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  • Writer's pictureKen Mitchell-Phillips

You Can Get Sued For That?

Common Events in Business That Can Bring About a Lawsuit

When business owners initially launch a business they are usually advised to create a business plan designed to help them focus on the specific steps necessary for the success of their business. Often times what is not discussed is the many legal risks that the business will be subject to throughout the lifecycle of the business. In particular, not enough time is focused on the predominate legal risks which are in the area of employment law. There are more than 50 state and federal laws that apply to the workplace that business owners need to be aware of to avoid being sued. Below I highlight some of the most common reasons small and medium-sized businesses are sued as well as some advice in preventing a lawsuit.

Failure to Keep Adequate Employee Records

Both state and federal laws require employers to keep accurate time records. In the event they fail to do so, they are at risk of being sued which could result in significant costs for the business. The most typical scenario is when a disgruntled employee sues an employer for unpaid overtime wages and failure to allow the employee to take the statutory required meal and rest breaks. This often happens in the restaurant industry. In a recent case in California, an employee was able to collect a significant amount of damages based on the employee’s testimony that he worked over 40 hours a week and did not receive overtime pay. Because the employer could not refute his testimony with the statutorily required employee records, the employee was entitled to damages. Imagine if you fail to keep overtime records on your employees for 5 or more years, you could be on the hook for 5 years of overtime pay based on the employee’s recollection of how many overtime hours he or she worked. Ouch!

To avoid being sued, you should be aware of this list of the basic records that an employer must keep for at least 2-3 years according to the Federal Labor Standards Act:

1. Employee's full name and social security number.

2. Address, including zip code.

3. Birth date, if younger than 19.

4. Sex and occupation.

5. Time and day of week when employee's workweek begins.

6. Hours worked each day.

7. Total hours worked each workweek.

8. Basis on which employee's wages are paid (e.g., "$9 per hour", "$440 a week", "piecework")

9. Regular hourly pay rate.

10. Total daily or weekly straight-time earnings.

11. Total overtime earnings for the workweek.

12. All additions to or deductions from the employee's wages.

13. Total wages paid each pay period.

14. Date of payment and the pay period covered by the payment.

Performing Inadequate Background Checks Prior to Hiring

A good business owner will constantly look for ways to cut costs. However, a business owner moves into dangerous territory if he or she decides to forego adequate background checks in order to cut costs. In addition to serious business and financial consequences (e.g.discontented clients, unmotivated employees, and loss of customers) the business may be sued for negligent hiring.

The basis for a negligent hiring claim is that an employer knew or should have knownabout the employees background and failed to take appropriate action. A good example of a negligent hiring case occurred in Arkansas when a court awarded a family $7 million dollars when one truck driver killed another truck driver in a work-related accident. The court found that if the employer had performed an adequate background check, they would found that the truck driver had an unsafe driving history and his license was revoked at least twice.

In order to avoid being sued, most experts suggest employers conduct a background check that include inquiries into the following areas:

· Criminal History

· Credit

· Previous Employers

· Drug Testing

· Validation of Qualifications

· Driving Records

· Reference Checks

· Sex Offenders

· Previous Addresses

The top background companies include companies like BeenVerified, Truthfinder, Instant Checkmate, Peoplefinders, and US Search, GoodHire, and AccurateNow. The costs typically range from $25 to $99. Although for small businesses, this may seem like a significant cost to perform a background check for all potential employees, when considering the potential costs of a negligent hiring suit the cost is well worth it.

Misclassifying Employees

After an employee is hired, another common source of lawsuits is the misclassification of employees. The most common misclassification mistakes employers make include, but are not limited to:

· Misclassifying an employee as an independent contractor

· Misclassifying an employee as a volunteer

· Misclassifying a nonexempt employee as exempt

Due to the high cost of employees ( insurance, social security, unemployment, etc.) business owners habitually attempt to save money by classifying employees as independent contractors. In addition, occasionally business owners attempt to avoid the risk of employment related lawsuits by classifying employees as independent contractors. The American Bar Association estimates that at least 3.4 million employees are misclassified as an independent contractor.

The problem is that the law, rather than contractual relationships, regulates whether an individual is properly classified as independent contractor or an employee. The distinction is complex and there are many different tests that federal and state laws and courts use to determine the proper classification of an independent contractor and an employee. The biggest factor is how much control the employer has over the individual. To determine the level of control courts generally ask, among other things, the following questions:

· Does the individual have his or her own equipment or is he or she using the company’s equipment?

· Does the individual engage in business with other clients or is the employer the only client?

· Does the individual have the ability to work his or her own hours?

· Is the employer in control of how the individual does his or her job?

