Avoiding the Most Common Business Lawsuits

by edralyn on July 23, 2013

Caution: I'm HotThese days, most small business owners understand the danger of lawsuits from the time their company is just an idea to the time it’s an office full of hundreds of employees. According to the U.S. Small Business Administration, one out of every three small business is threatened or served with legal action every year. Two thirds of companies who were sued paid more than $10,000 in legal costs. In order to avoid a dire situation, it’s important to understand how they arise and what you can do to avoid them. The majority of small business lawsuits fall into a few distinct categories, which means companies often make the same mistakes leading up to them, even if they’re not guilty of any crime. These are the most likely reasons your business will be threatened with a court case and what you can do to protect yourself.

1. Discrimination


The accusation of discrimination drives thousands of lawsuits per year, whether it’s based on gender, race, disability, or orientation. Discriminating against employees in the hiring process and beyond is a violation of several federal laws, and cases are usually investigated by the Equal Employment Opportunity Division, who work with employees to make it easier to sue. So what can you do? The best approach is to have a clear policy handbook that outlines the company’s strong stance against discrimination. You should also offer training on discrimination and harassment for employees and be very thorough in your hiring and firing processes. If you’re not guilty of being discriminatory, you should have documentation of the reasons why you didn’t hire somebody or why you had to let them go. Still, it’s also important to have a discrimination clause in your errors and omissions insurance policy, which you can find online just in case you have trouble offering concrete proof against an abstract accusation.

2. HarassmentHerman Cain

Harassment suits, whether they involve violence or sexual advances, can be costly and ugly. They not only put your finances in jeopardy, they compromise your company’s reputation. The Equal Employment Opportunity Division sees an average of 12,500 harassment lawsuits per year. It doesn’t matter if you think a claim is frivolous or unfounded, it’s of the utmost important that you investigate every accusation that comes your way. When one of your employees harasses another, you’re the one who will pay a hefty price if you don’t take it seriously. Your policy handbook should include strict rules about harassment and rules about making false claims, but it should also state clearly that every claim will be taken in good faith and investigated thoroughly. If you discipline or fire an employee for harassment, make sure it is well documented. You can’t be held legally responsible for a worker’s crime, but you can be held legally responsible for not doing everything you can to stop it from happening again.

3. Wrongful Termination

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Wrongful termination lawsuits are very common but luckily, they’re also extremely difficult to prove. Almost all states offer “at-will” employment, which means you are allowed to terminate employees without consequence, and they are allowed to quit. If your employment contracts state that the position is at-will, then the burden will be on the employee to prove you discriminated against them, held a grudge against them, or purposefully made their working conditions unbearable. Be smart and avoid saying anything negative about an employee in person or in writing, because you never know when emails, text messages, or even conversations could be used as proof of character defamation. Make sure that if you have a documented process for termination, you follow it to the letter, including gathering evidence of every reason you had to terminate the defendant’s employment. These types of suits are on the rise, and in many states, over 50 percent are won by the former employee. That’s why you need to cover all your bases.


Keep in mind that lawsuits, like business itself, evolve over time, and there may be new types of legal action on the rise in the internet age. Intellectual property suits and cases involving invasion of privacy are growing, so you not only have to be careful about the way you treat employees and customers in person, you also have to be careful about your presence online. Unfortunately, lawsuits aren’t going away any time soon. There will always be unlawful, irresponsible businesses out there who put people in jeopardy. And there will always be small business owners learning the ropes, trying to build their reputation as companies to rely on while staying far away from a courtroom.

Walter blogs about the various types of insurance available for personal and business. Follow him on Twitter at @walterzeiss.

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