Avoiding Legal Attacks

Part II of the Protecting Your Business Series

 

By Mike DuBose with Blake DuBose

 

Business owners and leaders face a multitude of threats every day. They often wake up at night wondering things like: “Will competitors move in on our customers? Will profits keep up with expenses? Do we have the right staff members to succeed?”

There’s another very important question, too, that many should be asking: “Are we doing anything that’s going to get us sued?” However, it seems like few individuals take the time to thoroughly examine their businesses for legal threats, develop steps to address any dangers, and implement protective measures to avoid future hazards. Business lawsuits can cause massive disruptions to productivity, profits, and even leaders’ personal lives, so it’s in every owner’s and leader’s best interest to implement plans that minimize the risk of them occurring.

Although there is no foolproof solution to completely prevent legal attacks, there are many measures you can enact in your organization to make them less likely. Consider applying the following strategies (if you have not already) to protect yourself and lessen damages in case you are sued:

Select the appropriate legal structure for your company: Operating as a sole proprietor has a few advantages (including less paperwork and very liberal tax-exempt retirement programs), but it exposes your personal assets to lawsuits and is more likely to trigger a tax audit. The limited liability company (LLC) format is inexpensive, acts like a corporation, can be implemented quickly without legal assistance, and requires minimal paperwork (only three pages in South Carolina). If your business offers different services and products, consider establishing multiple businesses, like one company owner we know who placed his cement mixing operations in an LLC and the higher-risk delivery trucks and staffs in another. (Consider placing valuable assets under a low-liability company and fewer assets in high-risk entities—if one is attacked, the others will be protected.) Another idea: pool all of your employees into one LLC with no assets to reduce liabilities and decrease fringe benefit costs; then, lease staff to your individual businesses. Whichever you choose, make sure that all entities appear legally separate from you (obtain different checking accounts, for example).

Develop a team of liability experts: Before you need them, establish relationships with skilled defense and litigation attorneys, certified public accountants, insurance agents, and human resource experts. All should have experience in developing strategies to protect staff, the company, corporate officers, and owners from liability issues. Then, if any threats surface, call the appropriate professional immediately for advice.

Consult a human resource expert for a full understanding of important laws: Human resource law can be extremely complex, so secure expert advice to guide you through problems and explain regulations. JoAnn Moss ([email protected]), our excellent HR consultant, recommends using professionals with extensive field experience who understand your company; have detailed, up-to-date knowledge of federal and state employment laws; maintain strong ethics; and have servant-leader attitudes. Proven HR professionals are worth their weight in gold, as they can often prevent lawsuits!

Establish structured, well-documented hiring processes: When you publicize employment opportunities at your company, keep the ads clear, unbiased, and based on the job description. Allow candidates to fill out an official employment application that captures key applicant information and authorizes your company to conduct background checks, drug tests, personality assessments, physician-implemented medical reviews (to confirm that candidates meet the job’s physical requirements), and financial background searches (if the position handles money). Our Columbia-based litigation attorneys John Koon and Stephen Cook (www.koonandcook.com) reported, “Employee background checks, including driver and criminal records, are very important in lawsuit prevention. This is especially true if employees are expected to drive company cars—drivers with major driving offenses and/or alcohol and other drug convictions should not be allowed to operate company vehicles. If these drivers were to be involved in accidents, the business would be subject to not only civil lawsuits under an agency theory, but additional causes of action for negligent entrustment. The business could be sued for negligent entrustment even if the employee wasn’t driving the company car in the course and scope of his employment.”

Conduct fair, thorough interviews: Ensure that any staff members who will conduct interviews are well-trained on questions they can and cannot ask—some, like the employee’s country of origin or whether they have or are thinking about having children, are illegal! (For some ideas, see our compilation of 80 great interview questions from leaders who have been featured in the New York Times at www.mikedubose.com/interviewquestions.) Don’t rush the interviewing process. Have multiple staff members speak with candidates at least three times on different days. During the discussions, allow the applicants to talk at least two-thirds of the time, and listen carefully for signs that they will mesh with the workplace culture (one of the most important factors for a good employee fit).

Draw up clear, non-threatening customer, vendor, contractor, and employee contracts: The goal is to limit liabilities wherever possible, but also to be fair and understandable to everyone. Whomever the contract is with, make sure that it clearly spells out the responsibilities of all parties involved; take special care to include sections addressing issues you have dealt with in similar relationships before. Have lawyers review all contracts, but try to keep confusing “legalese” minimal.

Train your managers on common legal risks and dangers: Managers are on the “front lines” and often have the opportunity to notice problems brewing before senior leadership can. Provide your decision makers with extensive training on identifying and addressing threats, focusing specifically on implementing progressive, well-documented disciplinary procedures. They should also check for physical dangers around the premises, such as loose handrails or tripping hazards, and warn customers and staff about them, according to Koon and Cook, who stated, “It is the responsibility of company leaders to anticipate problems and dangers in the environment.”

