As Start Ups begin to succeed, growing in size and taking on more staff, they often run into a few challenges. It is much easier to make sure everyone is on the same page in terms of how to work with each other when there are just three or four of you and you have been building a new business together from scratch. When there are 20 or more staff, new issues can emerge. Some of those staff may have just joined recently and won’t necessarily slot into the existing culture. Others will have different cultural backgrounds, education, and work history, and therefore may bring a different set of expectations about what role they can play in the business.
Start Ups don’t really get rules and procedures. Many Start Ups succeed because the people running them never accept that ‘this is the way these things are always done’. Sometimes they have succeeded because they found a smarter and better way to get something done, ignoring or bypassing existing rules and conventions. But as they get bigger and more successful, they can find it is important to work out and agree on how people within the business should behave.
Working with a number of successful Start Ups, we have seen some common themes emerge around people and the challenges and risks that need to be addressed as “Start Ups become Grown Ups”.
Having a clear and current contract in place for any staff member, whether they are a full time, casual or part time employee, or a contractor, is a relatively simple but vital step. It helps reduce misunderstandings and disputes about the nature of the arrangement. For example, you don’t want the staff member, whom you thought was only engaged to complete a specific short term project, to assume that because they have been around for six months they are now a full-timer.
It’s also important that any contract covers any employee’s current role or position. If an employee goes through some major changes in the nature of their role in the business (eg a promotion), this can mean that the old written contract no longer applies. This can cause disputes if and when the employment comes to an end, as the employee may be able to successfully argue that if you want to terminate their employment, you must provide ‘reasonable notice’. In some cases this has been as much as 12 months’ pay or more.
For example in Ma v Expeditors International (2014) NSWSC 859, a Financial Controller who had been a long-term employee of a logistics company was fired. She sued on the basis that she should have been paid more than the five weeks’ termination pay she received. There was no written term about notice of termination. The court decided that she was entitled to 10 months’ pay as ‘reasonable notice’. Obviously, this would be an expensive outcome for any Start Up.
The contract should also consider fundamental issues such as whether the relationship is exclusive. A cornerstone of traditional working arrangements is that you only work for the one employer. That is your job. You can’t go juggling your time. Start Ups can shake up that concept, with a preparedness to focus on outcomes and an attitude designed to ‘break the mould’. Often to encourage people to contribute ideas, invest time and effort for little immediate reward and because the work may be sporadic, there is a preparedness to allow employees to have more than one job.
What is the position on working for other companies? Do you care? Typical fiduciary duties are about devoting your time and attention to the one employer. Stepping away from that model requires clear consideration of the parameters – what would be acceptable? Could the individual provide work for a competitor? How can you stop that? The terms of the contract are the first place to start.
2. Contractors vs Employees
Fundamentally, though, how does the Start Up want to engage labour? Start Ups typically focus on flexibility as a key element of their business, both for the benefit of the organisation itself and the individuals working for it. But how far does this flexibility go? Are the individuals running their own business as independent contractors, able to work for many, or are they part of the traditional ‘master/servant’ paradigm of employment?
The characterisation of whether a person is, at law, truly an employee or an independent contractor is significant. It is relevant for tax, superannuation, employment entitlements and possible claims under the Fair Work Act 2009 (Cth) (FW Act) such as unfair dismissals or claims under the ‘sham contracting’ provisions. It also directly affects the duties that the person has towards a Start Up, with a number of implied duties of fidelity and good faith, and other fiduciary duties, dependent upon an employment relationship.
The problem is - particularly with Start Ups - it is often not all that clear. Courts apply a “multi-factor” test that, when applied to many entrepreneurial enterprises, rarely produces clear results.
The ramifications of getting it wrong are significant. Aside from the potential of penalties for breach of the FW Act and taxation legislation, the Start Up can be exposed to significant underpayment claims (including minimum pay rates, penalty rates, allowances, leave liability and often minimum engagement periods). A Start Up whose business model is based on the engagement of independent contractors rather than employees, needs to ensure it gets it right at the outset, as the later imposition of employment terms and conditions can be crippling.
In Australia and internationally, as Start Ups are becoming Grown Ups and their profile and penetration in the market is increasing, the legal status of workers engaged in the 'gig economy' and through 'peer to peer' platforms is being tested through class actions and other proceedings.
3. Intellectual Property
So, you have all these smart and creative people working for you, developing new products for the business. You need to clearly establish that your business owns the IP in this work. That is relatively simple to secure, through some basic terms in a contract, or a clear policy or other document covering the topic that is made legally binding.
But what if they also develop some new IP or invention, with some work colleagues. Say they do this ‘after hours’, but using the business IT and premises? Or they spend some time developing the product in ‘working hours’? Who owns it?
