Some of the most difficult problems small businesses face can arise from legal issues in a number of areas, including hiring and firing procedures, discrimination, employee/customer injuries, product liability, and protecting customer data from cyber attacks.
In addition to federal statutes, New Jersey business owners are subject to some of the most pro-employee state regulations in the nation. And while larger companies usually have the means and resources to deal with legal issues, just one major slip-up by a small business can lead to a lawsuit that forces the owner to shut down operations for good. This makes it all the more important to put safeguards in place to deal with problems as they arise – or help avoid them altogether.
Hiring and Firing Procedures
When it comes to putting a staff together, small business owners should familiarize themselves with state and federal wage and hour laws, such as the differences between an employee and an independent contractor, or who is exempt from overtime and who isn’t. “As soon as you have an employee, you have a potential liability issue, and compliance can be very challenging,” says Adam Gersh, shareholder, litigation and labor law practice groups at Flaster Greenberg PC in Cherry Hill. “A typical pitfall is you have a non-compliant compensation system, such as mischaracterizing an employee as exempt and failing to pay overtime, and a disgruntled employee calls the Department of Labor, triggering a host of consequences, including penalties.”
Another important aspect of hiring is not to discriminate in any way based on protected categories such as race, national origin, age, sexual orientation, or disability status. New Jersey offers a broad range of protections in this area compared to other states, and small business owners need to know these categories and what questions to avoid, even in casual conversation. When conducting a job interview, for example, stick with topics like job history and desires for the job the candidate is seeking, but steer clear of questions, like, “Do you have kids?” or, “What do you do in your spare time?”
Employers must also make sure they’re recruiting in a way that’s non-discriminatory, particularly in reference to people with disabilities who may require accommodations to perform the job. “The question becomes, ‘What is a reasonable accommodation for this business?’” Gersh says. “If you lease space on the third floor of a historic building and aren’t allowed to install a ramp or lift, you still need to weigh other potential accommodations for a candidate with impaired mobility. The key thing is for employers to engage in interactive dialogue to look for creative ways to accommodate qualified candidates with disabilities.”
Small businesses often need legal counsel to help them understand where they have risk, making sure their hiring practices and pay structure are compliant as part of a good documentary policy. Employers should also keep in mind the Family Medical Leave Act (FMLA), which allows for leaves of absence for medical and family considerations. Even if a business has less than 50 employees and is exempt from the federal FMLA requiring 12 weeks of leave, it still might be held accountable by the state if an employee is fired for taking time off.
“I recommend small businesses be mindful that, like any other employer, they have a duty to reasonably accommodate employees with a qualifying disability or medical condition,” says Jennifer Passannante a partner with Hoagland, Longo, Moran, Dunst & Doukas, LLP in New Brunswick. “If a small business only has three employees, it may pose an unreasonable hardship to have one employee out on leave for a couple of months. However, without a demonstration of unreasonable hardship, a small business risks the potential for a disability discrimination lawsuit by failing to make a reasonable accommodation.
“In addition, it’s important to conduct regular employee reviews and keep them in a file in case you want to terminate someone later on. If you have someone who has performance or attendance issues, you should document those problems and warn the employee that if they don’t improve, they will be fired, says Scott Ohnegian, partner, chair of labor an employment practice group at Riker Danzig Scherer Hyland & Perretti LLP in Morristown. “If you allow someone to hang around after you determine they’re not doing a good job, it gets harder and harder to get rid of them.”
Avoiding Incidents of Sexual Harassment
The recent “me too” movement has made it more important than ever for small business owners to put policies in place that guard against sexual harassment in the workplace. More pressure is being placed on employers to demonstrate a commitment to keeping the workplace safe from harassment, and for having a means to report it if/when it does occur. Ideally, a “no tolerance” policy will be part of the employee handbook, with new hires being asked to sign a paper saying they’ve read and understood the policy and they know what steps to take if they witness a violation of the policy.
“You need to do training to make sure employees know what might have been okay to say in 1972 isn’t okay now,” Ohnegian says. “It doesn’t matter what an individual’s intentions may be, what matters is how an individual’s words or actions are perceived by others. Current awareness of these issues has rightfully caused employers to look at themselves and their policies very carefully.”
Another area small businesses need to address is employee and customer safety. First, the owner should develop a safety program for both customers and employees tailored to the type of business in question. If it’s a manufacturing business, for example, you want to make sure employees know safety procedures and wear proper equipment such as goggles, gloves or boots. Or, if it’s a restaurant and the floors have just been mopped, put up a sign telling employees and customers to be careful.
“For most businesses, safety should be part of the employee handbook,” says Michele Haas, a partner at Hoagland, Longo, Moran, Dunst & Doukas, and head of the workers’ compensation practice group. “They need to develop a program to educate employees about how to use equipment as well as how to handle situations when someone does get hurt. There should be processes in place on what to do, who you need to notify, and what steps to take afterward.”
