When you start a business, the first question that is asked by a founder is should I be an employee or just work as a shareholder. Tax usually drives this decision. To begin with – it is common for a founder not to be employed but to essentially ‘work’ for ‘sweat equity’.
The question is – when are contracts with employees and contractors required?
As discussed above – it may not be necessary to have an employment contract with a founding shareholder initially. This is ok so long as there are some contractual relations which make sure that any Intellectual Property the founder creates is owned by the Company rather than the founder themselves.
This is the same when engaging contractors. Early stage companies often outsource as an efficient and cost effective way of developing their product. It is very important that there is a contract (usually known as an intellectual property assignment deed) which transfers any intellectual property developed back to the company.
As the company grows – venture capital firms will require founders to have employment contracts. It is usual as part of a series A capital raise to have these in place.
Even though an early stage company feels like it is your own, it is key that thought is given to the company owning what is created and not just the founder.
Similarly, when contractors are used as an easy way to bring in workers on an ‘ad-hoc’ basis, it is important to watch as to whether the contractors end up transitioning into employees. This usually happens if a contractor works more than around 6 months in a business (unless they are truly contractors and can, for example, delegate their services to a third party).
The reason this is important is that under Australian law, employees are entitled to things like minimum wages and other employee entitlements that contractors are not.
So we hope that the key takeout you will have from this chapter is to consider the type of relationship you have with workers and keep an eye on who own the Intellectual Property and whether a worker has transitioned from a contractor to an employee.