Article reference: UK-IA-EMP36

Setting yourself up as an employer

If you are considering taking on an employee, you’ll need to set yourself as an employer. There are a number of steps for this.

Are you hiring an employee or taking on a contractor?

An employee is some who has a contract of service – an employment contract, whether written or verbal – rather than someone who has a contract for services. There have been many cases as to whether someone was employed or self-employed, and the difference between the two often depends on the circumstances. However, a good rule of thumb is that if the business for which the person works controls significantly how the person works, then the situation is one of employment.

Significant control might be:

  • a line manager who sets what work the person will perform

  • a contract that prohibits the person for working for any other business

  • a contract that sets specific conditions under which the work must be performed, such as where the work is performed, what hours must be worked, and what equipment must be used

  • where the business provides a place of work and equipment to do the work

Executive directors are usually employed, non-executive directors are usually self-employed.

Part-time and temporary staff may be employees.

Legal documents

You should use a written employment contract rather than a verbal one. A verbal contract is legally binding, but has the significant disadvantage of being easily disputable. It is very hard for an employee to argue that he or she did not know something when his or her signature is at the bottom of a document.

By law, every employee must be given a statement of particulars of employment that summarises the main terms of the contract within two months of starting. Because of this requirement, it is usually easiest to put in place an employment contract before the employee starts because the contract should contain all the information that the statement of particulars contains. The requirement is another reason why verbal contracts shouldn’t be made.

Make sure the employment contract is signed by both parties before the person starts working for you. There is always a tendency to want an immediate start date with the contract to follow. However, it is difficult in the first few weeks to take a strong view on something you would certainly have imposed eight weeks earlier. This is particularly important with less common provisions in a contract such as the requirement to work in multiple locations (perhaps at on-site at different customers' premises).

A director’s employment contract is often called a service agreement. This name was used before directors became classed as employees (receiving the same rights) and has remained. The contents of the document may cover additional points relevant to someone in a senior management position, but are otherwise the same for any other employee.

In addition to contracts, your business should use employment policies, most likely compiled into an employment handbook (which could be on an Intranet or on paper). Policies complement contracts by providing employees with information about how your business works with respect to its staff, what procedures are followed (such as for disciplinary matters) and how staff are expected to act (such as what clothing is acceptable).

It is usually best to place policies in separate documents where they can be updated easily by you and accessed and read easily by your employees. It is hard to amend contracts of employment on a regular basis.

Checks

You have an obligation to check that the person you wish to hire has the right to work in the UK.

You may need to apply for a DBS check (which was formerly known as a CRB check) if the person will be working with children, the elderly, disabled or otherwise vulnerable people.

Tax

You will need to register the business as an employer and the employee with HMRC.

You will need to register your business. You can do so online. You must register before the first pay day, but not less than two months beforehand. The process can take up to two weeks, so it is best to register in the days just before the employee starts.

Your employee should provide you with a P45 form and his or her National Insurance number.

If the person does not have a P45 form, you can use the PAYE starter checklist.

HMRC will help you calculate:

  • income tax payable through Pay As You Earn

  • employer National Insurance Contributions

  • employee National Insurance Contributions

  • student loan deductions (if there are any)

Auto-enrolment on pension schemes

It is a requirement that you automatically enrol your employee into a workplace pension scheme if he or she:

  • is between 22 years old and the state pension age

  • earns at least £10,000 a year

You do not have to do so if he or she provides you with proof of a lifetime allowance protection scheme.

The scheme works by deducting contributions from the employee’s salary each month and paying this into an approved pension scheme. You can be fined if you fail to do so, or if you pay into the scheme late.

Induction

You will need to induct your employee. If your workforce is very small, an induction is likely to be an introduction to any other people who work with the business, a run through health and safety and employment policies, and basic training in IT systems (such as your file storage system).

On-going support and training

You should expect to have to continue training. This doesn’t need to be formal but it will help the person become effective in the business.

Online courses are often an excellent and inexpensive way for small businesses to train new staff.

Prepare a workspace

Your employee will need a workspace where he or she can work comfortably.

There are requirements for the workplace to provide lavatories and access to drinking water. You will also need to consider health and safety issues such as provision of a chair, desk and monitor such that strain is not caused.

Employer’s liability insurance

As soon as you hire someone, you will need employer’s liability insurance, abbreviated to EL insurance. Your policy must cover you for claims of at least £5 million and be provided by an authorised insurer.

EL insurance covers the payment of compensation for injury or illness caused by work.

The fine for not having liability insurance is up to £2,500 every day, and you could be fined £1,000 if your certificate of insurance is not displayed at your workplace, or if you fail to show it to inspectors.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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