By Josh Burgener and Joseph McKinney
Periods of rapid growth are exhilarating for small businesses. But, if an organization isn’t properly prepared for substantial growth, it can quickly find itself in unfamiliar territory at best, and at worst – in the legal trenches.
To welcome the fast expansion that nearly every business owner seeks, businesses should err on the side of caution by first protecting themselves with four legal safeguards.
1. Implement Internal Policies
Internal policies and procedures should be crafted to protect a business as it grows. A company’s workforce plays a large role in its success, but a business must safeguard all proprietary company information acquired by its employees. To that end, it’s often smart for employees to sign legal non-compete and non-disclosure agreements.
A non-compete states that when an employee leaves your company, they will not solicit your customers for business or work for a competitor in the same geographical area for a specific amount of time (Typically, one or two years is the standard limitation for this). A non-disclosure agreement provides an additional layer of protection by prohibiting an ex-employee from sharing confidential information that he learned while doing business with your company and clients.
However, simply having these policies in place is not enough to remove risk altogether. You must ensure that your non-compete agreement is enforceable and that the limitations are relevant and not overly broad. An enforceable non-compete must be narrowly tailored to a company’s legitimate business interests and geographical area while still allowing an individual to earn a living.
2. Understand Employee Thresholds
As your company grows, so will your payroll—meaning there are legal labor and employment laws you should carefully consider. Even the addition of a handful of employees could force your business to seek compliance with additional regulations.
Below are employee thresholds for the current federal employment laws:
- Family and Medical Leave Act (allows employees to take unpaid, job-protected leave for family or medical reasons) – For businesses with 50 or more employees in 20 or more workweeks in the current or preceding calendar year
- Americans with Disabilities Act (prohibits discrimination based on disability) – For businesses with 15 or more employees
- Title VII of the Civil Rights Act of 1964 (prohibits discrimination based on race, sex, nationality or religion) – For businesses with 15 or more employees in 20 or more workweeks in the current or preceding calendar year
- Age Discrimination Employment Act (prohibits discrimination based on age for workers who are 40 years-old or older) – For businesses with 20 or more employees in 20 or more workweeks in the current or preceding calendar year
- Fair Labor Standards Act (establishes minimum wage and overtime pay requirements) – For businesses that have an annual sales total of $500,000 or more or that are engaged in interstate commerce
It’s also important to note that every state has its own employment laws that often have significantly lower thresholds than the federal laws. Companies doing business in more than one state must be sure to comply with the states’ laws in which they are operating.
3. Classify Employees Correctly
One of the most important – and difficult – aspects of hiring is properly classifying your employees as exempt or non-exempt under the FLSA. A non-exempt employee is eligible for minimum wage and overtime pay. Exempt positions fall into very specific legal categories, and if an employee’s position does not fit into one of those categories, that employee could be deemed an hourly employee or an independent contractor (defined under specific guidelines).
Incorrectly classifying employees could lead to expensive FLSA battles in court, as noted by recent lawsuits against Uber. (Uber currently identifies its drivers as independent contractors, but some drivers argue they’re actual employees.)
If a court rules that any employee was wrongly classified, that individual will have the right to collect benefits and payment – including overtime pay – that would have been owed. Once you factor in attorneys’ fees – the reimbursement value could quickly skyrocket for an unprepared business.
4. Document Everything
Documentation is an ally to any growing company. From time-off requests to actual hours worked, it’s wise for your business to have a paper trail for everything.
For instance, if a court rules that you must pay damages to an employee who was wrongfully classified under FLSA standards, and you don’t have documentation of the actual hours that the employee worked, you may find yourself in a “he said, she said” situation – and required to pay out unnecessary damages.
It’s also important to have policies and/or documents in place that direct an employee to where he can request leave and other benefits and services. If an employee requests a leave of absence that you’re not legally required to grant him, this should be communicated to the employee and documented to show that the business is in compliance with applicable laws.
As a business owner, you should invest time and money in self-protection from the very start. As your business grows, the safety precautions implemented in the early days will prove valuable in protecting the business you’ve worked hard to build.
Josh Burgener and Joseph McKinney are attorneys with the Nashville office of Dickinson Wright, PLLC. Josh focuses his practice in labor and employment law, as well as civil and commercial litigation. He can be reached at JBurgener@dickinsonwright.com. Joseph also focuses his practice in labor and employment law, as well as civil and commercial litigation, minority business enterprises and business immigration. He can be reached at JMcKinney@dickinsonwright.com.
