Are fintech firms doing enough to protect themselves against the risk of contractors?

It’s vital for businesses to ensure their employment contracts are up-to-date to reflect the changes in the labour market

The fintech sector is thriving. According to Ernst & Young, the industry employs 61,000 people in the UK and generated £6.6 billion in revenue in 2015. These employees, past and present, are broadly split into two camps: those who work for start-ups; and those who work using technology to strengthen their existing relationship with customers in traditional financial institutions.

In this blossoming industry, we have seen a surge in short-term hires and freelancers. This sharp increase is partially a result of millennials’ desire to achieve a better work-life balance through the flexible working arrangements of a contractor. Seasoned professionals are also shunning permanent employment in favour of a number of portfolio appointments, usually operating as contractors through personal services companies.

With such dramatic shifts in the labour market, there have been several legal developments which employers have not always kept up with, leaving them exposed to both Tribunal claims and damage to their business interests.

In particular, there have been a number of recent court cases surrounding employment/worker status and post-termination restrictive covenants, as well as legislative developments concerning trade secrets, data protection and taxing consultancy arrangements. Further changes are on the horizon with the expansion of the Senior Managers and Certification regimes.

Because the fintech sector is relatively new, many fintech businesses are start-ups or relatively inexperienced employers. Often their contracts with employees or contractors are “off the shelf” and not tailored to their business or the particular recruitment, leaving them open to trouble down the line.

For example, post-termination restrictions may not have been imposed on the founders of a business or its first workers – but this can leave the business exposed when those workers (who probably know vital confidential information or hold key client relationships) want to leave. It can also be a problem when businesses seek external investment.

Without experienced HR and legal advice, start-ups have been known to erroneously enter into a consultancy arrangement instead of a fixed-term employment arrangement. This can create a range of issues, including inadequate protection for their intellectual property (IP), failure to properly account for PAYE, and complaints of unfair dismissal when the contract is terminated. Employment (particularly regarding continuity of service) and tax problems can also arise further down the line if the firm wants to convert the consultancy into permanent employment.

Disputes surrounding IP are rife in the fintech industry. We are frequently witnessing tensions evolve whereby contractors believe they have the rights to the designs and product developments they worked on whilst freelancing, leaving the firm unprotected if their consultancy agreement isn’t properly drafted. As a result, we are seeing a growing number of disputes relating to the coding or product innovations which consultants built within the firm and which they want to take with them when they leave. Firms are also increasingly reluctant to allow freelance designers to showcase their work in personal portfolios and websites, because of the risk that their confidential information is being disclosed unintentionally. Again, this is something which is now being addressed in tailored consultancy contracts and staff policies.

When hiring freelancers, fintech firms must ensure that they have a clause clarifying that all IP belongs to the firm and to provide for the assignment of IP rights. If not, the ramifications can be incredibly damaging to the firm, with the business left unprotected and unable to use the designs or products of the consultant once they move on to their next project – unless they agree to pay to licence it from their former consultant.

The situation is different for employees, because the general rule is that IP created by employees in the course of their employment automatically belongs to their employer. Firms are well advised to strengthen their IP clauses to try to cover relevant/competitive IP which an employee may be developing in their own time.

One cannot stress enough the importance for businesses to ensure their employment contracts and consultancy agreements are up-to-date to reflect these changes in the labour market. Businesses must have firm, clear written contracts which properly reflect the way the arrangement will work in practice, mitigate the risk of future employment/tax disputes and which outline who will own and control the IP rights – whether the property be data, software, design or other content.

By Aron Pope,

partner at Fox Williams LLP