For many smaller businesses, the red tape caused by employment legislation is a good reason to avoid hiring staff and using agency workers or freelance consultants is a tempting alternative. We hear from the entrepreneurs eschewing the payroll

When Stephen Knight started Pimento, his marketing company, he never imagined it would have a turnover of more than £5m within three years, but no employees. As it is, Knight works with a team of 70 subcontractors who help deliver the firm's services. "Because they are self-employed, their reputation and their livelihoods are on the line every time they do a job," he says. "Therefore, they work that much harder than a full-time employee will do in an organisation."

It's an effective way of running a small business, if you go about it the right way, Knight argues. "First of all, work with people who are good and who can bring their talents to bear on a particular problem your organisation has. Secondly, work with what I call grown-ups—people who are self-reliant and don't need to be managed on a day-to-day basis."

Knight is not alone in wanting to build a business without an army of wage slaves. Of the almost 5 million small and medium-sized enterprises (SMEs) in Britain, 75 per cent have no employees. When the Annual Small Business Survey last asked SMEs (in 2005) why they didn't want to take on staff, 40 per cent said it was because they didn't have enough work and a further 32 per cent said they preferred to work on their own.

But there are plenty of entrepreneurs who want to expand their businesses but don't see any need to lumber themselves with the bureaucracy that goes with taking on employees. Claire Moran saw the downside of hiring staff when she worked as a director at PR giants such as Porter Novelli and Grayling. "It never happened to me, but I saw different people having tremendous battles with some employees in other agencies. All their time was spent wrangling with lawyers," she says. As a result, Moran was determined to avoid human resources problems when she set up her own agency, the Forge Public Relations. "The model I've adopted is to win the business myself and then work with other senior people," she explains.

Moran hated the idea of spending hours on the paperwork involved in employing people. As she explains: "Government legislation, in many respects, applies equally to large and small businesses. From rules and regulations surrounding employment conditions, through the risk of being sued for constructive dismissal, to the difficulty of getting rid of unsuitable employees. All this makes the life of small business owners very difficult. They have to spend a huge amount of time on all of it, which distracts them from running the business," she says.

Moran has discovered that her approach of working with freelance consultants means she can offer a better service to her clients. It's an approach that has enabled her to build a business, which this year will post turnover close to £200,000.

Ian Dodds, who set up a management consultancy five years ago, has already built an annual turnover of £1.5m, again without any employees. He works with a team of 70 to 80 subcontractors to deliver his services. He points out that his approach means he can keep overheads low and therefore offer clients higher-quality consultants than might be the case if he had rows of staff sitting in offices.

But he adds that this route is not an easy option. "If you're going to hire really good subcontractors, you have to put a lot of effort into a different kind of management process," he says. "Subcontractors need to feel you're interested in them and that you appreciate their contribution. That helps them feel loyalty to the business."

Dodds says he spends a lot of time making sure his subcontractors understand the philosophy of the business. He adds that he has no trouble in running a million pound-plus company without any secretarial or administrative support. "I've discovered that it's remarkably easy to use the software that's available," he says. He reckons that he spends no more than a couple of hours a month sorting out his accounts on his computer.

His experience is a million miles away from the unhappy employers who spill out their misery on the website Red Tape Rants run by former Daily Telegraph business columnist, Sylvia Tidy-Harris. Unhappy directors point out that there's a quantum leap between operating as a sole trader and starting a company with employees.

John Wright, national chairman of the Federation of Small Businesses, believes employment law has become much too complicated for SMEs to handle. He points out that many directors of SMEs are also worried about the health and safety implications of hiring staff.

He says: "Rather than going down the road of hiring people, many people running small businesses feel they don't want their lives complicated and take the view that they won't hire anyone unless absolutely necessary."
Specifically, Wright would like to see employment tribunals given more latitude to take a common-sense approach when dealing with unreasonable cases brought by aggrieved employees. "At the moment, the tribunals feel they have to comply with the complicated grievance, disciplinary and dismissal procedures. They should be able to decide that the evidence suggests the employer acted fairly."

Emma Jones, founder of the small business website Enterprise Nation, advises directors to get help from an HR professional in drawing up an employment contract and to take out employee liability insurance to protect themselves and their company. And she suggests subscribing to an HR newsletter—such as the free online cheringtonhr.com—to keep in touch with changing rules.

"Keep relations with staff as happy and professional as possible so, hopefully, you never end up on the wrong side of the regulations," she adds.

But despite all the problems, some budding entrepreneurs realise they will have to become employers sooner or later. One of them is Roz Mita, who started Mannakin earlier this year. Based in Newark, Nottinghamshire, the company hires out mannequins. On the back of an endorsement from ITV's Trinny and Susannah, who hired a dozen of the dummies for the first show of their new series, Mita is targeting a £60,000 turnover for her first year's trading.

She realises she will eventually have to devote time currently spent drumming up business to hiring and employee management. "It's not just the time it takes when you've got an employee, it's the preparation of making sure you've got the right person in the first place," she says.
For now, she is planning to hire temporary staff, when she needs them, from an agency. But she is shocked by the costs involved. "If you're hiring somebody whose pay is £6 an hour, you pay the agency around £10 an hour."

But she adds: "Hiring temporary staff is a way of leaving headaches with the agency. Until I've got time to sit down and study what's involved, that's quite an attractive proposition."

Mita echoes the views of many of the 600 entrepreneurs who expressed their opinions to ministers in last year's consultation exercise on what business wants from government. One finding was that SMEs want less red tape, as proportionally it is harder for them to handle than it is for larger companies.

The government has announced that it is delaying the introduction of some new regulations, such as the extension of statutory maternity pay from 39 to 52 weeks. But it will need a sea-change reduction in existing rules, rather than a delay in new ones, to persuade more SMEs to start hiring lots of new staff.

And, as the FSA's Wright points out, with the economy heading south, in the near future, at least, many SMEs are going to be more cautious than usual.