Whether or not you like capitalism is not very relevant. If you are an entrepreneur and want to make money, you are part of the capitalist system and it’s the only real economic system we know in the West.
Capitalism has at its heart the idea that an entrepreneur exploits resources.
There are only three forms of resource – people, money and commodities.
Entrepreneurs employ people to use money (to buy the means) to process commodities into desirable finished goods and services. Sometimes of course, people are using money, to process money, to make more money! London has developed to be the financial capital of the World using just this latter model.
In either model, people do the processing and hence most entrepreneurs are faced with employing people.
‘Employ’ is used above broadly and without definition. Employment in the legal sense defines a very special entrepreneur-person relationship under which the person or employee surrenders some of their individual freedoms to come under the direction of the entrepreneur. In return for a wage, the employee agrees to do the entrepreneur’s bidding. The entrepreneur has become a manager.
But some entrepreneurs just don’t want the hassle of employing staff. They want to focus on their business, on the stuff that excites them, without getting bogged down in having to motivate other humans.
This blog discusses how an entrepreneur can proceed without employing people. It asks ‘can there be growth without employees?’
The generic term for people engaged in some way by an entrepreneur to do work is a ‘worker’. A worker may be employed. A worker may also be engaged via some other form of contract. The difference is the degree to which they surrender their personal freedoms. This is fundamental to understanding the employment contract and how one can proceed without employees.
So what are the alternatives to employing people?
In the UK today there are around five million people who work for themselves. They run either sole-trader or limited liability firms in which they are the only employee. Those workers seek to sell their labour to entrepreneurs. This labour market gives the entrepreneur rich picking of very skilled and motivated individuals without having to employ them.
This group should be regarded at sub-contractors and the entrepreneur needs to organise their work in work-packages to discriminate between the on-going day-to-day effort (of an employee) and discrete deliverables against which payment can be made (to a sub-contractor).
A sole-trader or limited liability company needs to be contracted with. Both need several critical elements in those contracts. The first is a definition of the services they are to do and how performance (of the services) will be understood by both parties. The second is commitment to certain behaviour such as an undertaking of confidentiality. And the third is the assignment of any invention and intellectual property in the work done by the sole-trader or limited liability company.
This last point is important. Under the UK Copyright, Designs and Patents Act 1988, invention and IP is automatically assigned to an employer. But where the worker is not an employee, special provision must be made.
Entrepreneurs might also contract with small firms that do employ a few people. In this era of independent workers, there’s no guarantee that those small firms will actually employ the workers they send to work with the entrepreneur. Their workers may come from the pool of five million. There’s no guarantee therefore that invention and IP will be transferred from worker to sub-contractor and on through a sub-contract agreement to the entrepreneur. It’s distinctly possible that, whilst a licence to use the intellectual property is implied, the worker will own the intellectual property. Special action here is essential to avoid the entrepreneur having to later buy the rights to the work.
It can be very attractive today to gain effort from the millions of well-skilled people in foreign countries. In countries like Serbia the typical hourly rate for a software developer is £20. Rates in India are even lower. In the UK this is often as high as £150. It’s easy to see the attraction of contracting workers abroad.
Entrepreneurs cannot employ foreign workers. They can start firms or branch offices in these foreign countries and those entities can employ the workers. And entrepreneurs can persuade the workers to start firms themselves, and then become sub-contractors. Starting firms in some countries is difficult. But protecting the ownership of intellectual property cross-border is fraught. Unless UK entrepreneurs fancy fighting in foreign courts, other methods of protecting interests should be used.
And as with sub-contractors in the UK, work given to foreigners should be packaged as distinct work-packages with clearly defined deliverables and deliverable-dependent payments.
The biggest reason that firms form, and that entrepreneurs elect to employ people, is that the transaction costs of employing sole-traders and sub-contractors is high. It’s OK perhaps in the early days with just a couple of workers. But, for example, attempting to run a 20-man firm with 19 one-man sub-contractors is difficult.
With 19 sub-contractors, the entrepreneur becomes manager come-what-may. They spend their days forming work into work-packages, in administering these and validating performance to ensure that deliverables from the sub-contractors integrate to saleable goods and services.
It’s so much easier to dispense with the arms-length trade arrangements, bring everyone under one roof – even if metaphorically – and tell them what to do day by day. By employing the workers, the entrepreneur protects their investments, builds more through innovation and minimises costs.
The down side is that the entrepreneur must engage with the foibles of psychology, working daily to motivate people.
Growth Without Employees
So entrepreneurs can engage workers without employing them. It takes a good bit of care, arranging contracts with those workers and ensuring that work is packaged to avoid the worker learning or winning any one thing worth exploiting.
But firms form because there are greater benefits to be had in employing workers. Capitalist exploitation works better when the entrepreneur is employer and manager.
If contracts, employees and workers confuse you, or you’d like to discuss how to protect your intellectual property and organise efficient operations, call us now.