Keeping employees, contractors and advisers happy, motivated, and fairly compensated is instrumental to your company’s growth — so it is important to have your ducks in a row from the start. This means ensuring that formal contracts are signed, expectations are understood from both parties, and compensation clearly defined.
As a general rule during the early stages, everyone involved in your company should be full-time — if they are part-time, they should not be “double-jobbing.” It is extremely difficult for anyone to give 100% to two different jobs.
Hiring part-time consultants for core functions (such as sales) rarely works. Those people are unlikely to stay with the company in the long run and can be biased to claim value in the near term — not to help you create long-term value.
Unless your team has shown prior success involving remote workers, distributed teams at this early stage should be avoided. Maintaining a clear vision and communicating effectively is far more difficult when colleagues are not together full-time, in the same place, every day.
There are some exceptions to this general rule, such as lawyers, accountants, PR firms but for the founding team, they should either be full-time immediately, or have a very clear and agreed path to becoming full-time at the earliest opportunity.
Template employment contracts that you may receive from incubators/outside investors are generally geared towards founders and may not be totally appropriate for non-founder employees. If you have early employees sign those template agreements, you will probably find yourself having to change the terms in the future, and that can create friction — you’ll be asking them to sign something new, essentially as a favour to the company.
It is worthwhile to get your own employment contracts drafted — this is where getting proper legal advice will be beneficial. Even if you use an online template, you may not have the knowledge or confidence to know what terms can or should be changed to suit your business.
For example, you may or may not know whether to insert a non-compete clause into your standard employment agreements; for some companies and some positions it is absolutely appropriate, but for others it may not make a lot of sense.
A decision about the length of a probationary period should also be made after deliberate consideration. Many templates have a default probationary period of 3 or 6 months. You may want a longer period, but may be unsure as to whether it is reasonable, or as to what to do if a prospective employee objects to a longer period (that would be a red flag).
This manual provides a template employment contract as well as a casual/intern employment agreement. While the casual employment contract is fairly standard, you should review the template employment contract carefully to make sure it suits your needs.
Engaging Law Firms
If you engage a law firm to help you draft your standard employment contracts, we recommend contacting a few separate firms and decide on the person or firm you feel most comfortable with. All good legal professionals should be able to explain in plain terms what work is involved and should be able to give you general advice about what’s common practice and the advantages and disadvantages of certain provisions. For something like an employment agreement, or other “standalone” work, it is reasonable, and recommended, to ask for a fixed-price or estimate in advance. Absent any unforeseen complexities, your legal adviser should be able to deliver within that agreed estimate. If you engage a legal adviser on an hourly basis, make sure to get regular updates on the number of hours “on the clock” so you avoid potentially nasty surprises.
Important Note for “proprietary” and other directors in Ireland
A proprietary director is a director who owns or controls 15% or more of the ordinary share capital of the company. A proprietary director is treated as being “self employed”, regardless of whether that director is employed full-time by the company. The director is not entitled to normal PAYE allowances, but may be entitled to the new (January 2016) Earned Income Tax Credit. Proprietary directors must file an annual tax return each year, and there are penalties imposed if a return is not filed or if it is filed late.
A director who holds 50% or more of the shares in a company is classified under “Class S” PRSI, where PRSI is payable by the director but not by the company. Class S taxpayers are entitled to different (fewer) social welfare benefits than regular “Class A” employees. It is beyond the scope of this manual to cover personal tax liabilities but you should talk to your financial adviser to make sure you are in compliance with these Irish Revenue obligations.
Practicalities for hiring employees
- If you register as a company, you are automatically registered for PAYE/PRSI with Revenue.
- If you really want to, you can purchase payroll software to administer payroll (including all filings etc.) yourself; or
- Hire an outsourced provider to do payroll — it is very cheap.
You may have advisers who act in an informal “mentor” capacity. You may also have advisers whom you pay, to whom you want to promise equity, or who work on substantive material for the company — like sales plans, investment decks, or even software.
In the latter cases at the least, you should have a written agreement with that adviser. It does not have to be complicated, but it should deal with what is expected by and from both parties, what happens if the relationship ends, confidentiality and IP, and anything to do with shares and options. Material developed by a non-employee is not automatically owned by the company, and that also applies to work done by advisers.
Note: if you promise equity to an adviser, due to the difficulty in Ireland of repurchasing shares if the company is not profitable, our default recommendation would be to grant standard share options (if that is what you agreed with your adviser) as opposed to restricted stock.
Until you have a clear idea of what functions require full-time employees, you might hire a contractor to complete some initial work. It is very important that you enter into a written agreement with any contractors, particularly if they work on your product. As you will learn in the Intellectual Property section, in the absence of a written agreement to the contrary, intellectual property (IP) will vest in the contractor, not the company. A template Contractor’s Agreement is in the Downloads section.
Be careful with using individual contractors on a long-term basis, particularly after you have hired your own employees — when a comparison can be made between how the employee is treated and how the contractor is treated.
While engaging a contractor on a genuine fixed-term or fixed-purpose arrangement will not usually cause difficulties, if a contractor is, in essence, performing work in the same manner as an employee, that contractor may be deemed to be an actual employee. This has a number of consequences, including the obligation to register that employee, withhold tax, pay employer’s PRSI, and the possibility that the contractor may claim to be entitled to rights and benefits offered to other employees, such as health benefits, share options, and paid holidays.