There are many specific questions in the field of labor law that startup companies should take into account gladly already when planning the actions of the company. In the beginning, the financial resources of the company can be limited, and the need for permanent employees can vary from time to time. Therefore, the decisions concerning labor law in a startup company should often enable flexibility in the actions of the company.
What should be considered when setting up a startup?
When setting up a startup company, it is vital to review how the previous employment agreements relate to setting up a new company. The employment agreements of the founders can, for example, include an agreement of non-competition and agreements concerning the transfer of immaterial rights. The founders can also be committed to a non-disclosure agreement. The foundation of a startup company should not violate these previous agreements. The better these questions are anticipated, the lower is the risk for future disputes.
The founders should, at an early stage, agree on how the work is divided between them. Usually, the strongest way legally is to enter into a shareholders’ agreement. Thatsecures that the founders, who at the same time are shareholders, are committed to certain actions even if the employment relationship of the founder ceases. The shareholders’ agreement should also include rules in case one of the founders breaches his/her obligation to participate in the duties concerning the company. One possible option is to agree on that if someone of the founders breaches his/her obligations repeatedly, other shareholders have a right to redeem the shares owned by the founder who has breached his/her obligations.
It is also possible, and usually recommendable, to agree on ownership rights and intellectual property rights, such as copyrights, patents, utility models (registered or not), as well as rights to modify and transfer the previously mentioned rights. The employer and employee can mainly agree on that any and all right, title and interest in and to the results and material achieved while performing the employee’s tasks are transferred to the employer.
It is also recommendable to agree on confidentiality so that the employee is obliged to keep strictly confidential all information which he/she has received based on his/her employment and to use such information only when performing the tasks under the employment agreement and not for his/her benefit.
How is an employment relationship determined?
According to the Employment Contracts Act, an employment contract exists when a person agrees personally to perform work for an employer under the employer’s direction and supervision in return for pay or some other remuneration. Although an oral employment agreement is valid, it is always recommendable to make a written employment agreement.
Even though a startup company would acquire work performances, for example, from an independent entrepreneur without hiring employees, can this kind of work sometimes form an employment relationship. If the work is performed under the employer’s direction and supervision, it can be interpreted as an employment relationship by authorities. Personnel leasing must be separated from employment relationships, and it can be a flexible way for a startup company to acquire resources.
Contracts of employment: important stipulations
When it comes to the contract of employment, it is worthwhile to mention the duration and nature of the employment relationship, such as full-time or part-time employment, in the contract. Also, since the need of the workforce in the startup companies may vary especially in the beginning, it is recommendable to endeavor to flexibility. However, the limitations imposed by legislation should be taken into account. For instance, employment contracts can be made for a fixed term only if there is a justified reason. Otherwise, an employment contract is valid indefinitely. The seasonal nature of the work, for example, can be considered a justified reason. Fixed-term contracts can also be made on the employee’s initiative. Nevertheless, it is prohibited to use consecutive fixed-term contracts when the amount or total duration of fixed-term contracts or the totality of such contracts indicates a permanent need for labor.
When compared to the fixed-term contracts, there are fewer limitations on concluding part-time contracts. However, one significant restriction is that if the employer requires more employees for duties suitable for employees who are already doing part-time work for the employer, the employer shall offer such employment to these part-time employees.
So-called zero-hours contracts can also be considered as an alternative to full-time and part-time employment contracts. In zero-hours contracts the employee undertakes to perform work for the employer only when separately asked to do so. Even though zero-hours contracts allow for the flexible use of the workforce, the downside is the employee’s right to refuse the shifts offered to him or her. Zero-hours contracts include a variable hours clause, which means that the employee’s working hours vary between a minimum and maximum amount, e.g. 0-37 hours per week.
An important clause that should be included in every employment contract is a stipulation concerning trial period. The trial period is an effective way to ensure that the new employee is suitable for the job. The trial period must be expressly agreed, and during the period, the employment contract can be cancelled by either party quite freely. The employment contract may not, however, be cancelled on discriminatory or otherwise inappropriate grounds with regard to the purpose of the trial period. The maximum length of the trial period is six months, starting from the beginning of the work. However, in fixed-term employment, the trial period may comprise no more than half of the duration of the employment contract.
In startup companies, also the other stipulations of the employment contract should be as flexible as possible. For instance, it is worthwhile not to draft employees’ job descriptions too detailed so that they can be assigned a wide range of different kinds of tasks when needed. However, with regard to working hours, Working Hours act is, like the Employment Contracts Act, mandatory, unless otherwise provided in the Act itself.
Besides the things mentioned above, if a startup company’s property is mainly intangible, it is essential to protect the intellectual property rights and trade secrets. For the protection of the trade secrets, employment contracts should comprise a confidentiality clause, which prevents the information from spreading outside of the company.
Besides, it should be noted that the company’s CEO is not considered as an employee, since the CEO is an organ of the company. Thus, CEOs do not conclude an employment contract, but they usually sign a so-called CEO agreement. Also, employee redundancy protections do not apply to CEOs, which is why CEO agreements usually include a compensation clause.
Prohibition of competition
During employment, employees are obliged to conform to the prohibition of competition based on law. Due to the prohibition, employees shall not work for another employer or engage in such activity that, taking the nature of the work and the individual employee’s position into account, would cause harm to their employer. If the employer wants the prohibition of competition to continue also after the employment relationship has ceased, an explicit agreement of non-competition should be made between the employer and the employee. The agreement of non-competition restricts the employee’s right to conclude an employment contract on work to begin after the employment relationship has ceased with an employer which engages in operations competing with the first-mentioned employer, and also the employee’s right to engage in such operations on his/her account.
An agreement of non-competition can be concluded if there is a particularly weighty reason related to the operations of the employer or the employment relationship. For instance, the need to protect the employer’s trade secrets is usually considered as a weighty reason. Thus, it is recommendable to institute an agreement of non-competition, especially when the employee deals with trade secrets during his/her employment. Also, in assessing whether a weighty reason exists, consideration shall be given to the employee’s status and duties.
An agreement of non-competition may restrict the employee’s right to conclude a new employment contract or to engage in the trade concerned for a maximum of six months. If the employee can be deemed to receive reasonable compensation for the restrictions imposed by the agreement of non-competition, the restriction period can be extended to one year. The agreement of non-competition does not bind the employee if the employment relationship has been terminated for a reason deriving from the employer.
Collective labor agreements
In addition to the things mentioned above, it is essential to pay attention to the possible collective labor agreement since the collective agreements may, in some cases, derogate from what is provided for by law. In that case, the provisions of the collective labor agreement must be complied with. The mandatory provisions of the collective labor agreement also override the employment contract. Therefore, before setting up a startup, it is crucial to check whether the sector is subject to a collective labor agreement.
However, the overriding effect of the collective agreements is relevant only if the collective agreement is either generally or normally applicable. The collective agreement is normally applicable if the employers have either entered into such an agreement directly or are members of the employer organization that concluded the agreement. General applicability means, in turn, that the employer operating in the relevant agreement sector shall observe at least the provisions of a national collective agreement considered representative in the sector in question even though the employer is not organized.
Text and additional information:
Carita Hulma, Senior Associate, tel. +358 40 090 2036, [email protected]
