As a vast majority of businesses need employees in order to expand, company directors, sooner or later, have to face the process of recruiting people and familiarize themselves with the employment law. Once the selection of candidates is made and the job is offered, the law comes in the way.

Employment status

There are five categories of employment: self-employed person, worker, employee, director and contractor. As they have different legal, tax and National Insurance Number implications, employers must be aware of the differences and know which category suits their business best. For example, a person can be classified as self-employed for tax purposes but as a worker or an employee for the employment rights benefits.

Contract of employment

A contract of employment is an employee's acceptance of the terms and conditions offered by an employer, evidence of which is commencement of the work by the employee. The contract is often agreed verbally.

There are three types of contracts: a contract of employment, a contract for the personal performance of work and a contract for services. The person's employment status depends on which contract has been agreed.

All employers are legally obliged to provide their employees hired for more than one month with a written statement of employment no later than two months of their start date.

The statement sets out what has been agreed between the employer and the employee during the recruitment process, such as job title and description, starting date, place of work, salary, benefits, required hours of work, holiday and sickness entitlement, notice periods, grievance arrangements and disciplinary procedures.

Often employers include in the contracts of employments sections such as confidentiality agreement and non-compete clauses.

It is also a common practice to provide new employees with the company's Health & Safety policy, Equal Opportunities policy, Data Protection policy and other important company documents together with their employment contracts.

Directors as employees

Usually, an executive director is also the company's employee through executive service contract. However it is important for a business owner to establish if a director is an employee by analyzing the following key factors:

- if mutuality of obligation exists, for example, an employer's obligation to provide work or pay during absence from work to the director and the individual's obligations to perform work required by the employer.

- the degree of employer's control over the individual.

- the extend to which the director is integrated in the company by adhering to its policies and procedures such as disciplinary and grievance procedures, benefits, sick and holiday pay provision.

- duration of contract.

- exclusivity of the engagement, i.e. permission to work for other companies at the same time.

- method of payment.

- if the equipment and administrative support are provided by the director or employer.

The outcome of the analysis will have impact of the director's entitlement to his/her employment rights and tax obligations.

Conclusions

Contracts of employment exist to clarify obligations from the employer and employee and should detail benefit and entitlements due to the employee as well as list what is expected from them. It is a legal obligation in the UK for employers to provide employees with a contract of employment within two months of starting work.