Protecting Your Small Business From Employee Lawsuits

Lawsuits are an issue that most entrepreneurs don’t really think about when starting their small businesses but they’re a threat that could even wipe a company out. In fact, if business owners don’t properly incorporate their companies, an entrepreneur’s personal assets could also be at risk should they be taken to court. While there are many reasons a company could be sued — ranging from infringements to injury — some of the most common lawsuits involve the employees you hire and how you treat them. 

Recently William Morrow at The Huffington Post shared a few tips and best practices for small business owners to help avoid employee lawsuits. Here are some of the top preventative measures entrepreneurs should take in order to protect their businesses.

Know the laws

Your first line of defense when it comes to avoiding employee lawsuits is to know laws that your state and the federal government have in place. This includes rules for overtime pay, when employees are entitled to sick leave, whether or not you need to provide health coverage, and much more. A good resource to start with the U.S. Department of Labor’s website. Granted this won’t make you an expert but it will certainly give you a basic knowledge of what your business must comply with.

Ensure your managers and supervisors are properly trained

It’s not enough for you to know your state’s employment laws — the people you put in charge need to be aware of them too. Furthermore you have to trust that your managers and supervisors aren’t trying to skirt those laws or engage in illegal activity without your oversight. To help with this you’ll want to make it clear to your employees that they can speak with you or someone else if they have any issues so that you can try to resolve problems before they become lawsuits.

On top of common issues such as employees being forced to work off of the clock, other problems businesses face are charges of harassment. While sexual harassment is probably one of the best-known forms of discrimination, employees may also claim they’re being discriminated against because of their race, religion, etc. This also means that showing favoritism to one employee over others could result in a discrimination lawsuit.

In these cases the business itself in addition to the manager(s) responsible could be sued. For that reason it’s important to properly train and refresh your leadership team on what is and what is not okay. Some states actually mandate that all managers attend harassment and discrimination training but, even if your state isn’t one of them, you should still consider providing similar training for your employees.

Provide an employee handbook and retain documentation

For a small business, having an employee handbook may seem unnecessary but it could help you out immensely in the case of a lawsuit. A smart practice is to publish a handbook including all of your employee policies and then have each of your new hires sign acknowledging that they 1) received the book and 2) agreed to the policies. If you do make any changes down the road, you’ll also want to be sure to amend the handbook and again have employees document that they received the updated documents.

Why is this important? Not only does having your policies written provide a great resource for employees but also could protect you against wrongful termination suits. However, in order to fully cover yourself, you’ll also want to keep other documentation on each of your employees. This will include their handbook acknowledgment as well as documentation of any disciplinary measures you might take against them. It may also be necessary to have the employee sign a formal write-up of your disciplinary discussion so that there is proof they were talked to about it. These documents can go a long way in showing that an employee was aware of your policies, was warned about disobeying them, and was subsequently terminated after further failure to comply.

Employee lawsuits are not something that small business owners should take lightly. However, as serious as they can be, they are also preventable. By educating yourself, your management team, and your other employees about the laws and about your policies you can help protect your business from lawsuits.


Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded in 2015 to focus on personal finance and the emerging FinTech markets.

Other Articles by Jonathan Dyer

Top 10 Personal Finance Articles of the Month — June 2022 

It’s time again for one of my favorite features here on Dyer News: a look at the top 10 personal finance articles of the month. To start, we'll take another look at financial independence and freedom. Then, with the housing market going a bit crazy lately, we'll feature a pair of articles on home buying. Lastly, we'll cover tips for one-income households, finance after death, fighting inflation, and more. As...

Bilt Rewards Launches Travel Portal with Benefits for Cardholders

Last year, the startup Bilt made a splash when it announced a new service that would reward users for paying their rent. That premise was then expanded upon with the launch of the Bilt Mastercard, which is issued by Wells Fargo. Now, continuing to capitalize on both the hype of their product and the demand for travel, Bilt has debuted another new offering for customers. This week, Bilt Rewards announced...

Cash App Introduces Round-Up Investing Feature for Debit Card

Debit card customers looking to grow their investments gained a new, automated option today as Block Inc. (formerly Square Inc.) officially announced a new feature for its popular Cash App. Now, customers with the Cash App Cash Card can opt into Round Ups as a means of growing their investments. When this feature is toggled on, Cash App will round up debit card purchases to the nearest dollar and invest...