As a small business owner, it's essential to consider potential legal pitfalls that come with managing a workforce. While payroll and workplace policies may seem like less consequential aspects of your business, team member complaints, and workplace violations are one of the top areas where small business owners find themselves in hot water.
Taking a proactive approach by auditing your processes and improving your systems can help you ensure a fair and compliant work environment that steers clear of legal trouble.
To make sure your business is on a straight path and that your team members are happy and focused, make sure you aren’t making any of these simple employment mistakes.
01 | Wage and Hourly Pay Mistakes
Minimum wage issues, overtime, holiday pay, and comp hours can complicate your payroll if you have W-2 employees. As a result, miscalculating pay due to your employees can have legal consequences and harm your reputation.
To avoid compensation issues, make sure your payment policies are clear and concise. If you have limitations to working hours, (for instance, you don’t provide holiday pay or overtime) make these policies extremely clear from the very beginning.
Bold or capitalize any particular restrictions in your employment agreement and handbook, and remind team members of the policy whenever the question of working hours comes up. By being forthcoming with your policies and keeping them top of mind for your team employees will temper expectations and help avoid payroll confusion.
Where possible, hire your team members as salaried employees or contractors on a flat-fee basis rather than as hourly employees. This won’t be possible for every type of role, but if you can, hiring someone as a contractor will help you get the work you need without having to worry about overtime pay or hourly time tracking.
02 | Misclassifying an Employee as an Independent Contractor
Misclassifying an employee as an independent contractor might seem like a convenient shortcut, but beware—the consequences can be costly!
Hiring independent contractors to perform work for you has benefits over hiring W-2 employees. Your business won’t have payroll tax or an obligation to provide contractors with employee benefits. But only certain team members can be treated as independent contractors based on the level of freedom they have to perform their work.
As tempting as it may be to save on taxes and employee benefits, the misclassification of a team member can lead to hefty fines, back taxes, and legal headaches. Plus, it's not just about the money—misclassified workers may be denied essential protections like overtime pay and workers' compensation.
The best approach? Ensure you properly classify your workers from the start and ensure that every independent contractor has a signed agreement, and that you are paying your independent contractors to their own business entity, as that can provide a safe harbor of sorts. If you do not have a standard independent contractor agreement that you have signed by every independent contractor working for you, contact us to create a template you can use.
03 | At-Will Employment Misunderstandings
At-will employment is a concept recognized by nearly all 50 states. An at-will arrangement means that either party has the flexibility to terminate the employment relationship at any time, whether the person hired isn’t a good fit after all or the team member decides to take a different opportunity somewhere else.
But here's the thing. If you do decide to terminate the relationship, always document the reasons behind the termination in writing to add a layer of protection to your business.
At-will working relationships are the most flexible work terms you can have, but that doesn’t protect you from accusations of discriminatory or retaliatory firing from a disgruntled ex-employee. To avoid this, always document your reasons for the termination in writing.
Record any incidents that the team member had before being let go, such as showing up late or failing to complete work on time. Even if the reason for the termination isn’t based on performance, such as simply needing to downsize your team to fit your new budget, document it and make a note of issues affecting hiring in the company as a whole in your company meetings and expense reviews.
Getting into the habit of documenting your hiring and firing decisions, as well as the company’s condition as a whole will help protect you and your business from any firing accusations that might arise in the future.
04 | Not Including “Work for Hire” and Confidentiality Provisions in Your Contractor Agreements
Hiring an independent contractor is a great way to outsource work for your company, but if you aren’t including provisions in your contractor agreements to protect your ownership rights of the work they create, you risk losing ownership of the materials they create for you.
To make sure your intellectual property such as proprietary processes, marketing materials, and artwork belong to your company and not to the contractor themselves, it’s essential to include “work for hire” provisions in your contractor agreement. You also need to include confidentiality agreements and may even want to have your contractors sign a nondisclosure agreement to prevent information about your company from being disclosed to the public.
Including these simple but often overlooked provisions protects your company’s materials from being repurposed or sold to another company or third party by the contractor and ensures you have recourse if a contractor discloses confidential information about your company.
Watching Out for You and Your Business
As a business owner, proactively addressing potential employment issues is key to protecting your business's reputation and keeping your workforce satisfied and productive. But, making sure your business complies with different employment laws and regulations can feel overwhelming.
That's where I come in as your Personal Family Lawyer®. To make sure every area of your business is set up for success, I work with you to audit your legal, insurance, financial, and tax systems through my LIFT Business Breakthrough Session™. During this session, we'll review your current practices, address any concerns, and create a tailored legal strategy that safeguards your business while promoting a positive work environment.
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This article is a service of Sky Unlimited Legal Advisory PC, Personal Family Lawyer® . We're not your traditional law firm, we stand apart from the rest by helping you make informed and empowered decisions on how to deal with your business throughout life and in the event of an emergency. We offer a complete spectrum of legal services, including a New Business Planning Session or an Existing Business Review Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. You can begin by calling our office at (650) 761-0992 today or book online to schedule a Business Planning Session and mention this article to find out how to get this $950 session at no charge.
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