What if they develop specialist expertise through working with you, and then use that expertise to develop some highly valuable IP in their own time away from work. Do you own that IP also? If you cover these issues through employment contracts, policies, and/or Deeds, you have a good chance of asserting ownership. If you don’t take these precautions, your chances are low.
In one case, Victoria University of Technology v Wilson & Ors  VSC 33, long, expensive and messy litigation arose after two academics and a student jointly developed a valuable IT program and business idea, partly using the resources of the University. The Court found that the University had not established that it owned the IP pursuant to the employment contracts or policies of the University. The University was eventually able to largely succeed in getting some ownership of the IP through other, more complex legal arguments. But their position would have been much stronger, and the whole situation would not have required long and complex litigation to resolve, if they had the right documents in place from the start.
More recently, a similar dispute between an academic and a university, led to a long running series of cases over many years, culminating in an appeal decision in University of Western Australia v Gray  FCAFC 116. The University ultimately failed in its claim over IP for the new invention developed. One of the Judges in the appeal commented “on a practical level the lesson of this case (is that)…there is a need for express arrangements”.
4. Confidential Information and Post Employment Restraints
These same smart and creative people are often the brains behind the good idea and the innovative use of technology. As the Start Up becomes Grown Up, protection of the confidential information that has driven the Start Up becomes critical.
Start Ups are most vulnerable at this early stage. They need to have an eye on the capacity to protect their confidential information, by having enforceable post-employment restraints that are focussed on legitimate business needs and that are able to adapt and be tailored as the business grows. Similarly, they need both the carrot and the stick to ensure key personnel don’t undermine the business.
The risk of misuse of confidential information, or key persons leaving to set up a rival business, is real, and the potential for damage to the business is extensive. However, with the increasing use of forensics as a way of gathering evidence of the theft of confidential information, we are seeing more activity from employers and Courts protecting the information. For example in Helensburgh Property Management Pty Ltd v Brady  NSWSC 1861, a Property Manager established a rival business during her employment. She sourced her clients from the employer’s business clients and used confidential information to assist her set up. The Court intervened and held that she had breached the implied duty of loyalty and good faith, and the confidentiality clauses of her contract.
5. Policies and Procedures - Do we need them?
One of the most common growing pains we see emerge is dealing, often for the first time, with employee conflict and employees behaving badly. Start Ups can grow quickly, and conflicts can emerge. How do you actually clip the wings of some employees, and do you want to?
Some conduct is obviously not appropriate. Be aware, however, that an employee’s view of appropriateness and an employer’s will frequently differ. Having in place a Code of Conduct or similar policies that identify behaviour expectations can assist in practically enforcing standards, and protect the business from a “rogue” employee.
The obvious matters that should be covered by policies include harassment, discrimination and bullying. Everyone agrees these behaviours cannot be tolerated, and to protect the business, policies must be in place and implemented. In the case of “bullying”, a policy has the added advantage that it clarifies what constitutes bullying – it is a term often used and often misunderstood. To constitute bullying under the FW Act, it needs to be ‘repeated’ and ‘unreasonable’ behaviour that ‘creates a risk to health and safety’ and ‘occurs at work’.
It is equally important to have a clear framework for the resolution of disputes. In the case of the common issue of bullying, for example, the Fair Work Commission’s (FWC) ‘stop bullying’ jurisdiction has created another avenue for employees to air their grievances. As was recently illustrated by the FWC in Purcell v Farah and Mercy Education Limited  FWC 2308, resort is too often made to the FWC to resolve tense interpersonal relationships involving some hostility. But as the FWC stated: “that it seems is the way of things, with workplace combatants all too keen to cede to a third party the capacity to resolve conflict, which with a modest amount of goodwill, some introspection and reflection, ought be capable of resolution by the combatants themselves.”
Despite the apparent frequency that the FWC can be drawn into these interpersonal disputes, it rarely intervenes to make orders. Part of the reason for this is that it needs to be satisfied there is a risk the bullying will continue. This is where an organisation with clear policies, a code of conduct, well trained staff and a grievance resolution procedure that is implemented, are able to intervene to prevent specific orders directed at specific behaviours.
6. What’s work got to do with it?
Conduct at work is one thing. But what about outside work? Surely that’s an employee’s time and he or she can to do what they want?
It is well settled that an employer may discipline, and dismiss, an employee for conduct ‘out of hours’ where the conduct is likely to cause serious damage to the employment relationship, damage the employer’s interests or is incompatible with the employee’s duties. Establishing the necessary connection to work is often not clear, and while most leading cases involved employees who travelled with work, increasingly the conduct is closer to home. Take the use of social media as an example.
