Lawsuits filed by disgruntled employees or independent contractors against small businesses are one of the most vexing problems that business owners continue to face. Many are constantly on edge, fearing frivolous legal actions that can ruin the business even if the complaint has no merit.
Other small businesses – and especially those new to the employment game – may unintentionally violate employment rules simply by trying to be nice to employees by providing flexibility, or to save money for the business. Either way, it’s a serious and longstanding problem for almost any type of small employer in the U.S.
Here are the top mistakes that small employers make that lead to lawsuits:
1. Classifying all employees as “exempt” from overtime rules.
Under employment law, there are two basic employee classifications. In general, salaried employees are exempt from overtime and various other time-off or rest break rules that apply to hourly or “non-exempt” employees. Businesses get in trouble because it’s easier to pay everyone a salary rather than deal with hourly wage requirements that apply under both state and federal law. But merely paying someone a salary does not guarantee they are truly exempt, and job titles don’t either. An exempt employee is normally someone who is a high-level executive, administrative or professional.
2. Making people “independent contractors” because hiring employees is more trouble and expense.
This is a bright red flag for the IRS. Just because you want the employee to be an independent contractor – or the employee prefers that status – does not make it legal. There are strict and detailed rules around what qualifies as independent contractor status and you’ll need to follow them.
3. Failing to provide supervisors (or yourself) with any training about harassment or discrimination.
Too many business owners think that training just isn’t necessary. But the best defense against a discrimination or harassment complaint is making sure that you) or anyone in a managerial position in your business) know the rules on sexual harassment, discrimination, disability, safety and wage-and-hour laws.
4. Letting employees decide what hours and how many hours they want to work each day.
Most employees are restricted by law as to the number of hours they can work without overtime pay. Alternative workweek schedules are an exception, but employees can’t simply decide they want to work 10 hours, four days per week. A valid alternative workweek schedule requires that employers follow specific steps to institute such a program. Failure to meet requirements can mean penalties and back pay for overtime.
5. Withholding a departing employee’s final check if they haven’t returned company property.
For most business owners, this seems completely reasonable. But in some states, final paycheck deadlines set by law carry hefty penalties if not met, regardless of whether the employee still has keys, a uniform or whatever.
6. Firing an employee the wrong way.
The simple step of being sensitive when firing an employee can go a long way toward avoiding lawsuits. Employees who consider legal action after being fired often do so because of the emotional aspects of being unjustly terminated. Treat the employee in a similar fashion to other similarly situated employees. Get professional advice on proper termination procedures before you proceed.
7. Being nice to employees by letting them take lunch breaks whenever they want to.
Many employers – especially new ones – are surprised to hear this one. But in some states, such as California, employees must be provided at least a 30-minute meal break if they are working more than five hours. This is an unpaid, off-duty period. Failure to provide this can result in penalties and additional wages.
8. Failing to accommodate sick or disabled employees.
Businesses with more than 15 employees are subject to the Americans with Disabilities Act (ADA) – and California laws take that down to five employees. Employers have been sued for firing someone who is sick, obese, depressed, injured on the job or otherwise limited.
9. Hiring the wrong employee.
Your most valuable defense against lawsuits is to hire the right employees in the first place. “Wrong” employees create a negative work environment, harass co-workers, offend customers or vendors and will sue your business. Don’t hire in haste, conduct background checks and carefully screen all applicants.