4 Common Legal Mistakes Small Businesses Make
Think your business is too small to justify paying for professional legal help? Think again. Failing to dot your i’s and cross your t’s in important matters can expose you to significant risk, and the most cost-effective time to consult an attorney is often before your business is booming.
The Intuit Small Business Blog asked a few legal experts to identify the most common mistakes entrepreneurs make and to offer some advice for correcting the errors (in case any of them sound familiar).
1. Misunderstanding ownership of creative assets — You may not think the products you sell, the services you offer, or even the business name and logo you use warrant legal protection. However, when it comes to work that qualifies for trademarks, patents, and copyrights, it’s generally less expensive to obtain protection shortly after developing your IP than having to protect it later (especially if a third-party starts using something similar), says Marc Misthal of Gottlieb, Rackman & Reisman.
In addition, says Ashley Dobbs of Bean, Kinney & Korman, anytime someone other than an employee creates something for your business (such as the concept for and design of your company’s website), it’s important that you obtain a signed work-for-hire agreement before work begins — even if the person is donating or trading services.
“When the person is not an employee of the business, the copyrights in the materials vest in the creator, not the company, unless appropriate written agreements are in place.” Without them, Dobbs explains, the person could resell, reuse, or even compete with you, using the very materials you asked them to create.
2. Misunderstanding copyright laws — Do you ever repost other people’s content on your website, share it with customers via an email or a newsletter, or supplement your original blog posts with images you find online — and presume that you’re legally “covered,” provided that you give credit to the author and link back to the site where the material originally appeared?
If so, you’re exposing your business to possible copyright violation fines and/or legal action. "If you copy someone else’s work wholesale or even substantially, it's most likely copyright infringement. While there are exceptions or defenses of 'fair use' (criticism, commentary, news reporting, teaching, scholarship, or research), defenses to copyright infringement are limited and should not be relied upon without consulting an attorney," says Dobbs.
Though she says that you should always get permission to use someone else’s copyrighted materials, it does not necessarily have to be in writing in cases that involve less than exclusive rights to use material. Nonetheless, it’s a good idea to get it in writing in order to protect against later claims of infringement.
3. Failing to implement firm, accurate HR policies — You may have a small team, but you must treat employee relations with the same discipline as a large corporation. “At the heart of most workplace disputes is the non-uniform treatment of employees for the same issue, or the same offense, or the same question,” says Matthew Fitzsimmons of Nicola, Gudbranson & Cooper, who has handled employment-related litigation for more than 30 years.
Lacking a formal employee handbook that outlines company policies and procedures is one common error, and failing to perform consistent annual reviews and keep detailed written records of what transpired is another, he says. Misclassifying employees is another major mistake.
“Wrongly characterizing employees is a violation of federal Fair Labor Standards Act and similar laws in most states. You can be liable for back pay, penalties, employee withholding taxes, overtime that wasn’t paid, and plaintiffs’ attorneys’ fees,” Fitzsimmons says.
According to Gordon Berger of FordHarrison, small-business owners also tend to wrongly assume that a salaried worker is exempt from overtime pay. “Make sure that you maintain [records of] all workers’ time and attendance,” he says. “If you don’t, you will have a difficult time defending any wage and hour claims.”
4. Trying to handle disputes on your own — Tackling legal issues yourself to save money may prove penny wise and pound foolish. For example, if you are ever contacted by another lawyer, hire your own to respond. “Whatever you say in response to that attorney is testimony and can be used as evidence in a legal dispute; your attorney's communication is not evidence or testimony,” Berger says.
Likewise, if anyone else is involved in your business or its future profits, hire competent counsel to document the company’s ownership and draft shareholder agreements. “This is what I call ‘knowing how you get divorced before you get married,’” he says. “Lack of documentation of ownership, transfer of ownership interest, payment of profits, etc., typically leads to protracted and unnecessary lawsuits."
Similarly, if an employee is injured on the job (even in cases that seem minor), report all work-related accidents to your workers compensation carrier. “Trying to handle it by paying out of your own pocket could have disastrous results,” Berger says.