The proliferation of social networking sites, instant messaging, blogs, and activity stream sites such as Twitter, together with the propensity for their use and integration into everyday life, has blurred the distinction between what is private and public. It is now accepted that social media must be considered in the public domain – but this is lost on many. Information is also shared at such a rate that may compromise its confidentiality.
There are a range of claims that can be made associated with the use of social media. The most common involves offensive comments made about an employer or another employee. For example, in the case of Little v Credit Corp Group Limited  FWC 9642, an employee who posted on Facebook a ‘joke’ about harassing a new male employee, and other references to being raped by work, was summarily dismissed. The FWC did not accept, nor excuse, the idea that the comment was a joke. It was an offensive post that could adversely affect the employer. The employee’s defence that he did not understand how Facebook worked was rejected as implausible.
In an older case, an aggrieved employee took to Facebook to express his dissatisfaction with payment errors, and in strong language threatened the employer was ‘going down’. Not surprisingly, his dismissal was not unfair.
SBS found itself in hot water for a more novel reason when it sacked a journalist who made controversial Tweets about Anzac Day. In that case, the journalist claimed that the views expressed on social media constituted a political opinion. The case never got to a final hearing. A confidential settlement later, and both parties no doubt see the potential troubles arising from Tweets.
7. OHS issues
As a business you will be legally responsible for the safety of all of your employees and for many other people such as contractors, customers and visitors who might be affected by safety hazards in your workplace or safety issues caused by the products that you design, manufacturer or supply. The rules will differ slightly from state to state but the basic concepts are the same.
If something goes wrong and somebody is hurt at or because of your business, the government safety agency will ask you:
What were your safety procedures and policies?
Had these been communicated to staff?
What steps did you take to assess and evaluate the risks in relation to the work that you do or the products that you provide?
As your business gets bigger, you need to have in place some basic systems and policies to address these issues. A failure to have these systems in place simply because you didn’t have time to think about it, or hadn’t realised that it was a priority, will not be an adequate explanation or excuse. Fines and other penalties can apply where businesses breach these obligations.
8. Workers Compensation
Your employees have to be covered by workers compensation insurance.
The rules differ from state to state, but in most jurisdictions you will also have to apply the same insurance coverage for contractors who work within or for your business.
If one of these employees or contractors gets injured and makes a claim there will be various obligations to assess and either accept or reject the claim promptly, and then manage the rehabilitation process for that worker.
Generally, the workers compensation authority in each state, or an insurance broker, can help you identify what policies you need to have in place and to make sure the policies cover all the people that they need to cover.
9. Working remotely
You can’t expect to attract savvy, smart and creative people working for you unless you have a savvy, smart and creative working environment - or at least a flexible working environment. Flexibility, and the capacity to work remotely, is increasingly seen by employers as a strategic business issue, critical to workplace effectiveness, employee engagement and long term business sustainability. Employees see it as a given.
Most progressive workplaces now have policies that set some parameters for how flexible working arrangements can work. Often separate agreements are reached, setting out mutual expectations. Matters covered can include planning a home office, safety considerations, work organisation, supervision, the provision of work equipment and work stations, system requirements, access to training and career progression and information security. These are all matters that are typically the subject of consideration with more formal remote working arrangements. Thought also needs to be given to an employee’s privacy out of hours and to separating their working and home lives.
The increasing acceptance of the home as a potential workplace has ramifications for safety and workers compensation laws. Telstra was required to pay the legal and medical costs of an employee who slipped down the stairs on two occasions when working from home in Brisbane. In another Queensland case, Ziebarth v Blackwood (Workers’ Compensation Regulator)  QIRC 121, an employee was having a shower while ‘on call’ and rushed to answer his mobile phone. The call was work-related, and there was an expectation he would answer his phone. He slipped and injured his back. This was covered by workers compensation.
10. “Sweat Equity”
Can we pay employees in equity? How do we incentivise employees?
It is a great idea to incentivise your employees by giving them shares, share options or other forms of equity in the company, particularly if (like most Start Ups) the company is short on cash but big on ideas in its early stages. But there are a range of legal requirements in terms of how shares or share options are provided to employees or other staff. You need to step though these carefully.
In addition, some Start Ups make the mistake of thinking that they can bypass or ignore minimum employment conditions that are set by legislation, because they provided employees a generous equity benefit instead. This is not the case. The FW Act and awards set minimum standards and conditions of employment (things like rates of pay, annual leave and sick leave etc.) and these have to be satisfied at all times. It is not possible to bypass them or to satisfy them by providing equity. Equity has to be provided on top of the minimum employment conditions.
So if your Start Up is getting to be a Grown Up, or it looks like it is heading that way, take a little time to think about the lessons we have learnt along the way. All of these issues can be managed and controlled, so you are not being distracted from your real vision and strategy. It just takes some planning and preparation.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.