If you're a small business owner, the thought of navigating a potential lawsuit can be scary. As a Maryland lawyer and former CPA who represents small businesses and who has also been a commercial and business litigator in a premier law firm in Baltimore, I know both the business side and litigation side of the question. I have also run my own business for 14 years. I am passionate about this topic because I strongly believe that legal services are grossly expensive for most individuals and small businesses. The fear of a lawsuit can paralyze a business owner because of the economic costs, the emotional costs, and the uncertainly of the outcome. I try my best to make sure that my clients are aware of the major problems that could end up in litigation. I want my clients to call me before they take action if there is any question about the legality of an action.
What are some of the biggest reasons why small businesses get sued?
Other than a collection action for the failure to pay a debt or bill, I believe the biggest reasons a small business would get sued or end up with a claim against it are:
- Employment discrimination in hiring or personnel actions – employers need to know that there are many requirements when advertising, interviewing and hiring an employee. Generally, a person cannot be treated disparately based on being a member of a protected class. This includes overt discrimination and disparate treatment.
- Failure to classify a person as an employee (that is, considering the person an independent contractor when they are actually an employee) – this can subject the employer to significant penalties and back taxes by state and federal taxing authorities. Many, many employers make this mistake. If an independent contractor becomes disgruntled, all it takes is a call to the state labor division and an investigation can ensue.
- Wage and hour issues – the failure to comply with the federal Fair Labor Standards Act and comparable state laws – like discrimination and classification problems, employers get into hot water when they fail follow all of the detailed regulations mandated by the federal Fair Labor Standards Act or state counterparts. For instance, failing to pay overtime, failing to pay for all work done, failing to offer required breaks, etc., can result in a complaint by an employee and/or an investigation by a government agency.
- Intellectual Property Issues – using someone's logo, name or trademark – this is a common problem and businesses need to be aware of the risk of using another's intellectual property
- Personal Injury Claims – if the business has a brick and mortar business or sells products, the business is at much higher risk of being the subject of a lawsuit.
What steps can small business owners take to avoid getting sued?
The numbers below correspond to the numbers above:
- Employers who are advertising for and interviewing candidates are well served by
- reading articles regarding what questions can and cannot be asked, and what factors can and cannot enter into a decision to interview or hire a candidate;
- using pre-prepared questions and not deviating from them;
- using the same questions for all candidates and making sure each candidate is treated similarly;
- having a set of requirements for the job and documenting whether each candidate does or does not fulfill the requirements;
- using a platform that has a preset process for advertising, interviewing and hiring candidates.
- My mantra is “1099 is not a verb” and there is no such thing as a “1099 employee.” I have heard many business owners say, “I 1099 that person,” or “I just hired a 1099 employee.” This is a huge red flag. A person who fulfills the criteria of an employee will be treated as an employee by a government agency regardless of what that person is called, how she is paid, or what type of tax reporting form is submitted to her at the end of the taxable year. So, if the person is, in actuality, an employee, that person must be treated as one, which means that the employer must withhold taxes and pay workers compensation and employment taxes. If the employer has a question – ask an HR expert or an attorney. Do not guess.
- Know and understand the FLSA and make sure you have a policies and procedures manual that outlines the lawful policies – and follow them.
- Do your research before using a name or trademark. Google it, search trademark and tradename databases. Search domain names. If you are extremely vested in a name or mark you wish to use, I highly recommend that the business owner hire a trademark attorney to register the name and/or mark. The money spent will potentially save thousands lost if the business receives a cease and desist letter from another business and has to change logos, taglines, websites, brochures, contracts, etc.
- First, make sure the real property is free from issues that could cause an injury. Also, products need to be free from defects, and the company should ensure that it has standards that it follows on a regular basis to ensure that negligence cannot be proved by a claimant.
1-5 – for all of the above, the business MUST carry general liability coverage and include riders for employment claims and intellectual property claims.
What steps do you recommend a small business owner take if he or she does get sued?
First, contact a lawyer who is a litigator and who specializes in the type of law which is the subject of the suit (personal injury, product liability, FSLA, contract, discrimination, etc.). Second, if you skip the first step, do the first step. Seriously, no one should attempt to represent themselves (or their business) in litigation.
What, strategically, could a path to remediation look like?
The lawyer (or the principals) should talk to determine if a settlement or remedy can be reached. The parties could agree to mediation, which is a voluntary process. Settlement is always best because of the economic costs, the emotional costs, and the uncertainly of the outcome of litigation.