Hiring Your First Employee in the UK: The Founder's Policy and Compliance Checklist

1. Decide employment status

Before you do anything else, decide whether the person is going to be an employee, a worker, or a self-employed contractor. This one decision affects the tax you deduct, the rights they have, the insurance you need, and whether you can end the contract quickly if it doesn't work out.

Employee is the default for anyone working regular hours, under your direction, for a salary. They get the full set of rights — paid holiday, sick pay, maternity/paternity leave, protection against unfair dismissal (after two years), redundancy pay. You run PAYE and pay Employer's NI (currently 13.8% above the £9,100 secondary threshold).

Worker sits between employee and contractor. They get paid holiday, national minimum wage, rest breaks, and discrimination protection, but not unfair dismissal or redundancy rights. Casual staff, zero-hours contracts, and some freelancers fall into this category.

Self-employed contractor runs their own business, invoices you, controls how the work is done, and takes the tax risk. They have none of the above rights but you also don't deduct PAYE or Employer's NI. The critical thing: labelling someone a contractor does not make them one. HMRC and employment tribunals look at the substance of the relationship. Pimlico Plumbers, Deliveroo, Uber, Hermes — all major cases in the last ten years where companies lost at tribunal because their “contractors” were in substance workers or employees.

Use the gov.uk Check Employment Status for Tax (CEST) tool as a starting point. For borderline cases, take twenty minutes with an employment solicitor — the cost of getting this wrong is HMRC claiming six years of unpaid PAYE, interest and penalties, plus the employee's tribunal claim for unpaid entitlements.

2. Register as an employer with HMRC

Register for PAYE at gov.uk/register-employer. You'll need your UTR (Unique Taxpayer Reference), company number, address, and the first payday. HMRC sends you a PAYE reference and Accounts Office reference by post, usually within five working days but sometimes up to four weeks if the post is slow. You cannot run payroll without these numbers.

You can register up to two months before the first payday but not earlier. Don't leave it later than two weeks before the first day — if the reference hasn't arrived by payday, you either pay late or pay outside PAYE, both of which cause problems.

Once registered, pick a payroll system: FreeAgent, Xero, Sage, BrightPay, Moneysoft, or HMRC's own free Basic PAYE Tools (fine for a single employee but awkward at scale). Your first Real-Time Information (RTI) Full Payment Submission goes to HMRC on or before the first payday.

3. Buy Employers' Liability insurance

This is the item most first-time hirers forget, and it is the most dangerous one to forget. The Employers' Liability (Compulsory Insurance) Act 1969 requires every employer to hold EL insurance from the first day of employment, with a minimum indemnity of £5 million, through an authorised insurer. The certificate must be displayed at the workplace or made available electronically to employees.

The Health and Safety Executive can fine an employer up to £2,500 per day that they're without EL cover, and a further £1,000 for not displaying the certificate. If something happens and you don't have cover, you personally are liable — no corporate veil protects you.

EL insurance is cheap: for a one- or two-employee office-based business, expect £60–£200 per year. Brokers include Simply Business, Hiscox, AXA, Direct Line. The quote process is typically same-day.

A handful of narrow exemptions apply — family businesses where everyone is a close relative, some public bodies, unpaid volunteers. If you're reading this, you almost certainly don't qualify.

4. Run a right-to-work check

Under the Immigration, Asylum and Nationality Act 2006, every employer must verify that every new employee has the right to work in the UK. The penalty for not doing so is up to £45,000 per illegal worker for a first offence and £60,000 for subsequent offences, introduced by the Home Office's February 2024 civil-penalty uplift.

There are three acceptable methods:

• Online check via the Employer Checking Service at gov.uk/view-right-to-work — used when the candidate has provided you with a share code. This is the standard method for non-UK/Irish nationals.
• Manual document check — for British and Irish citizens who haven't used eVisa. You must see the original document (passport, birth certificate plus NI number document), take a copy, date and sign it, and retain for the duration of employment plus two years.
• Identity Document Validation Technology (IDVT) check — via an Identity Service Provider (IDSP) certified by the government. Used for British and Irish citizens where physical presence is inconvenient. Providers include Yoti, TrustID, and Onfido.

Do the check before the first day, not on the day. Record the date you carried it out. This creates the statutory defence if an employee later turns out not to have had the right to work.

5. Draft the written statement and employment contract

Under section 1 of the Employment Rights Act 1996 as amended by the Good Work Plan reforms (April 2020), a written statement of employment particulars must be given to every employee on or before their first day. It must include:

• Names of employer and employee
• Start date and date continuous employment began (usually the same for a first hire)
• Scale and method of calculating pay, and pay intervals
• Hours of work (including any variable or specified hours)
• Holiday entitlement and public holidays
• Job title or brief description of work
• Place of work
• Length of temporary or fixed-term contract (if applicable)
• Notice periods (both directions)
• Any probationary period, its duration and conditions
• Benefits (any that aren't pay or pension — healthcare, company car, etc.)
• Any required training and who pays for it
• Reference to disciplinary, dismissal and grievance procedures
• Sick-pay terms (even if just statutory SSP)
• Other paid leave (maternity, paternity, etc.)
• Pensions information and auto-enrolment
• Collective agreements (if any)
• Any work outside the UK for more than a month

Most UK SMBs merge the statutory statement into a full contract of employment, which adds restrictive covenants (confidentiality, IP assignment, post-termination restrictions), grievance and disciplinary clauses, probation terms, and an entire-agreement clause. The full contract is strongly recommended even for a first hire, because the statutory statement alone doesn't protect your IP or your confidential information.

