Sign up for Funding Circle newsletter!
Get our latest news and information on business finance, management and growth.
Updated: Dec 13, 2019
After working hard to establish your business, you finally decide you are in the position to hire staff. You likely aren’t hiring a human resource manager at this stage, but feel comfortable managing your workers because, hey, you’ve come so far already. It’s not as easy as it seems. Labor and employment regulations are complicated and you may leave your business liable for a lawsuit without even realizing you’ve made missteps. We’ve described four common small business mistakes that can lead to employment lawsuits.
It’s important to understand the difference between an independent contractor and an employee when making new hires. Classifying someone as an independent contractor allows the business owner to avoid providing benefits and paying certain taxes, but misclassifying a worker as an independent contractor instead of an employee can result in hefty state and federal penalties and leave your business vulnerable to potentially costly lawsuits.
Unfortunately, there’s no single test to determine whether a worker is an employee or an independent contractor. Each state may have a different definition or test to determine worker classification, but generally, regulators examine the amount of control the worker has over the manner and means of performing his or her duties. The U.S. Department of Labor Wage and Hour Division has set forth its own standards concerning employment relationships under the Fair Labor Standards Act (FLSA).
On a side note, the IRS uses its own guidelines to classify workers for federal tax purposes, which is separate from the tests assessed by state and federal governments. However, both employers and employees can submit an SS-8 Form to request a “worker status” determination by the agency.
Small businesses may not recognize the importance of an employee handbook, but it should not be overlooked. The handbook is a formal delineation of the company’s expectations regarding performance, provides an overview of the benefits provided to each employee, and generally summarizes the relationship between the employee and the employer. Employee handbooks protect businesses from legal liability by demonstrating the company’s compliance with labor laws and serving as a reference point if an employee later challenges you in court.
In addition to creating and distributing the handbook to new hires, it is important to also formalize your employee’s acknowledgement of the handbook to indicate that he or she understands and is willing to comply with company policies. On the flip side, it’s important that your company adheres to the policies outlined in the handbook and provides all the benefits promised to employees.
The policies you choose to include and the language used to convey such policies can be scrutinized in the event of a legal dispute. Some courts and employees interpret the language in employee handbooks as a contract that creates binding obligations on employers. A common example of this problem is when an employee interprets the handbook as a promise of continued employment so long as he or she is not in violation of any of the written policies. (To avoid this particular result, include language in your handbook that your company reserves the right to terminate employment for reasons not stated in the handbook or for no reason at all.) Another similar example is when an employee disputes his or her termination because the disciplinary actions taken prior to termination did follow a system described in the handbook. (To avoid this result, use language that does not obligate management to follow a particular disciplinary pattern for every circumstance.)
The Small Business Association’s Employee Handbook Guide provides a great overview of what to include when creating an employee handbook. Consider hiring an employment attorney to review your handbook for thoroughness as well as compliance with state and federal laws.
Something as small as a ten minute break can be the subject of litigation for many employers.
Though each state’s laws may differ, meal and rest break lawsuits are one of the fastest growing areas of business litigation. For example, in California, every company is required to create a meal and rest break policy, as well as evidence that this policy is regularly communicated to employees. The laws can be very specific. As an example, California law requires a meal break of at least 30 minutes must be provided to an employee no later than five hours after he or she begins work for the day. Employers are not only required to provide these breaks, but also maintain records of when the employee started and stopped the meal break.
An employment attorney can assist your company to create fair rest and meal break policies. Be sure to communicate these policies to your employees regularly.
Employers may subject themselves to legal action if they fail to properly respond to complaints relating to harassment and discrimination. It’s important to record all complaints and take appropriate remedial action, which could mean conducting investigations and/or reprimanding an offending coworker. Keep in mind that it’s against the law to punish someone for complaining about harassment and discrimination and that illegal retaliation can include less obvious actions like adjusting the complaining employee’s responsibilities or excluding him or her from meetings.
Employers should also acknowledge complaints relating to workplace settings that impose difficulties for employees with disabilities. The Americans with Disabilities Act (ADA) requires employers to “reasonably accommodate” qualified employees with disabilities by providing the proper equipment, services or devices that will allow them to do their job, unless doing so would be unduly burdensome. Examples of reasonable accommodation include providing a reasonable amount of medical leave or allowing a flexible schedule to allow the worker to receive medical treatments, purchasing ergonomic products, adjusting the heights of desks or monitors, etc.
By taking simple steps to appropriately address employee concerns, a business can shield itself from the cost and hassle of a discrimination lawsuit and the damage those suits inflict on the company’s reputation.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.