Growth Through People and the Risk That Comes with It!
As businesses grow, the focus inevitably shifts to people. Hiring, building teams, and creating capacity for growth are all essential steps in scaling a business. However, alongside that opportunity comes an increase in legal and commercial risk that is often less visible at the outset.
Unlike structural or financial issues, people related risks tend to develop gradually. They are often not identified until they begin to have a material impact on the business, whether through unexpected tax exposure, loss of intellectual property, disruption to operations, or, in more serious cases, litigation.
At this stage of the business lifecycle, the challenge is not simply building a team it is ensuring that the team is aligned, properly structured, and legally protected.
Choosing the Right Engagement Model
One of the most important decisions a growing business must make is how individuals are engaged and/ or employed. In practice, many businesses operate with a mixture of employees, consultants or contractors as well as formal directors. While this approach provides flexibility in the early stages, it must be carefully reviewed as the business evolves.
A key issue is ensuring that the legal classification of individuals reflects the reality of the working relationship. The courts will look beyond the written contract and consider factors such as control, mutuality of obligation, and the degree to which an individual is integrated into the business. In Autoclenz Ltd v Belcher [2011], the Supreme Court made it clear that contractual terms may be disregarded where they do not reflect the true nature of the relationship.
Where individuals are incorrectly classified, the consequences can be significant. Businesses may face employment tribunal claims, liability for unpaid statutory entitlements such as holiday pay, and wider operational disruption at a critical stage of growth.
IR35 and Off-Payroll Working
The position becomes more complex where contractors operate through intermediaries, such as personal service companies. In these circumstances, the IR35 regime under the Income Tax (Earnings and Pensions) Act 2003 must be considered.
For medium and large businesses, the responsibility for determining employment status for tax purposes rests with the engager. If a contractor is found to be operating as a deemed employee, the business may be liable for income tax and National Insurance contributions, together with interest and penalties.
In practical terms, this often arises where a contractor is engaged on what appears to be a flexible basis but, in reality, works exclusively for the business, is subject to direction and control, and is embedded within the team. In such cases, HMRC may take the view that the individual is effectively an employee, regardless of how the relationship has been labelled.
Fixed-Term Contracts and “Accidental Permanency”
Another common issue arises through the repeated use of fixed-term contracts. While these can be a useful tool in managing short-term demand, they can create unintended consequences where they are extended over time.
Under the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002, employees engaged on successive fixed-term contracts for four years or more may automatically be treated as permanent employees, unless the continued use of a fixed-term arrangement can be objectively justified.
In practice, this situation often develops incrementally. A fixed-term contract is put in place for a specific purpose, the work continues, and the contract is extended without a broader reassessment. Over time, the individual becomes embedded within the business. As confirmed in Ford v Warwickshire County Council [1983], continuity of employment may be preserved even where there are short breaks between contracts.
At that point, the individual may acquire full employment rights, including protection from unfair dismissal. In many cases, the transition from temporary to permanent status is not an active decision made by the business, but a legal consequence of how the relationship has evolved.
Contracts That Reflect Commercial Reality
As teams expand, informal arrangements quickly become insufficient. Contracts should not be viewed as purely protective documents; when properly drafted, they provide a framework that defines expectations, allocates risk, and secures value for the business.
Employment contracts, governed in part by the Employment Rights Act 1996, provide clarity around duties, responsibilities, and termination provisions, while also enabling the inclusion of enforceable restrictive covenants. Consultancy agreements must clearly define the independent nature of the relationship, set out deliverables, and ensure that intellectual property is properly assigned to the business. Director service agreements, operating alongside statutory duties under the Companies Act 2006, align personal obligations with the strategic objectives of the business and provide clarity in relation to remuneration and exit.
Where these documents are not properly aligned with the operational reality of the business, gaps begin to emerge that can expose both risk and value.
Protecting the Business: Intellectual Property and Restrictive Covenants
As a business grows, its value is increasingly driven by intangible assets such as intellectual property, customer relationships, and internal processes. The legal treatment of these assets varies depending on how individuals are engaged.
Intellectual property created by employees will generally vest in the employer. However, where work is carried out by contractors, ownership does not transfer automatically and must be expressly assigned. Without this, businesses may find that key assets sit outside the company, creating issues in funding, valuation, or exit scenarios.
Restrictive covenants provide an additional layer of protection but must be carefully drafted. In Tillman v Egon Zehnder Ltd [2019], the Supreme Court confirmed that restrictions must go no further than reasonably necessary to protect legitimate business interests. If drafted too widely, they risk being unenforceable; if too narrow, they may fail to provide meaningful protection. Getting this balance right is essential to preserving client relationships and maintaining operational continuity.
Governance and Internal Frameworks
As teams expand, informal management structures become increasingly difficult to sustain. Clear governance frameworks provide the foundation for accountability, decision-making, and compliance.
This includes establishing defined roles and reporting lines, implementing internal policies, and creating appropriate delegation structures. From a legal perspective, governance also supports compliance with employment law obligations, data protection requirements, and directors’ duties.
Strong governance is not about introducing unnecessary formality. It is about ensuring that the business can operate effectively as complexity increases.
Managing Risk While Enabling Performance
There is often a perception that introducing legal frameworks will slow a business down. In practice, the opposite is true. Clarity in roles, responsibilities, and contractual arrangements reduces ambiguity and enables more effective delegation.
This allows businesses to make decisions with confidence and ensures that individuals understand both their remit and their accountability. In that sense, legal structure becomes an enabler of performance rather than a constraint.
Johnson & Boon Insight
The most significant people-related issues rarely arise from the individuals themselves. They arise from a misalignment between the legal structure and the operational reality of the business.
As businesses evolve, that gap tends to widen unless it is actively addressed. Identifying and resolving that misalignment early is critical to sustainable growth.
If your business is scaling, it is worth considering whether your current people structures are aligned with both your legal obligations and your long-term objectives. The right framework does not restrict performance it provides the foundation for it.
