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Starting your own business is exciting. You're finally your own boss and you can run your hardwood flooring business the way you want. Whether it's this excitement or simply a lack of experience, some contractors overlook vital parts of their business plan, which can get them into trouble later down the road. Here is a list of common legal issues that are often overlooked by small-business owners.
Wage and Hour Issues
Wage and hour issues are often misunderstood by employers. This can result in misclassification of workers or possibly "off the clock" allegations that workers are not properly credited for time worked. The Department of Labor estimates that approximately 70 percent of businesses are out of compliance with wage and hour laws. What can you do to make sure you are not at risk?
First, hire a specialist to review your pay practices to determine if you are in compliance with the wage and hour laws, both state and federal. While there are wage and hour specialists who are not attorneys, you may consider hiring a lawyer for the audit itself to maintain attorney/client confidentiality and work-product privileges based on the results. These privileges would not extend to audits conducted by human resource specialists who are not lawyers. Make sure the review covers both state and federal law requirements.
A second step is to change your way of thinking about wage and hour issues. Too many employers pay employees a salary and then assure that they don't need to pay overtime. The key is to think exempt versus non-exempt, not simply salary versus hourly. In many jurisdictions, the distinction is based on the nature of the employee's duties and responsibilities, not how they are paid.
Once you understand wage and hour compliance issues, you should train your managers and make sure they understand the rules. Because they are often close to the front lines, managers can spot problems before they become too costly.
Implement your knowledge by creating policies on pay practices and employee hours. Make sure your employees do not work off the clock and that they work only those hours assigned. Address issues promptly when they arise. Wage and hour issues should be treated as seriously as employment compliance involving harassment or discrimination; wage and hour lawsuits can be just as costly to your business.
Never retaliate against an employee who makes a complaint for wage and hour issues. In these cases, an employee argues that the employer retaliated against him or her for making a complaint about unpaid wages or overtime. A retaliation claim generally focuses on the employer's actions after the company receives notice of the complaint, as opposed to whether or not the employer correctly paid the required wages under the law. For this reason, a retaliation claim is even more preventable than the underlying wage and hour claim.
For more information, consult Fact Sheet #23 of the U.S. Department of Labor. Visit www.dol.gov and search for "Overtime Pay."
Implement an Employee Manual
Employee manuals serve important practical and legal purposes. They can outline the nature of the employment relationship, your policies and what is expected of your employees. If a dispute ever arises between your company and an employee, an employee manual can provide an important part of your defense.
An employee manual provides the greatest protection for your business if it is both comprehensive and consistently followed. To be comprehensive, it should contain each and every policy that may affect an employee in your business. Commonly, it will include policies on a number of subjects including:
- the nature of the employment relationship
- requirements for a particular job
- hiring policies
- vacation days and sick days
- drug and alcohol policies
- policies governing Internet access and e-mail use
- policies governing employee privacy
- policies affecting document retention
- grievance policies and procedures
- notices required under state and federal law
- termination policies.
One of the most important functions served by an employee manual is its role as evidence in disputing (or validating) an employee's claim. If a manual is complete and detailed, then the merits of an employee's claim can be easily determined. An employee manual allows you to point to a particular basis for termination, if one is ever challenged.
It is critical to keep in mind that an employee manual is not to be treated as if it were carved in stone. You should periodically review each of the policies to ensure that they stay up to date with federal and state law. Perhaps the three most important policies to include in the manual are those for hiring an employee, terminating an employee and establishing a procedure for an employee to file a complaint.
Applications should be carefully prepared and reviewed on an ongoing basis to ensure compliance with state and federal law. Just as important, interviewers must be trained on what questions they can and cannot ask in order to avoid a discrimination claim. Additionally, one wrong question could provide the basis for a claim that an employee received a contract position when, in fact, the business owner intended only an at-will employment relationship.
It is equally important to document the firing process. An employee manual should contain a written policy addressing situations that might lead to termination and outline the employee's rights in such situations.
Putting policies in place is of little value if you cannot prove you explained them to your employees. When manuals or supplements are distributed, have each employee sign and return a declaration acknowledging that they received, read and understood the policies.
Just as important as having a set of policies is following them on a consistent basis. While not having a policy leaves businesses open to litigation, having a policy and failing to follow it on a consistent basis could create equally significant problems.
Any disputes between the business and an employee should be well documented, as should reasons for reprimanding or terminating. Similarly, any complaint by an employee should be documented, as well as the actions taken in response to that complaint. These should be kept in the employee's personnel file, in addition to the corporate records. By documenting any and all actions taken with respect to an employee, a business may be able to improve its position in employment litigation, if not head it off entirely.
Keep Up With Required Paperwork
When choosing the form of a business organization, all too often too much attention is paid to the type of business—whether it is an S corporation, a limited liability company or some other form—and not enough attention is paid to recordkeeping and paperwork required to maintain the benefits of the choice of that business type. Not keeping up with the paperwork and not maintaining a distinction between the business owner and the business can have potentially devastating consequences.
Most business and LLC laws require specific records to be kept by the owners. In general, LLCs require less documentation than corporations, but minutes of regular or special meetings of the business owners and decision makers should be documented at least as often as required by the applicable laws, and certainly with respect to every major decision made.
It is important for business owners to maintain a distinction between personal assets and those belonging to the business. Mixing personal finances with business finances is one of the easiest ways a business organization can lose the benefits of operating as a separate entity. Detailed accounting records should be kept tracing the transfer of funds from the business to the business owner. Additionally, business owners should keep detailed records for the money coming into the business prior to any distributions from the business to the business owner.
In order to maintain the limited liability that a corporation or LLC can provide, it is crucial to properly identify yourself as a corporation or LLC by using your company's full legal name (including the "LLC" or "Inc.") on contracts, correspondence, business cards, checks and other legal documents. When signing contracts or other legal documents for your company, the document should clearly indicate that you are signing in your capacity as an officer of the company and are not personally undertaking liability for the company's obligations.
Although it's exciting, starting your own contracting business is obviously a lot of hard work, and by avoiding the problems many small-business owners have at start up, you can help ensure your new business thrives.