Most businesses need two types of insurance: liability insurance in case someone is injured on the premises, and worker’s compensation, which is insurance that provides cash benefits and/or medical care for workers who are injured or become ill as a direct result of their job. Worker’s comp coverage is mandatory in New Jersey, even if you have just one employee. “Employers often find themselves in great distress when they don’t have worker’s comp and can face fines from the Department of Labor,” Haas says. “If they find that your failure to have coverage is intentional, it can carry criminal penalties.”
Even if you have worker’s comp, however, even one claim can significantly increase insurance costs for a small business, says Matthew Collins, chair of the labor and employment practice at Brach Eichler LLC in Roseland. In addition, when it comes to liability insurance, he suggests small business owners should know what they’re responsible for. “If an accident occurs within the premises, it’s pretty clear it’s their responsibility,” Collins says. “Where you get into a grey area is if it happens on the sidewalk outside the premises, or there’s an injury in the parking lot or in the common area in an office building. Business owners need to understand what areas they are responsible for maintaining.”
Business owners also need to be familiar with state disability discrimination laws and know when they need to accommodate an injured employee. Again, New Jersey is liberal in this area, and an employee who is denied a leave of absence due to injury can file a claim with the New Jersey Division of Civil Rights, or go directly to court and file a lawsuit. “New Jersey is right behind California as one of the most employee-friendly states, and Governor Murphy has come in with a platform to make it even more employee friendly,” Collins says.
Those businesses that make or sell a product may also be subject to product liability claims if that product has design or manufacturing defects, or there is a defect in any warning provided with the product. There are an estimated $12 billion in product-related payouts annually, and a small business owner is less likely to be able to withstand a big settlement than a larger company. In addition to extensive product testing, small business owners are encouraged to add a warning label to their product if it’s potentially dangerous. They should also obtain product liability insurance – the average amount of recommended coverage is between $1 million and $5 million, depending on the perceived risk of the product – to cover possible compensation to a person injured by the product as well as legal fees.
“All businesses – no matter the size – that make or sell products are vulnerable to product liability claims. It is a good idea for business owners to talk to an insurance broker about their potential risks and product liability coverage,“ says Melissa Chuderewicz, a partner in the health sciences department of Pepper Hamilton LLP, in Princeton.
It’s also important to note that in New Jersey, even if a small business is selling a product manufactured by another company, the owner can still be held liable for injuries under the Product Liability Act. Fortunately, a business owner can be absolved if he or she can identify the manufacturer. However, if that identification is incorrect, or if the manufacturer has no known presence in US and/or no attachable assets, the seller can still be held liable.
“In New Jersey, businesses that sell the product are ultimately on the hook, so if you can’t identify the manufacturer, or if they are located outside the US or do not have any attachable assets, then you might not be relieved of your liability under the act,” Chuderewicz says. “It’s a good practice to know your suppliers and to be aware that if you’re dealing with a company that doesn’t have a US presence, or is a ‘fly by night,’ it could saddle you with additional product liability.”
Protecting Customer Data from Cyber Attacks
In addition to these areas of potential liability, one of the biggest legal threats on today’s small business landscape is the prospect of a cyber attack. According to Lani M. Dornfeld, Esq., a member of the health law practice group at Brach Eichler, small business owners have seen a big uptick in cyber attacks in recent years. Particularly troubling are ransomware attacks, where a criminal worms his way into a business electronically, releasing a virus into the system that locks down electronic files, and then demands money to unlock them. If these attackers access files within such electronic systems, they also may access and steal saleable information such as social security numbers, dates of birth, driver’s license numbers, government IDs, insurance IDs, addresses and phone numbers.
“Education of the workforce is really important. Workforce members can be the weak link to letting attackers in the door,” Dornfeld says. “If your staff roams the internet and is permitted to upload files from the internet without appropriate oversight, or people are not cognizant of the dangers of clicking on e-mail attachments that might look suspicious, it puts your business at risk.”
A small business owner can hire an IT company to assess risks and vulnerabilities to minimize exposure to such attacks. Small business owners also should formulate a sound cyber policy, train and educate employees about the risk of infiltration, and sometimes use outside services to collect credit card information, which can limit exposure. Healthcare businesses are required to conduct periodic electronic risk assessments under HIPPA regulations because of the sensitivity of patient information. But even if risk assessments are not required for your business, they are advisable, Dornfeld says, adding, “For a small business, it’s generally not cost-prohibitive to do a periodic evaluation of the systems and security measures in place, and the cost is worth it.”
Finally, small business owners are advised to have a redundant backup system, including cloud storage and a hard drive backup offsite, as well as cyber insurance, the cost of which will be determined by the nature and complexity of the business. “If small businesses do not put into place appropriate security safeguards and become victim to a loss of personal information as a result of a cyber attack or other electronic vulnerability, they will be subject to risk of negligence and other lawsuits against the business,” Dornfeld says. “We are a very litigious country, and New Jersey is a very litigious state, so the importance of these safety measures cannot be overstated.”
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