a contractor can seem more flexible and cost-effective, if the working relationship resembles that of an employee with set hours, ongoing responsibilities, and company control, HMRC may disagree.
Misclassification can lead to penalties, unpaid tax liabilities and even claims for employment rights such as holiday pay or unfair dismissal. It’s vital to correctly determine employment status before work begins and to review these arrangements regularly as your business evolves.
Hiring an employee makes you responsible for operating PAYE (Pay As You Earn) and making National Insurance contributions. Many startups underestimate the complexity of managing payroll and accidentally fall behind on reporting or payments.
You’ll need to register as an employer with HMRC, deduct the correct tax and National Insurance from employee wages, and submit Real Time Information (RTI) reports each time you pay staff. Using a reliable payroll system or outsourcing to an accountant can simplify the process and ensure compliance.
Employment law applies to businesses of all sizes, even those with just one employee. From the moment recruitment begins, you are bound by laws covering equality, data protection, and fair treatment. Discriminatory language in job adverts or interviews can lead to claims, even before a candidate is hired.
You must also comply with right-to-work checks, provide statutory sick pay, and ensure safe working conditions. A small oversight can have big legal implications, so familiarising yourself with these obligations early is essential.
Startups often assume that formal policies are only necessary for larger companies. However, having clear workplace policies, such as disciplinary and grievance procedures, equal opportunities, and health and safety, helps protect both you and your employee from misunderstandings.
Written policies provide structure and consistency, especially as your team grows. They also demonstrate professionalism and fairness, key traits that attract top talent and investors alike.
As an employer, you will hold sensitive information about your employee, including personal details, bank information, and health data. Under GDPR, you must handle this information securely, limit access, and have a lawful basis for processing it.
Startups that fail to take data protection seriously can face fines and reputational damage. Create a data protection policy and ensure your employee understands their responsibilities when handling customer or company data.
Even small businesses with one or two employees must comply with workplace health and safety regulations. Many startup founders working from home or shared spaces assume these rules do not apply, but the law makes no such distinction.
You are legally responsible for providing a safe and healthy working environment, which includes carrying out risk assessments, providing suitable equipment, and offering appropriate training. Taking these steps not only prevents accidents but also builds confidence among your employees, showing that you value their wellbeing.
Probationary periods are an important yet often forgotten tool for startups hiring their first staff member. Without a clear probation policy, it can be difficult to manage underperformance or determine if the role is the right fit.
Set a defined probation period in the contract, usually three to six months, and communicate clear objectives and feedback throughout. Documenting performance reviews during this time helps you make informed decisions and maintain fairness if issues arise.
Beyond legal obligations, your first hire sets the tone for your company culture. Taking time to establish clear communication, feedback channels, and fair working practices creates a strong foundation for growth. Legal compliance and human connection go hand in hand; one supports structure, the other drives motivation.
Yes, it is essential. You are legally required to provide a written statement of employment particulars within two months. A full contract offers greater protection by detailing things like confidentiality, intellectual property, and notice periods, preventing future disputes.
The biggest risk is financial. If HMRC determines your contractor is actually an employee, you could be liable for backdated PAYE tax, National Insurance contributions, and penalties. The individual could also claim for employment rights like holiday pay and sick pay.
Yes, they are highly recommended. Basic policies on health and safety, data protection, and disciplinary procedures establish clear expectations from day one. They provide a professional framework that protects both you and your employee as your business grows.
Start by familiarising yourself with the basics on the HMRC and Acas websites. For critical documents like employment contracts, it is wise to seek professional legal advice. Resources from platforms like Online Business Startup can also guide you through the initial steps.
Yes, your health and safety responsibilities extend to remote workers. You must ensure their home working environment is safe and suitable. This typically involves carrying out a workstation risk assessment and providing the necessary equipment for them to work safely.
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