COMMON PITFALLS FOR

COMMON PITFALLS FOR

THE SMALL TO MEDIUM SIZED BUSINESS

By Greg Connor

Lawsuits, audits, and bad publicity are the three most dreaded terms in the businessman's lexicon. Audits and tax liens are a result of filing mistakes, avoided by hiring a reliable and competent accounting firm to handle your company's finances. However, lawsuits and bad publicity, which often go hand in hand, are the province of the business defense lawyer. Unfortunately, often the business lawyer is only contacted after the damage is already done. This article is intended to examine some of the most common legal pitfalls faced by the modern business. Obviously, the degree of risk and liability depends on the type of business and its particular circumstances, but this article broadly addresses common mistakes or omissions made by the small and medium sized business.

Organization.

The small business usually gives small shrift to the organization and structure of the business entity. Business partners, key employees, and investors have their own expectations and their own agendas. When these expectations and agendas conflict with those of others involved in the ownership or management of a company, lawsuits are not uncommon. Proper organization of the business is the key to minimizing these disputes. Through thorough discussion and careful drafting of organization agreements, the relative expectations of the parties are revealed. Using this process, often the principals in a business are surprised that they hear unexpressed expectations and desires emerge, which are usually quickly worked out to the satisfaction of the parties. Careful legal drafting insures that these expectations are legally enforced.

Buy-Sell Agreements are usually the most overlooked part in the organization of a new company. Buy-Sell Agreements provide for the orderly disposition of ownership to other owners in the event of the death or permanent disability of an owner, or his attempted transfer of his ownership. Often life insurance funds the purchase of the deceased owner's share by the other owners insuring continuity of leadership. Buy-Sell Agreements, even if insurance is not involved, are critical to most businesses and attempts to add them later often foment dissension among the owners as to the valuation method of the company and the specific division of ownership.

Employment.

Employees are an eventuality in all but the smallest of companies. Employees have their own expectations and agendas that sometimes conflicts with that of the employer. Often these conflicts are resolved without further incident. Occasionally, these disputes result in lawsuits. At the executive level, these disputes often revolve around compensation, internal grievances, or grounds for termination. Not surprisingly these are the same complaints heard from other employees. Most of the disputes are resolved by carefully setting expectations about the employment, either through a written employment contract for executive-level employees, or through a company handbook. Company handbooks usually describe the at-will employment relationship between the employees and the company. In addition, aside from required state and federal postings, the company handbook usually describes the following issues (current as of 8/13/2001):

Jury Duty: In North Carolina, no employer may discharge or demote any employee for the reason that the employee has been called for jury duty or is serving as a grand juror or petit juror. Entitled to paid time off, but no jury duty pay specified.

Family & Medical Leave: Family leave is now mandated under the federal Family and Medical Leave Act. Only employers with 50 or more employees are subject to this law. In a nutshell, it requires that covered employers allow employees to take the equivalent of 12 weeks of unpaid leave each year due either to a birth or adoption of a child, or to attend to the serious health condition of an immediate family member or to the employee's own serious health condition.

Workers' Compensation: Mandated for all employers with three or more employees.

Harassment / Discrimination Policy: An harassment/discrimination policy requires the employee to report any harassment or discrimination to the proper person in order to correct the problem, unless the report person is the harasser or discriminator.

Garnishing Wages for Damage or Theft. A North Carolina employer may garnish an employee's wages under only certain specific circumstances unless notice is given at the inception of employment about a policy for damages or theft.

A common complaint from employers is the fear of a discrimination suit. Employees may bring a discrimination suit based on their race, color, nationality, religion, or disability. Avoiding liability involves excellent communication about expectations through a company handbook and initial training. If an employee is terminated or another adverse job action is taken, an employee may suspect discrimination unless the employer has made clear his dissatisfaction (in writing!) through the entire process. An employer that remains quiet about poor performance and springs a termination on an employee is more likely to be sued. A recent survey found that jurors were more likely to rule against an employer that lacked a company handbook because they considered this was a form of negligence on the part of the employer.

Customer Related Suits.

Customers are the least likely source of suit, but where an injury or misunderstanding takes place, damages can be high. Proper hiring and retention of employees by the company is important and failure of the employer to check backgrounds or order drug tests is often a source of liability. Next, make sure that your premises are safe from injury; a physical injury is a costly mistake for a company. Finally, insure that any dispute that arises is settled to the reasonable satisfaction of the customer as quickly as possible. Any customer that feels morally satisfied is unlikely to sue or complain about the company. In fact, resolved customer complaints frequently lead to referrals.