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4 Common Small Business Mistakes That Lead to Employee Lawsuits

03/17/2015 04:29 pm ET | Updated May 16, 2015

Lawsuits are filed against small businesses far too often--many of which are due to easily avoidable human resources mistakes that aren't seen until it's too late. Many of these lawsuits involve current or past employees who believe they have some kind of "dirty laundry" on the business, or think they can turn a minor grievance into a major payday. In fact, almost 75 percent of all litigation against corporations today involves employment disputes. Over 40 percent of these lawsuits are filed against smaller employers (15 - 100 employees).

Employment-related lawsuits are often even more costly for small businesses than consumer lawsuits. The median compensatory award for employment practices liability insurance cases is $218,000. The precautions you take today can prevent a frivolous--and potentially bankrupting--court case tomorrow. Here are four mistakes that can get you into trouble.

1. Not Running Background Checks on Employees
A first impression is always important, but it's hardly the only thing on which a job candidate should be judged. Considering the cost of employment-related lawsuits, your small business should do a thorough background check on prospective hires. This includes criminal background checks, calling past employers, and checking references. Doing so can uncover potential employment issues down the road and help you avoid lawsuits.

2. Not Using Employment Agreements
Written employment agreements, as long as they're professionally drafted, can eliminate any doubts about what is expected in the employee/employer relationship. For example, prospective employees will have no misunderstandings about sick days, their working hours, and even personal use of office equipment since these items can be clearly spelled out in an agreement.

3. Inadequately Documenting Terminations
Employees will come and go even if you have excellent advancement opportunities and work hard to reduce employee turnover. Terminations are part of running a small business, so you must carefully plan for them. Failure to do so could open the door to potential lawsuits from past employees. Document every termination, including the process, reason, and events that led to it. Documenting the termination of an employee minimizes the risk of future claims brought against your business.

4. Ignoring Relevant Employment Laws
Failure to follow basic, relevant employment laws could be much worse than just a lawsuit. You could face fines and even lose your license. Federal and state employment laws are nothing to ignore; make sure you thoroughly understand and comply with all of them. This can include everything from overtime pay to working hours to vacation time and even discrimination. While a happy employee might not mind you breaking the rules, a terminated or disgruntled employee may report you and file his own lawsuit against you.

Protect Your Small Business
Improving human resources management in your small business is critical in many ways. Adhering to all necessary policies, procedures, and laws enables you to reduce your risk for lawsuits, whether coming from employees or other businesses. Even if a lawsuit occurs, following these steps can reduce their severity and hopefully build enough evidence to dismiss the lawsuit.

Margaret Jacoby, SPHR, is the founder and president of MJ Management Solutions,a human resources consulting firm that provides small businesses with a wide range of virtual and onsite HR solutions to meet their immediate and long-term needs. From ensuring legal compliance to writing customized employee handbooks to conducting sexual harassment training, businesses depend on our expertise and cost-effective human resources services to help them thrive. This article first appeared on the MJ Management Solutions blog.

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