Lawsuits filed by disgruntled employees or independent contractors against small businesses are one of the most vexing problems that business owners continue to face. Many are constantly on edge, fearing frivolous legal actions that can ruin the business even if the complaint has no merit.
Other small businesses – and especially those new to the employment game – may unintentionally violate employment rules simply by trying to be nice to employees by providing flexibility, or to save money for the business. Either way, it’s a serious and longstanding problem for almost any type of small employer in the U.S.
Here are the top mistakes that small employers make that lead to lawsuits:
• Classifying all employees as “exempt” from overtime rules. Under employment law, there are two basic employee classifications. In general, salaried employees are exempt from overtime and various other time-off or rest break rules that apply to hourly or “nonexempt” employees. Businesses get in trouble because it’s easier to pay everyone a salary rather than deal with hourly wage requirements that apply under both state and federal law. But merely paying someone a salary does not guarantee they are truly exempt, and job titles don’t either. An exempt employee is normally someone who is a high-level executive, administrative or professional.
• Making people “independent contractors” because hiring employees is more trouble and expense. This is a bright red flag for the IRS. Just because you want the employee to be an independent contractor – or the employee prefers that status – does not make it legal. There are strict and detailed rules around what qualifies as independent-contractor status and you’ll need to follow them.
• Letting employees decide what hours and how many hours they want to work each day. Most employees are restricted by law as to the number of hours they can work without overtime pay. Alternative workweek schedules are an exception, but employees can’t simply decide they want to work 10 hours, four days per week. A valid alternative-workweek schedule requires that employers follow specific steps to institute such a program. Failure to meet requirements can mean penalties and back pay for overtime.
• Firing an employee the wrong way. The simple step of being sensitive when firing an employee can go a long way toward avoiding lawsuits. Employees who consider legal action after being fired often do so because of the emotional aspects of being unjustly terminated. Treat the employee in a similar fashion to other similarly situated employees. Get professional advice on proper termination procedures before you proceed. •
Daniel Kehrer can be reached at email@example.com.