02/24/2006
Elizabeth Gaudio, Senior Attorney
NFIB Legal Foundation
Civil lawsuits can cost individuals and small businesses billions of dollars each year. With the dramatic rise in the cost of lawsuits, many small businesses fear even the possibility of being sued. However, instead of hoping a lawsuit will pass you by, every small-business owner needs to develop a strategy that will help prevent legal entanglements and defend your business. Here are 10 tips to help small businesses stay out of court or win their case.
Rule #1: Incorporate
Going into business alone may have more drawbacks than advantages. By incorporating, you can limit the liability on your personal assets as opposed to your business assets. Also, you can save on taxes through deductions for business expenses. To protect your business, make sure you follow corporate procedures and have your attorney or accountant review your records each year.
Not knowing the law is not a good defense and is a good way to get into legal trouble. Three areas you should focus on are employment laws, tax laws and environmental and health safety. Make sure your employees are well-trained and aware of discrimination laws. Hiring a CPA or tax attorney can help you deal with taxes. However, it is important to make sure your company has a secure, safe record-keeping system that provides supporting documentation. Safety laws affect nearly all small businesses, and the Occupational Safety and Health Act regulates all businesses regardless of the number of employees. Rule #3: Maintain adequate insurance
Make sure your insurance covers you in all situations. If your insurance does not cover the claim, the injured party may try to go after your personal or unincorporated assets. Additional protection might also be available with an umbrella policy and Employment Practices Liability Insurance (EPLI), to respond to claims of employment discrimination. Rule #4: Manage your employees fairly and wisely
When hiring a new employee, make good decisions from the start. Interview thoroughly but fairly and be appropriate. All applicants should be treated equally and asked the same questions. Set out clear expectations with a new employee right from the start by providing a job description and the company’s code of conduct. If you notice an employee slacking off, make sure you tackle the problem early to avoid confusion later on. Finally, enforce company policies consistently with each employee. Rule #5: Prohibit discrimination
Discrimination in the work place is difficult to handle. Be aware of what goes on at all company functions, not just in the workplace. All employees should be given written policies stating that discrimination and harassment will not be tolerated. Rule #6: Classify employees correctly under the FLSA
Some of the most recent lawsuits have dealt with the misclassification of consultants and salaried “exempt” employees under the Fair Labor Standards Act. In order to avoid this mistake, regularly review your employee’s FLSA classifications. Also, keep extensive payroll records for all employees to ensure your protection. Rule #7: Be careful with independent contractors
Employers need to be particularly cautious not to incorrectly classify an employee as an independent contractor, because the liability for doing so can be significant. You may be liable for employment taxes for the worker and a penalty. To determine whether or not an individual is an employee or an independent contractor, employers must conduct a fact-specific inquiry regarding the particular job duties of that individual.
Rule #8: Watch out for those workers' comp claims
Stop workplace accidents before they happen. Implement proactive training and hiring procedures, implement a written safety plan, promote safety and wellness, and aggressively investigate accidents. Report claims immediately; waiting one week can cause settlement costs to increase up to 60 percent.
Rule #9: Hire an attorney There will be some time in the course of a small business that a lawyer will be needed. Interview two or three attorneys before making a selection. Be sure to ask questions about their experience, their tendency to settle or go to trial, costs and amount of time a case will take. If you are confused with what the lawyer is saying, ask for clarification. Also, don’t sign anything until you or others have had time to review it. There are numerous ways to keep your legal costs down such as only making necessary phone calls, being organized, requiring authorization for any expenses exceeding $200, asking for receipts and meeting quarterly to discuss case progress.
Rule #10: Document, document, documentWriting and keeping documents are vital to your business. Institute a document retention policy that all employees must follow. A good policy will promote efficiency, save valuable computer and physical space, and protect your company in case of a lawsuit.
Lawsuits can severely hurt small businesses, new business formation and job creation. While there are no guarantees when it comes to court cases, assessing your risks will help minimize your liability.
The NFIB Legal Foundation is a 501(c)(3) organization created to protect the rights of America's small-business owners by providing advisory material on legal issues and by ensuring that the voice of small business is heard in the nation's courts. The National Federation of Independent Business represents the consensus views of its 600,000 members in Washington, D.C., and all 50 state capitals.
