From a legal perspective, the challenges that a recruitment business faces in its early years should hopefully be small. As long as the legal structure of the business is in place from the outset, the company should be free to grow without too many legal issues.
But it’s all about getting on the right legal track at the start. I can’t stress enough the importance of well drafted Memorandum and Articles of Association, setting out the company’s purpose and remit. On top of that should sit a Shareholders’ Agreement, detailing how the shares in the company are held. Then come the service agreements of those who make the business work – the directors and employees.
If the company is well structured from the outset, it is unlikely to run into early legal difficulties. However, those that do arise at the beginning tend to be a legacy from previous employment. The primary issue that I see in a new recruitment company surrounds the founding director(s) restrictive covenants from their previous role(s).
Typically start ups are founded by employed successful consultants who want to go it alone and build their own recruitment company. What they don’t always consider is what restrictive covenants they have from their previous role. One of the mistakes that are made is ignoring those restrictions, and either deliberately or accidentally breaching them. If that happens, heavy legal costs can be incurred in defending an attack from a previous employer who wants to restrict the new company’s business activities. It’s vital to check what you can or can’t do, who you can contact and with whom, therefore avoiding incurring unnecessary legal costs and a distraction from building the new business.
The secondary issue surrounds Terms of Business. Countless times I am instructed by new recruitment businesses who have “borrowed” their terms of business from their previous employer, expecting them to suit the new company’s purpose, then finding their new clients won’t sign them or worse still, not being able to rely on them. Even worse, I see “borrowed” terms of business that are tweaked in an attempt to re-style them, but in the process lose their sense of meaning and their legal efficacy.
I am well aware that incurring the legal cost of having bespoke Terms of Business drafted for the new company may seem an unnecessary outlay, but it’s far more costly in the long run trying to do business on terms which are no longer fit for purpose.
So my message to is not to scrimp on getting the right legal advice to set the company up with solid foundations, as the cost of failing to do so can be so much more.
This article was written by Lucy Tarrant, Managing Director of Cognitive Law, a member of ReRe: Recruitment Resource.
Look out for further articles, all written with the recruitment business in mind, and come and put your questions to Recruitment Resource – ReRe at: –
The Recruiter Workshop from 1730 on
Monday 5th September at RBS, 250 Bishopsgate Conservatory, London EC2M 4AA