05/10/2010 05:15 pm ET Updated Aug 09, 2011

Sexual Harassment In The Workplace: 5 Things You Need To Know

Sexual harassment lawsuits can be an entrepreneur's worst nightmare. In addition to the disruption to your business and the resulting financial costs, the damage to your business's reputation could be irreparable. Unfortunately, the potential for inappropriate and even unlawful behavior in the workplace is all too common -- especially at smaller and often close-knit companies. "Employees often forge friendships outside of work, and that can be a hotbed for a harassment claim," says Jamie Resker, founder and president of Employee Performance Solutions, a Boston-based HR consulting firm. "One person misreads the signals of his co-worker, perhaps alcohol was involved, and it all makes for a very uncomfortable Monday morning back in the office." So what are the best ways to deal with -- or better yet, prevent -- these scenarios? Here are five things you need to know.

1. Understand what sexual harassment is.
The U.S. Equal Employment Opportunity Commission spells it out quite clearly: "Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature constitute sexual harassment when this conduct explicitly or implicitly affects an individual's employment, unreasonably interferes with an individual's work performance, or creates an intimidating, hostile, or offensive work environment." Additional details and a fact sheet can be found on the EEOC website.

2. Create an anti-harassment policy.
Every business should have a formal, official policy against sexual harassment in the workplace. "One of the laws that applies to all organizations is Title VII of the Civil Rights Act of 1964, which among other things, prohibits sexual harassment," Resker says. "Employers must show that they took reasonable care in preventing sexual harassment, so at a minimum, an anti-sexual harassment policy should be in place." In no uncertain terms, your policy should define what sexual harassment is, designate how complaints should be filed and investigated, and explain the consequences of unlawful behavior. The EEOC website provides detailed information regarding laws and regulations.

3. Set the right example.
Even small, casual, startup environments need to treat the issue seriously. "Make a point to walk the talk and be the picture of professionalism yourself," Resker says. "Make it clear that crude jokes and sexual innuendos aren't right for your organization and are best employed for the outside of work circle of friends." The lines of professionalism can easily blur when friendships extend outside of work, so stay aware of the potential for problems and take steps to ensure you do your part to inform employees.

4. If a situation occurs, take action immediately.
As soon as a complaint is filed or a situation is witnessed, it's time to initiate an investigation, as stated in your anti-harassment policy. "Gather all of the relevant facts," Resker says. "This means interviewing all of the parties involved." FindLaw's detailed "Checklist for Sexual Harassment Investigations" can help guide you in the process and ensure your approach is fair, complete, consistent, and confidential. Never overlook an incident that crosses the line.

5. Work toward prevention.
If you want to minimize the risk of sexual harassment at your company, prevention is an important step. In addition to creating a policy and setting the right example, "make it comfortable for people to report an incident," Resker says. "Publicize the process for doing so." You can also schedule sexual harassment training for supervisors -- in fact, some states, like California, even require it.

The original version of this article appeared on AOL Small Business on 5/10/10.