Entrepreneurs who want to start a business may want to consider consulting an attorney to help with proper business formation and legal contracts to avoid costly legal issues down the road. That’s according to Lisa Cagle, an attorney with the law firm of Gunderson, Palmer, Nelson and Ashmore, LLP in Rapid City, South Dakota. Cagle focuses her practice primarily on business and estate planning, employment law and real estate law.
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“Getting things set up right from the beginning is going to cost a little bit up front, but can save you tens of thousands of dollars on the back end if we’re trying to fix it,” she said. “We’ll see businesses come in and they’ve been running along just great, and they run into a problem that we could have easily fixed or prevented with a contract in the beginning, and now we’re having to have the court involved, and that’s so much more expensive.”
Consulting an attorney to review an organization’s employee handbook and policies can be beneficial for the business. They can check for inconsistencies in policies and make sure anti-harassment and anti-discrimination policies are written correctly to ensure protection of not only the business but also the employee.
Employee classification is another area that can get a business into trouble if it’s determined a worker is misclassified, such as a salaried employee who should actually be classified as hourly.
“You want to make sure that your 1099 workers are actually 1099 workers. They shouldn’t be W-2 — that can get you in trouble if they’re misclassified,” she said. “That can get you in trouble with the Department of Labor. It can get you in trouble with state and federal revenue, IRS, Department of Revenue.”
She said a small business owner may think it’s more convenient to classify someone as an independent contractor or freelancer rather than an employee because they don’t want to have to pay into unemployment insurance, for example, but that can come back to bite them.
“But that little bit of inconvenience is small compared to what happens if you start getting in trouble with state and federal agents,” she said. “You really want to make sure if you have a person who is a 1099 worker, that they meet all the requirements to be a 1099 worker and document it.”
Cagle said when employment issues escalate to the point of needing a lawyer, things have usually gotten out of control. To prevent this, employers should have clear, written policies in place — especially for sensitive matters like terminations or drug use. For example, with the legalization of medical marijuana in South Dakota, it’s essential to have clear guidelines about testing and workplace expectations, particularly since federal law still prohibits marijuana. Policies will vary depending on the nature of the business and any federal contracts involved.
Beverly L. Adams is an attorney with Fredrikson & Byron in Fargo, specializing in employment-related matters and health care law. She provides guidance on items such as employment investigations, disciplinary matters, employment contracts and union labor negotiations.
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One of the more frequent reasons she’s contacted by businesses is because they want to terminate an employee.
“Depending on the scenario, is this employee a minority, is it related to FMLA leave or ADA leave, is this a whistleblower, do they belong to some protected class? You’ve got to go through that whole gamut, what are the facts, what are the risks, understand the situation and figure out how much risk the company wants to take with it,” she said.
Adams also helps small businesses that want to hire their first employee, for example, and have questions.
“The first thing I ask is, do you have an employee handbook? There’s small to mid-size companies that currently don’t have handbooks. There are some presidents, CEOs, COOs, who believe it’s going to tie their hands and restrict them on what they can and can’t do. ‘I don’t want to have rules and want to be free to address things as they come.’ A lot of times what small businesses don’t realize is that, at a minimum, you want to have a discrimination-harassment section in your handbook to describe what it is, to advise employees what their rights are and to give employees the roadmap to bring those claims forward and to make them feel comfortable with creating a culture where you don’t tolerate this type of behavior.”
The only ways a company has liability for discrimination or harassment are if they don’t have a policy, so employees don’t even know how to raise the issue and report it, or they have a policy and ignore it, Adams said. Organizations should make sure that when someone is hired, they are set up for success by providing them with the company’s code of conduct.
“A lot of companies don’t realize the importance of an employee handbook. It may seem like a waste of effort or a requirement they don’t see value in, but it does have a lot of value because it can limit the liability that your company can be exposed to in a harassment or discrimination complaint,” she said.
Her advice to business owners who are going to implement a unique compensation program is to run it by an attorney to make sure they’re not violating any state or federal wage laws, because a mistake can be costly.
“Be very careful when you’re classifying somebody as exempt, because there are some gray areas. I’ve even worked at law firms when there was a time all paralegals were salaried, treated as exempt employees, and it turned out a lot of law firms got it wrong. They were actually hourly employees,” she said. “Whenever you’re going to classify someone as salaried, however they’re described in a job description, be sure that matches what they’re doing, and that you’ve vetted them out, that they’re actually an exempt employee.”
The wage and hour laws state that in a good-faith error, you have to go back two years to remedy any wage and hour errors. If it’s a willful violation, it’s a three-year lookback period, she explained.
“Those damages can be large,” Adams warned.
