By: Lauren Stahl
As a small business owner, you are more likely concerned with sales, managing employees, and cash flow than potential lawsuits. However, many small business owners will face the threat of a lawsuit at some point. And the financial impact can be devastating. A recent study from the U.S. Chamber Institute of Legal Reform revealed that tort liability costs are a “significant drain on…small businesses in particular.”
For many small businesses, which survive on small profit margins, litigation costs are crippling, if not fatal. The effects of litigation can reach far beyond financial loss. An impending lawsuit can—and will—add additional stress to you and your employees. Sitting in a courtroom will not help you to maintain and grow your business. A lawsuit can also harm your business’s reputation, especially if the case is publicized by a local or national media outlet.
To avoid costly litigation, you should consider the following proactive steps to keep your business out of the courtroom and the headlines.
hire experienced lawyers
Many businesses, including small businesses, will have contracts with third parties and employees. Many legal disputes arise surrounding the interpretation of a contract. Often, litigation can be avoided if an experienced lawyer drafts or reviews those contracts.
Hiring a lawyer can be expensive. But spending $500 or $1,000, for example, to have a lawyer draft or review a contract could help the business avoid a $200,000 lawsuit. Cost is relative. A modest sum of money upfront could save a small business an extraordinary sum of money in the future. Consider, too, that something in your business will go wrong—maybe not today but someday. And at that time, a relationship with a lawyer who is willing to help on short notice will likely be necessary.
PUT EVERYTHING IN WRITING
Small business owners might have the temptation to verbally agree or shake hands on an agreement. But think again! All contracts should be in writing. As mentioned above, many legal issues arise from interpreting contracts. Putting contracts in writing will help to avoid miscommunications and misunderstandings about goods, services, expectations, and payments.
Additionally, keeping a strong written record is important. Business owners should keep a record of all email correspondence, invoices or other statements, company policies and procedures, among other documents.
Why is keeping a written record so important? Written email correspondence can help decipher exactly what you agreed to. Invoices and other statements reveal when balances are due. Company policies and procedures should also be in writing as they can be used to demonstrate nondiscriminatory employment practices. Putting contracts in writing and keeping a written record are essential to avoid costly litigation.
DEVELOP CLEAR WORKPLACE POLICIES FOR FAIR AND CONSISTENT PRACTICES
Businesses create workplace policies to provide guidance on how to consistently handle workplace situations and manage expectations. Most policies provide direction for employees. Workplace policies help to distinguish appropriate from inappropriate behavior. They also help to maintain order within the business and ensure that its employees are treated fairly and equally.
Businesses do not need to create policies for every possible unanticipated event. Doing so would limit the ability to address individual situations and employee needs as they arise. But businesses do need policies that provide clear guidelines to ensure legal compliance and fair, equal, and consistent practices within the business. For example, business owners should develop policies to create consistency and fair treatment among employees (e.g., paid time off and benefits eligibility). Business owners may also want to create a policy that addresses appropriate employee behavior or conduct (e.g., attendance policy, code of conduct, and social media policy).
As small business owners, you should not only create clear policies but also communicate those policies with employees. You will also likely need to update and revise those policies over time to address the changing workplace and ensure compliance with the law.
Business owners should consult an experienced lawyer in developing these policies. Creating, communicating, and implementing company policies in a fair and consistent manner will help small businesses avoid litigation.
conduct research on people & companies before doing business
While not all legal disputes can be prevented, some can. Consider what hiring people who lack integrity, honesty, competence, and professionalism could do to your business. Or what doing business with less than reputable companies could do.
These types of people and companies could harm not only you or your business but also third parties, such as your customers. This exposes you to even more liability.
Prior to entering an employee or business contract, take your time. Request multiple references from potential candidates and take the time to call those references. Have conversations in a variety of settings with prospective employees, vendors, distributors, etc. Conduct social media searches.
When you are hiring, you will want to make decisions based on what will be best for your business now and in the future. While you may need to hire someone quickly, do your best to hire the right person or business. Such practices will save you time and energy in the long run. Especially if hiring the wrong person or company results in an impending lawsuit.
consider another cost-effective choice: mediation
Complaints against other employees or management in the company will arise. Having a plan for early resolution can prevent these issues from escalating.
Utilizing mediation—versus litigation—is a way for businesses to avoid the costly litigation process and move right to resolving the dispute. Through this process, a mediator works with both parties to manage communication and identify the parties’ real interests. Mediation is a great alternative to consider. Its beauty is found in its low cost, speed, and confidentiality (discussions cannot later be used in court).
main takeaway
Costly litigation can be avoided. Consider these proactive steps to keep your focus on what is important: your business.
This post has been reproduced with the author’s permission. It was originally authored on February 7th, 2022, and can be found here.
Sources:
https://www.sba.gov/sites/default/files/files/rs265tot.pdf
https://www.wolterskluwer.com/en/expert-insights/workplace-rules-for-business-owners-and-employees
https://www.cohenandmalad.com/tips-for-small-businesses-to-avoid-litigation/
https://cuetolawgroup.com/how-to-protect-your-business-from-lawsuit/
https://www.hsolaw.com/blog/how-to-avoid-litigation