Clearly define all positions: Giving employees detailed job descriptions will not only help them understand exactly what is respected of them, but also provides the company with documentation should they fail to meet their responsibilities. In addition, classify all employees correctly; for example, workers who are paid by the hour should not be labeled “exempt.” Don’t allow off-the-clock work or comp time, even if non-exempt employees volunteer for it. When warranted, pay workers overtime or restrict them from going over the 40-hour mark.

Document everything: In an article by M. Duffy for the National Federation of Independent Businesses, attorney Santiago Cueto notes that “the best way to avoid any misunderstanding is to put everything in writing. Nothing is better at preventing lawsuits than a well-drafted contract, memorandum of understanding, memo to file or any other writing that records an agreement or important event, he says.” Write follow-up e-mails to employees and clients summarizing important verbal discussions so you have electronic records of the conversation. Document employee-related issues thoroughly, especially in the early stages, including dates and the matters discussed with the employee. Should any allegations come up, these records will provide management, defense lawyers, and/or human resource experts with helpful information and proof that the proper procedures were followed.

When terminating staff, be kind: We’re all human beings, and no one likes being fired or laid off. If you make an effort to act in a caring way and preserve their dignity, former staff members are less likely to become angry and attack your company. Plus, it’s just the right thing to do if you follow the Golden Rule. We recommend giving terminated or laid off employees severance and asking them to sign releases of liability in return. If you are contacted later by a prospective employer, be careful about sharing information about former problematic employees other than salary and employment dates. Otherwise, you may get sued!

Communicate respectfully and clearly: Not all disputes must end in a courtroom! Cueto advised, “The best preventative measure to avoid a lawsuit is to simply pick up the telephone to clear up any misunderstanding.” Sometimes, threats may be based on misinformation or hurt feelings. Speaking to the potential litigant respectfully and finding “win-win” solutions might make court unnecessary and may even save your business relationship with them.

Keep records of loans: If you lend money to your business, develop written loan agreements with a lawyer’s assistance. Preferably, place liens against company assets so you will be paid before any creditors if things go south.

Each year, review your insurance coverage with your agent: Depending on your roles in the business and your community, you may need several types of insurance to maximize your liability coverage. Our excellent insurance agent Scott Moseley with Irmo Insurance Company (irmoinsuranceagency.com) advised, “Think twice about serving on the board of directors of any organization unless they have Directors and Officers Insurance. Consider this type for your business as well, combined with a broad, general umbrella policy, and a $1-3 million liability policy. Carefully examine your home and auto policies to ensure adequate insurance coverage, since personal and business assets can be simultaneously attacked! Increase your automobile limits to $500,000 and add on a $1 million liability policy for a few hundred extra dollars annually.”

Hope for the best, but prepare for the worst: Be optimistic when looking into the future, but know that hazards are going to pop up along the way! Plan for things to go wrong just in case, and you’ll be in an excellent position when things go right.

Face the facts: Be fair. After putting your pride aside and considering your team of experts’ advice, if you believe that you or your staff members have wronged someone, admit your wrongs and apologize (with professional guidance to make sure that you don’t increase your liability) and settle accordingly. However, if you believe you’re innocent, the odds are in your favor, and it’s worth your time and effort, you may want to defend your reputation in court. If you have a good lawyer who handles your case wisely, plaintiffs without a good case will often back off!

The bottom line: For business owners, liabilities and dangers are lurking around every corner! The best strategy is to prepare for issues before they arise, and that means assembling a team of experts before you need them; putting fair, well-documented policies and procedures into place; obtaining more insurance coverage than you think you need; and constantly looking out for any new threats on the horizon. This may not be enough to prevent every lawsuit, but it will decrease your chances of going to court and losing your hard-earned assets!

 

See our next segment in this three-part series for tips on obtaining comprehensive insurance coverage against threats and liabilities.

 

About the Authors: Our corporate and personal purpose is to “create opportunities to improve lives” by sharing our knowledge, research, experiences, successes, and mistakes. You can e-mail us at [email protected].

Mike DuBose, a University of South Carolina graduate, is the author of The Art of Building a Great Business. He has been in business since 1981 and is the owner of Columbia Conference Center, Research Associates, The Evaluation Group, and DuBose Fitness Center. Visit his nonprofit website www.mikedubose.com for a free copy of his book and additional business, travel, health, and personal published articles.

Blake DuBose graduated from Newberry College’s Schools of Business and Psychology and is president of DuBose Web Group (www.duboseweb.com).

Katie Beck serves as Director of Communications for the DuBose family of companies. She graduated from the USC School of Journalism and Honors College.

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