I hate to be a fearmonger, but small business owners need to watch out. We live in a lawsuit-infatuated society where employees are king and employers are often left scraping financial reserves to satisfy filed charges. (See infographic on the rise of employee discrimation charges.)
Yes, employees have rights that need to be defended, but small business owners often get slapped with suits for employment violations they didn’t know even existed.
I sat down with William H. Healey, certified civil trial attorney at New York-based Mandelbaum Salsburg, to get the scoop on three legal bullets and how to dodge them.
Wage and hour violations
This is where an employee isn’t compensated for overtime.
Employers may not mean to underpay workers, but end up doing so by failing to document hours and/or misclassifying an employee’s status as exempt (don’t get overtime) or non-exempt (get overtime).
“There is a great deal of confusion over whether employees are exempt or non-exempt,” says Healey.
In general, exempt employees include those who make a salary and are in professional positions. Non-exempt employees are those who do not manage others and are paid hourly.
Confusion can set in when, for example, someone is paid hourly, has a ‘manager’ title, but doesn’t actually manage anyone. In that case, the person may be a non-exempt employee, Healey says.
Visit the U.S. Department of Labor’s site for more information on status distinctions.
Work-hour documentation is also essential to covering yourself in a lawsuit. Healey recommends instituting a punch clock, phone-in system, or computerized program to track employee hours and breaks.
“If you don’t do this and an employee claims you haven’t paid overtime and you don’t have a record, your credibility will be in question,” he says.
In mid-May, the U.S. Department of Labor released a smartphone app, DOL–Timesheet, designed to help workers keep track of hours and wages.
“This is a huge development and allows employees to keep and send records to other people; it means employers really need to be on their toes with time documentation,” Healey says.
Termination retaliation claims
You hire someone, you don’t really like him or her, but you keep them around for a while. Finally, you hit your breaking point and give them the boot. Sound familiar?
While this is a common situation, problems arise when an ex-employee sues for discrimination or retaliation…and you haven’t documented problems along the way.
“When you encounter a problem with an employee, speak to them and then put a written memo or e-mail on file, chronicling the situations as they arise,” Healey suggests.
That way, when you’ve finally had enough and decide to fire them, you have a paper trail that explains your reasoning. Without a trail, Healey says business owners are “fueling an employee’s claim that is retaliatory or discriminatory.”
Retaliation claims are a major problem of late. According to Healey, persons who lost their jobs during the recession are running out of severance. Retaliation claims have a filing period of up to two years (based on the state), and claims are on the rise.
Employee misclassification violations
The distinction between independent contractor and employee seems obvious, but is often misunderstood and overlooked.
For example, your graphic designer comes in three days a week for eight hours a day. You are their only stream of income and you tell them when to come in and where to work, but they aren’t technically on your staff, so you don’t have to pay their employment taxes…right?
According to Healey, an independent contractor (someone you can 1099) conducts himself or herself as an independent business. They may invoice clients, have business cards, set themselves up as a LLC, control the frequency of their work, refuse assignments, and work for competitors.
Employees are in another category altogether.
“If a business is exerting control over someone—telling them when to come into work, where to sit, giving non-negotiable assignments, etc.—that is an employee,” Healey says.
This differentiation has major legal and tax ramifications. If an independent contractor gets terminated and files for unemployment, they are out of luck. The opposite is true for an employee.
Check out the IRS’s site for more distinction specifics.
“[T]he government is really cracking down; laws can differ by state and there are a lot of gray areas, so talk to a professional if you have questions,” Healey suggests.
Additional resources on this topic:
The Small Business Start-Up Kit: A Step-by-Step Legal Guide, by Peri Pakroo and Barbara Kate Repa
Handling Employment for Bosses and Supervisors: Avoid Employee Lawsuits, by Geoffrey H. Hopper