Templates from gov.uk are legally compliant but generic. A proper UK employment contract from a solicitor is typically £300–£700 one-off. A bespoke contract as part of a policy pack (the PolicySuite UK Employment & Workforce Compliance pack includes one) comes in the pack at £400 total.

6. Put essential HR policies in place

At minimum, have the following ready by day one:

• Disciplinary procedure — required in substance by the ACAS Code; absence of one is a 25% uplift on any tribunal award.
• Grievance procedure — same ACAS Code, same uplift risk.
• Equal opportunities policy — supports the “all reasonable steps” defence under section 109(4) of the Equality Act 2010.
• Data protection / employee privacy notice — required under UK GDPR Article 13 (information to be provided to data subjects at collection).
• Acceptable use (IT) policy — establishes the lawful basis for monitoring, prohibits leakage to consumer AI tools.

Once you reach five employees, a written health and safety policy becomes statutorily required under section 2(3) of the Health and Safety at Work Act 1974. At first hire, if you're office-based and low-risk, a light-touch H&S statement is still good practice.

The broader essential set — ten policies covering sickness, leave, anti-harassment, whistleblowing and so on — is covered in the companion guide on essential HR policies for UK small businesses. For a first hire, the five above are the day-one minimum; the rest can follow in week two.

7. Set up pension auto-enrolment

Under the Pensions Act 2008, every UK employer must assess every worker for auto-enrolment from the first pay date and enrol eligible jobholders into a qualifying pension scheme. The employer must also complete a Declaration of Compliance to the Pensions Regulator (TPR) within five months of the duties start date.

Eligible jobholders are workers aged 22 to State Pension age earning over £10,000 a year (2024–25 threshold, unchanged for 2025–26). They must be auto-enrolled and can choose to opt out within the first month. Non-eligible jobholders (younger, lower-earning, or over State Pension age) have a right to opt in.

Minimum contributions from 6 April 2019 are 8% of qualifying earnings: 3% employer, 5% employee (4% net of tax relief). Qualifying earnings are between £6,240 and £50,270 (2025–26 figures).

The simplest provider for small employers is NEST (the National Employment Savings Trust), which is free for employers, accepts any worker, and integrates with most payroll software. The People's Pension and Smart Pension are the other low-friction choices. Sign up with your chosen provider before the first pay date.

8. Run induction and record acknowledgements

On or before day one, walk the new hire through:

• The contract and written statement — ensure both copies are signed.
• Each policy — explain what it covers and where to find it. Record the acknowledgement electronically with a date stamp.
• Data protection and IT — set up their accounts, explain the acceptable use policy, confirm password and MFA expectations.
• Health and safety basics — first-aid, fire exits, any specific hazards. Even a light office has an ergonomic obligation under the Health and Safety (Display Screen Equipment) Regulations 1992.
• Probation — a typical UK probation is three or six months. Book a 30-day, 60-day and 90-day check-in in both calendars on day one. If there's a performance concern, raise it at the 30-day review, not the end of probation.
• Holiday and sick-leave mechanics — how to book, how to notify. Most UK SMBs use BreatheHR, HiBob, or Breathe HR for this; a spreadsheet works for the first hire if that's what you have.

Store the signed contract, the right-to-work evidence, the policy acknowledgements and the induction checklist together in one place. These form your evidence trail at tribunal, at insurance renewal, and at due diligence if you ever raise or sell.

What you can skip at the first-hire stage

Things commonly recommended but not needed for a first hire of an office-based employee:

• Gender pay gap reporting — only required at 250+ employees.
• Modern slavery statement — only required at £36m+ turnover.
• Information and Consultation (ICE) arrangements — only from 50 employees.
• Full-blown BYOD/remote-working policies — not needed at headcount of one unless you are fully remote. A short addendum to the acceptable use policy covers it.
• A dedicated HR system — spreadsheet, cloud storage and payroll software are sufficient for the first hire and usually the first five.

Revisit each of these as you scale. The Marketing Plan's three employee-threshold triggers (five, fifty, 250) are the natural review points.

The cost of getting this wrong

The three failure modes at first hire, in descending order of frequency:

1. Mis-classification (calling an employee a contractor). HMRC recovery of unpaid PAYE and NI back six years, plus interest and penalties. Tribunal claim for unpaid holiday pay going back two years (ultimately capped at two years of the current rate under the Deduction from Wages (Limitation) Regulations 2014). Realistic total exposure for a two-year “contractor” paid £45k: £18,000–£25,000.
2. Dismissing in the first two years without following procedure. Two-year rule protects against ordinary unfair dismissal but not automatic unfair dismissal (discrimination, whistleblowing). Realistic exposure if the claim succeeds: one year's salary + 25% ACAS uplift + legal costs.
3. No EL insurance when an incident occurs. HSE fine up to £2,500 per day uninsured, personal liability of the directors for the underlying claim. Bankruptcy-grade.

All three are easy to avoid. The hardest is the first, because it rewards short-term thinking.

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