Five Employment Mistakes Made By Businesses

The process of hiring a new employee at your place of business is not as simple as one may think. There are important steps that must be followed in order to keep your company safe from costly legal disputes. Every type of business, large or small, is an open target for lawsuits by employees, past and present. First and foremost, labor laws must be fully understood and strictly obeyed. Since labor laws differ in each state be sure to research and understand the labor laws in your state.

Small businesses tend to be more apt to have lawsuits filed against them due to small mistakes that could have been avoided. Knowledge is power, so here are the top five mistakes made by companies that increase their threat of litigation:

  1. Hiring Employees as Independent Contractors – In order for a worker to be considered an “independent contractor” vs. an “employee”, they must have their own personally established business, do work for other clients/businesses, be paid by the job and not on a salary or by the hour, and provide their own workspace and tools required to perform the job, or some combination of these factors. If these requirements are not met, then the person could considered an employee by law and is eligible for benefits, overtime, worker’s compensation and unemployment benefits. Workers have been known to divulge this information to local labor agencies and in the event of a dispute, you could be forced to pay hefty fines and penalties, including back pay.
  2. Not Having an NDA – If a company fails to establish a well-drafted confidentiality/non-disclosure agreement (NDA) that is signed by employees, investors or contractors, the company is setting themselves up for significant risk. Protection of your confidential information is critical and the success for many businesses relies upon business models, formulas, devices, methods and/or ideas. The NDA must specifically state the types of information your business deems confidential and proprietary information and prohibit any use or disclosure of such information.
  3. Not Having a Non-Compete or Non-Solicitation Agreement – First, go ahead and determine whether or not a non-compete or non-solicitation agreement is needed for your business. If your evaluation’s answer is “yes”, then it is time to have your legal counsel carefully draft and review the non-compete and/or non-solicitation agreement for your company. The agreement restrictions differ in each state with some being stringent (Oregon and California), while others are regulated more loosely. Next, determine if this agreement should be signed by all employees and customers, or limited to certain employees and/or customers.
  4. Hiring/Keeping Employees with Poor Performance – First and foremost, the hiring process needs to be carefully prepared and executed. You should market the job position with multiple sources, including using headhunters if the job profile is a high-level or executive position. Another idea is to market with local colleges or specialty trade and business schools. The job description should be written in depth and convey exactly what the role is required to do and your expectations for the new hire. Next, the interviews must consist of questions that put applicants in real-life situations to help you determine how well they have handled past issues and what they will do when future problems arise. Once you have selected an applicant, if they are consistently not performing up to par and have been warned, it is time to let them go and find a replacement. You are wasting your company’s time and money keeping someone there when you could replace them with a much better employee.
  5. Violating Wage and Hour Laws Employees either fall into the category of “exempt” or “non-exempt” when determining if they are entitled to overtime pay. Employees that are paid hourly wages are non-exempt and must be paid hourly and paid overtime. Exempt employees include those paid on a salary basis (not hourly). Additionally, outside sales professionals and certain highly paid computer professionals may be exempt. One of the most common mistakes is the wrong classification of employees. If incorrectly classified, a business can be forced to pay penalties, attorney fees and back pay.

A profitable business usually has a productive, positive workplace as its backbone to success. It is best practice to provide excellent employee benefits plans and develop strong personal policies and procedures that are consistently followed by managers and HR. It is far too easy to make a mistake that can cost your company later down the road. Make sure that everyone in your company is following the rules and not bending them or rewriting them in their own way. You want to avoid any legal issues that are preventable, and set your business in the best possible position if a legal issue does arise in the future.

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