This is the sixth in a 10-part series exploring legal mistakes that can be fatal to a business (even a seemingly well-established one). The illustrations and guidance provided are designed to help you spot these mistakes early. Each of these mistakes is preventable with proper planning and preparation.

Last month, I discussed the dangers of failing to protect business IP. If you want to protect your most valuable assets, you must act promptly at the start of your business’s product or service development. Establish a game plan to assess, inventory, and protect your trade secrets by using password protected files, keeping secret from the general public propriety processes and ideas, and ensuring employees are governed by properly drafted non-disclosure and confidentiality agreements. Regularly audit your practices and procedures to make sure that they adequately protect your trade secrets and talk with legal counsel about the pros and cons of filing for patents on specific inventions. It is also recommended that you seek legal advice on filing and maintaining trademark and trade dress protection for products and services to prevent competitors and unrelated businesses from causing consumer confusion by marketing similarly named or looking products. Protecting your hard-earned customer goodwill requires actively protecting your business’s intellectual property.

So, you’ve taken the steps to properly incorporate, maintain, and segregate your business ventures and you’re using a registered agent. You’ve also taken the necessary steps to protect your business’s intellectual property. Congratulations! This article will discuss how to avoid the devastating consequences of failing to follow prudent employment practices. 

Read on for an illustration of how easily mistakes can arise, how fatal they can be for even the most successful business, and how to avoid them entirely with dedicated planning. 

Mistake 6: Failing to Follow Prudent Employment Practices

Your employment practices are key to the success of your business. If you don’t take care of your employment practices, you can easily find yourself on the wrong end of a lawsuit.

John owned and operated a bar and restaurant serving the spiciest Mexican food (and the coldest drinks) in town. Though the restaurant was the proverbial hole in the wall, it was incredibly popular. Beginning shortly after 5 p.m. each workday, customers rushed to the happy hour, often staying through the evening. It wasn’t just popular on weekdays, though; on the weekends, it was virtually impossible to find a parking spot within two blocks of the restaurant. Customers often had to wait more than an hour to be seated, but they kept coming. The food was great, prices were affordable, and the atmosphere was raucous.

To keep up with demand, John had grown his staff to at least eight cooks in the kitchen at any one time. Counting the hostesses, busboys, wait staff, bartenders, and dish washers, the restaurant employed more than 25 people, many of whom had worked for the restaurant for years. The workplace was fast paced and boisterous, with people constantly on the move. The staff got along great, or so it seemed.

Without really thinking about it, he had hired only women that he found attractive to work as hostesses and wait staff, while hiring mostly men to staff the busboy, dishwasher, and cooking positions. He had learned long ago that women sell more drinks as bartenders and have a better record of upselling customers on food specials as waitresses. There was always some level of flirtation going on between the front-of-house and back-of-house staff, but everyone had been working together for so long, John didn’t really think much of it. In fact, one of his bartenders had met and married one of the cooks at his restaurant.

John had never taken the time to run much of a background check on any of his staff. Nearly everyone had come recommended from family friends or existing staff and he trusted their judgment. The few times he’d had to let someone go it was obvious that they simply didn’t fit in with the culture; usually by being too timid.

When his most dependable hostess Amanda suddenly quit after a Thursday evening shift, John was shocked. Amanda had been working at the restaurant for nearly four years and had always seemed happy and upbeat. Lately she had been a bit down, but John chalked it up to his refusal to give her the raise she had asked for two weeks earlier. Business had been going well, but John was in the market for two new fryers and an upgraded ventilation system and just couldn’t swing the additional money when Amanda had asked. John apologized again for not being able to give her the requested raise and wished her well but was immediately distracted trying to find someone to cover Amanda’s Friday night shift. John didn’t even notice Amanda storm out.

John was stunned a few weeks later when he received a packet from the Equal Employment Opportunity Commission containing a Charge of Discrimination. It seems Amanda had filed a complaint about the working conditions at his restaurant. 

Amanda claimed that Charles, the head cook, had made unwanted sexual advances toward her. When Amanda rebuffed him, Charles began taunting her, encouraging others to join him. Amanda claimed that the harassment was so severe and extreme that she had no alternative but to resign.

John vaguely remembered Amanda complaining about Charles’ catcalling a month earlier, but nearly all of the hostesses and waitresses had complained about the busboys and cooks at some point. He would take the guys aside after their shifts sometimes and tell them all to cool it and that always seemed to smooth things over for a while. He didn’t specifically remember what Amanda had said, but he was sure he had probably addressed it. Amanda even claimed in her Charge that she had been purposefully passed over for promotion when she had objected to Charles’ illegal conduct. That was definitely not true. 

When John called a lawyer friend, he was shocked to learn that this was really serious and that he needed to hire an employment attorney immediately. His lawyer friend explained that Charles’ conduct – and maybe many of the other employees’ actions – constituted illegal sexual harassment under Title VII of the Civil Rights Act. Amanda’s claims had merit and John and his restaurant faced some serious accusations.

How to Avoid Mistake 6

State and federal laws create an alphabet soup of employment obligations that raise serious concerns for all business owners (the ADA and ADAAA, FMLA, ADEA, OWBPA, OSHA, and others). These laws and their corresponding regulations present challenges for even the most sophisticated employer.

Prudent employment practices begin before you hire your first employee, using sound interviewing and hiring policies, background checks, and reference calls. Those policies and procedures should also include well-drafted employee handbooks or manuals with comprehensive policies and procedures, followed by thorough and continuous training to ensure that those policies are followed by all staff – including those in managerial positions. Implement appropriate disciplinary procedures and, when necessary, dispense discipline even-handedly and fairly. 

Equal hiring practices and equal pay are just the start of prudent employment efforts. It’s a good idea to retain employment law counsel to discuss your business needs and let counsel guide you on the regulations of which you should stay aware. Review your practices and procedures regularly to ensure that they meet the ever-changing legal requirements at the local, state, and federal levels. While spending money on lawyers is often the last thing a business owner wants to do, employment counsel can help save hundreds of thousands of dollars over time by helping implement and enforce proper policies and make the workplace a safe and enjoyable place for everyone.

Most importantly, don’t dismiss out of hand internal complaints by employees, especially over sexually inappropriate or discriminatory behavior or comments by other employees. It’s always a good idea to investigate complaints (with or without outside legal assistance) and counsel, reprimand, or even terminate employees who fail to adhere to workplace policies or maintain appropriate workplace decorum.

In the next article, I’ll address the fatal mistake of a business failing to implement restrictive covenants with employees and contractors.