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Preventing Lawsuits
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Preventing Lawsuits


At this time, the tort system in the U.S. costs over $230 billion per year, which amounts to a staggering $845 per person, with about 50% of this amount going towards legal fees. There are approximately 1 million attorneys in the U.S. , which is an increase of 100,000 at the beginning of the 20th century. Seventy percent of the world's attorneys are located in the U.S. , and 94% of the world's lawsuits are filed here.

When it involves litigation, businesses take the brunt of the punishment. And it's usually the small $5,000 - $10,000 out-of-court settlements and not the million dollar verdicts that can financially impair a company. So, here are 10 practices that could help keep legal troubles away or, it not, to help a company be successful in the event it is sued.


A good many people who go into business do so as a "sole proprietor." This means that they are doing business on their own, as individuals. This situation offers no asset protection and poor tax benefits. If a business is unincorporated, then personal assets are at risk. For less than $100 in most states, a businessman can form a corporation to do his business or trade. And, if it is properly maintained, a corporation shields personal assets if the business should either be sued or go bankrupt.

It must be remembered that a corporation is good, but only if used properly. Many people will pay an attorney up to $1,000 to set up a corporation and its minute book and then promptly put the book up on a shelf and forget about it. A corporation will not shield anyone from personal liability if they fail to follow corporate procedures. Worse, if there is an IRS audit, they can set aside the corporation and hold the owner personally liable for the taxes.

To protect a business, at least once a year it is a good idea to have an attorney or accountant review corporate records.


Most employment disputes can be avoided by having good personnel management practices. There isn't any need for small businesses to create large Human Resource Handbooks. But employment disputes can be mitigated by applying a few basic fundamental policies.

Always make good hiring decisions from the beginning. When it comes to employing someone, an effective interview is the most important step to take when choosing the best applicant. To make an informed decision about an applicant's job qualifications, it is very important to compile as much information as possible during the interview. However, it is also important to never ask inappropriate questions that could wind up being the basis for an employment discrimination complaint. The applicants' resumes should be reviewed in advance of interviews along with standard job-related questions that will help to pick the best candidate. The same list of standard questions for each interview should always be used. Information about the company should be prepared and all questions from the candidate should be answered. It is extremely important to look and act professionally during the interview and to show interest in every candidate.

Once an employee begins, he should be provided with a job description which clearly defines his responsibilities. He should also receive a copy of the company's discipline policy and code of conduct, if one is available. Once this information is provided, the business owner has established a framework to evaluate the employee's performance and, if necessary, to provide discipline.

Regularly scheduled performance evaluations should be conducted and hard copies of all performance reviews kept in the employee's personnel file. Such reviews should never be inflated or inaccurate, and ought to give the employee an opportunity to improve if necessary.

It's very important for an employer to take action when he becomes aware of any deterioration of an employee's performance. By finding and addressing an employee's poor work performance before it becomes intolerable, it is easier and more effective to deal with performance problems than allowing these problems languish. By confronting poor performance early, a company will benefit in the long run by improving employee performance, increasing morale and protecting against possible employment litigation.

All company policies should be consistently enforced. Written copies of warnings and violations should be maintained in the employee's personnel file. Finally, whatever the company's disciplinary policy is, it should be applied equally to each employee. These steps show a pattern of fairness and willingness to work with employees before having to turn to termination of employment. As a general proposition, if an employee is informed that he is being terminated, whether for performance reasons or misconduct, it should not come as a surprise to the employee. In nearly every circumstance a termination announcement should be the end of a progressive discipline that gives the employee a clear signal that they have not been performing up to company expectations.


A major concern for the 21st century business owner is sexual harassment. Anyone who owns a company with employees has to be aware of what is going on. Even if the owner doesn't personally engage in conduct that is considered to be harassing in nature, he can be sued if his company sanctions a "hostile" environment.

Written company policies should be issued to all employees specifically stating that sexual harassment will not be tolerated.

Some of the most frequently litigated issues recently have involved misclassifying consultants and salaried "exempt" employees under the Fair Labor Standards Act (FLSA). The FLSA applies to all full and part-time employees of any business which has two or more employees and establishes minimum wage requirements, overtime pay, record-keeping and child-labor standards for full- and part-time employees.

Misclassifying an employee can be a very expensive mistake, and has potential for class action suits which seek unpaid overtime for periods up to three years. In order to avoid liability, employers should regularly review whether their employees are properly classified under the FLSA.

Finally, employers should never forget the FLSA Record-keeping Requirements: If an employee is subject to the minimum wage provisions or both minimum wage and overtime provisions, an employer must keep extensive payroll records.


As liability for doing so can be significant, all employers must take special care not to incorrectly classify a worker as an independent contractor. It is critical that an employer correctly determines whether people providing services are employees or independent contractors. Generally, employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. Employers generally do not have to withhold or pay any taxes on payments to independent contractors.

If an employer incorrectly classifies an employee as an independent contractor, he could be held liable for the employment taxes for that worker, plus a penalty.

In order to determine whether an individual is an employee or an independent contractor, employers must conduct an inquiry regarding the job duties of that individual. When employers conduct this inquiry, they should use different tests under various employment statutes to aid them in making their determination. Generally, these tests consider how much of control an employer has over the worker and whether the worker is dependent on the business of the employer for his livelihood. In applying these tests, many factors will be considered, including: whether the worker is being trained by the employer, whether services are rendered personally, how the worker is paid (i.e., hourly as opposed to by the job), the length of the employment and how the employer can end the relationship.


In the course of owning a business, there probably will come a time when the owner will need the assistance of a lawyer.

It's best to interview two or three lawyers before selecting one. The businessman should be comfortable with the lawyer he is working with, and he should have the necessary skills to win the case. During interviews, it's best to bring the general points of the case and all the names, addresses and phone numbers of everyone associated with it. At a minimum, the following questions should be asked:


  • How long have they been in practice?
  • How many cases such as this one have they handled?
  • Do they usually go to trial or are most of their cases settled out of court?
  • How much do they estimate this case will cost?
  • How long do they estimate this type of case will take to either settle or go to court?

If something the lawyer says is not understood, then the client should ask for clarification. In order for the client to feel comfortable with a lawyer, it is crucial that a person understands what he is telling him. No one should let a lawyer overwhelm them with "legalese".

Last of all, the terms of the agreement with the lawyer should be understood. No contract should ever be signed until it's been reviewed and other offers have been considered. Replacing lawyers should be avoided at all cost. When selecting a lawyer, a person should be comfortable with him.