The most common ways that the government finds out that an employer misclassified an employee as an independent contractor is when an employee files for unemployment or tries to file a worker’s compensation claim. In these cases if a business is found to have misclassified an employee as an independent contractor, the business is at risk for the following penalties:

· $50 for each Form W-2 that the employer failed to file because of classifying workers as an independent contractor.

· Since the employer failed to withhold income taxes, it faces penalties of 1.5% of the wages, plus 40% of the FICA taxes (Social Security and Medicare) that were not withheld from the employee and 100% of the matching FICA taxes the employer should have paid. Interest is also accrued on these penalties daily from the date they should have been deposited.

· A Failure to Pay Taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability.

· If the IRS suspects fraud or intentional misconduct, it can impose additional fines and penalties. For instance, the employer could be subjected to penalties that include 20% of all of the wages paid, plus 100% of the FICA taxes, both the employee's and the employer's share. 

· Criminal penalties of up to $1,000 per misclassified worker and one year in prison can be imposed as well. In addition, the person responsible for withholding taxes could also be held personally liable for any uncollected tax.

Christmas Parties

Most employers like to throw Christmas parties to maintain morale in the workplace. Frequently, the parties includes white elephant gifts and alcohol. Unfortunately, these items can put the employer at risk for a lawsuit. For example, when employers allow white elephant gifts, they are encouraging workers to bring impractical gifts and exchange them with other employees. Depending on the gift, employers may be at risk for a lawsuit if an employee brings gifts that are profane, graphic, or contain sexual content. In a recent case, an employee successfully sued an employer when a book containing pornographic suggestive language was exchanged at a Christmas party. The employee notified the CEO of his discontent and he failed to take any action. The employee sued under the theory of a sexually hostile environment and collected more than $25,000 in damages.

In addition to white elephant gifts, employers should be careful if they serve alcohol at a Christmas party. Most states have Dram Shop laws that provide, in pertinent part, that if someone (in this case the business) knowingly serves alcohol to another that is visibly intoxicated, they are liable for any injuries sustained by a victim of a drunk driving accident. As a result, if an employee gets too intoxicated at a Christmas party and harms someone in a drunk driving accident, the employer could be on the hook for any injuries sustained by the victim.

Moreover, because all religions don’t celebrate Christmas the same way, the employer has to be careful about decorations and activities engaged in during the Christmas holiday. This is because the Civil Rights Act of 1964 prohibits discrimination based on religion. If an employer celebrates one type of religion than the employer should make sure it celebrates all religion. This makes it tricky for employers to decorate during the holiday season. Most likely every employee does not follow the same religion so decorating the workplace with only Christian decorations could offend another religion and form the basis of a legitimate lawsuit. Moreover, prohibiting employees from decorating their own workspace for Christmas with their own religious decorations could also pose a problem.

Failing to Investigate Complaints

Another issue that is often overlooked, but enormously important responsibility of an employer, is to properly investigate employee complaints. In almost every workplace there are employees that make substantiated and unsubstantiated complaints to their supervisor or the human resources department. However, whether the complaints are valid or invalid, if an employer doesn’t properly investigate the complaint they could be sued. For example, if an employer fails to investigate an employee’s claim of sexual harassment and the employee sues based on this theory, the employer will have to show that the business undertook reasonable care to prevent and promptly correct the harassment. In a recent lawsuit, an employee complained to the CEO that his supervisor continually made sexual jokes in the workplace. The CEO did nothing. The employee sued for sexual harassment and retaliation and won a judgment in the amount of $100,000.

To avoid a lawsuit, an employer should promptly investigate any allegation by an employee of wrongdoing whether it is sexual harassment, discrimination, or any other conduct. Typical the investigation should commence within a few days by the human resources department. If there is no human resources department, any independent objective party like a supervisor or a CEO should conduct the investigation. Moreover, the investigation should be thorough and documented with a written report that includes documents reviewed, witnesses interviewed, and all factual findings and conclusions. Finally, the business should take appropriate disciplinary action if the allegations are substantiated. At the end of the day the employee should be satisfied that a prompt and thorough investigation was conducted.


There are many legal risks when operating business that, if a business owner doesn’t take the proper precautions, could prove extremely costly. The more business owners know and understand these risks, the better they can take the necessary steps to prevent a lawsuit. Lawsuits in the employment area are particularly tricky because even if a business did nothing wrong, because allegations are fact-based, it could cost the business a lot of money, time, as well as unnecessary interruptions in the day-to-day operations of the business. The best course of action is to be aware and take the proper safeguards to avoid being sued.

Disclaimer: Articles are made available for educational purposes only as well as to give you general information and a general understanding of the legal concepts, not to provide legal advice. By reading this article you understand that there is no attorney-client relationship created between you and KMP Business Consulting Services. The information provided in this article is not legal advice. You should not act upon this information without seeking advice from a lawyer licensed in your own state or jurisdiction.

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