Avoiding Common Legal Pitfalls of Small Businesses – Part II

On Behalf of | Aug 30, 2021 | Business Law |

For decades we have represented businesses of all types and sizes, including many start-ups and emerging businesses, and we have seen small business owners make the same mistakes over and over. This article is the second in a 3-part series designed to help you avoid making the same errors yourself. Having experienced business legal counsel on your team will help ensure you avoid these traps.

Mistake No. 5: Not having good written agreements.

All of your important business agreements should be in writing, whether with customers, suppliers, independent contractors, or others. Oral agreements are hard to enforce and leave you with uncertain recourse for compensation or legal action. Your contracts need to be well thought-out, suited to your business, drafted in your favor (but fair), and give you flexibility and protection. Sometimes specific legal disclosures are required, particularly if you sell to consumers. And always be proactive and keep a finger to the pulse of your customers through customer support, surveys, e-mail or other methods. Promptly address all customer satisfaction issues.

Mistake No 6: Unclear expectations and rules for employees.

In most businesses, employees are 60% – 70% of your expense base. Why wouldn’t you be extra careful to protect this investment? Employees should be hired with great care to ensure they are a good fit with the work ethic, culture and customs in your business. All employees should have job descriptions, regular performance reviews and appropriate reward or discipline for their performance. Employee training is often overlooked but so very important! Inform your employees when they are hired and on a regular basis, at least annually, that discrimination, sexual harassment, and other illegal acts won’t be tolerated.

Your employees should acknowledge in writing at the time of hire that they are “at will” employees, which means they can quit or be let go at any time without exposing your business to liability. Consider a well-drafted employee handbook as a “rules of the road” manual that clearly sets out all expectations, policies, etc. for your workplace. It should be acknowledged in writing at the time of hire or when any substantive change is made to the handbook. But also be careful- if not written properly, an employee handbook may be construed as an employment contract.

Mistake No. 7: Disgruntled employees.

As a business owner, this may be one of your most common legal headaches. In America, employees have far more rights than in many other countries, in the form of unions and reasons for “wrongful termination”.

If you terminate a non-performing employee, make sure there is a written roadmap of how you both got there, that the reasons for leaving are clearly documented, and that he or she signs a document carefully drafted by an experienced attorney when terminated to make the terms of dismissal crystal clear. Letting an employee go without any formal terms leaves the door wide open for legal actions. What are some of the common matters that cause legal issues with employees?

(a) See Mistake No. 6: unclear expectations and failure to document expectations and performance.

(b) Discrimination/Harassment in the workplace: the legal ramifications of alleged discrimination, whether sexual, ethnic, age or otherwise, can cause your company serious problems. Make sure you are prepared to handle these issues should they arise. During the hiring process, obtain and keep resumes from all applicants should allegations of discrimination arise to prove that you hire the most qualified individuals, regardless of gender, ethnicity, age, etc. Hold regular meetings to oversee co-worker relations and ensure that discrimination on a smaller scale is not occurring between office cliques, or influencing the decisions of managers.

Harassment – sexual, racist, religious or otherwise – can be a serious problem in an integrated workplace with workers from various ethnic and religious backgrounds and social classes. Regular meetings and interviews with staff will allow your managers to see transgressions, which should be eliminated quickly through the swift termination of offenders. Victims of harassment and discrimination tend to attract lots of media attention, which can hurt your company’s public image as well as drain your legal budget. Be proactive and stamp out these problems before they start.

(c) Wage and Hour issues. Improperly classifying employees as exempt under the Fair Labor Standards Act, and failing to follow good practices, has blind-sided small businesses with huge damage verdicts.

(d) Immigration Issues: You should make sure that all your company’s employees can legally work in the United States. I-9s must be completed at the time of hire. You can use background checks on a periodic basis to identify illegal immigrants with falsified documents. The U.S. government has been known to conduct extensive surprise immigration audits that can cripple a company if it is found to be using illegal labor.

No. 8: Not proactively considering how to deal with litigation.

As an owner of a small business, the danger of crippling litigation should be at the top of your priorities. Litigation, especially in America, can take you by surprise and severely hurt your business’ bottom line. Litigation fees can be astronomical, and litigation requirements quickly drain management time, energy and resources.

Consider alternative means of dispute resolution, such as mediation or arbitration. Or, if a reasonable settlement offer is available, think seriously about taking it instead of spending more time and money in litigation. Put arbitration clauses in your contracts. And then there are the issues of records retention and preservation of evidence should litigation be threatened or started.

At McIlnay Button Law, a full-service business law firm, we are here to help you navigate through the common legal pitfalls faced by business owners and avoid the unnecessary risks and costs associated with them.