5 Reasons Small Businesses Get Sued and How to Avoid Them

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Small business owners constantly have their hands full and, between promoting products or services, managing employees, administrative tasks, and overseeing cash flow, it’s likely you’re not thinking about getting sued.

However, lawsuits against small businesses are more common than you might think. According to the Small Business Administration, up to 53% of small businesses are involved in at least one lawsuit at any given time and the threat of litigation impacts small businesses across virtually every industry.

If your business is sued, it not only impacts your bottom line, but it also damages your reputation and your emotional health. If you want to avoid litigation, it’s important to first understand some of the most common reasons small businesses get sued in the first place.

Why Do Small Businesses Get Sued?

Issues Regarding Intellectual Property

If you use an image owned by another person or copy a logo of another business, even accidentally, you may face a lawsuit associated with copyright infringement.

Discrimination

During the hiring process, it’s never acceptable, or legal, to ask questions regarding a candidate’s race, religion, sexual orientation, or gender. If you’re not sure whether an interview question is legal, check with the U.S Equal Employment Opportunity Commission.

Harassment

There’s a reason companies establish comprehensive HR guidelines and best practices, they ensure that all employees understand what is expected of them, and the consequence they face if they behave inappropriately. Any allegation of harassment should be taken seriously and addressed immediately in order to avoid litigation.

Wage Disputes

As a business owner, it’s important that you understand how labor laws can impact your business. In general, you should never try to reduce an employee’s overtime pay because, according to the U.S Department of Labor, overtime pay must be at least one and a half times an employee’s hourly rate if they exceed 40 hours of work within a week.

Property Accidents and Injuries

Any time you or your employees interact with a client, there’s the risk that something could go wrong. For example, slip-and-fall accidents account for over one million emergency room visits every year, and if a client injures themselves on your property you’ll wind up paying hefty legal and medical fees. Additionally, if you’re on a client’s premises and you damage their property, you could find yourself in legal hot water as well.

How Can Small Businesses Avoid Getting Sued?

Hire a Reputable Lawyer

Having a professional who knows and understands the legalities of running a business can help you avoid lawsuits. A reputable lawyer will be able to inform you of risks that can lead to litigation for your small business and advise you on the next steps you should take if your business does face a lawsuit.

Follow HR Best Practices

Avoid getting sued by your employees by making their health and wellbeing a priority. The first step is to create a comprehensive employee handbook that clearly states all office rules; make it clear your business does not tolerate harassment or inappropriate behavior. In order to create a safe work environment, your employees need to understand what the office expectations are and what to do in case an untoward incident occurs.

Avoid Making Promises That You Cannot Deliver

Never make false promises to your clients because failure to deliver on a product or service will not only lead to unhappy clients it could also lead to lawsuits. Save yourself time and money by being transparent with your customers.

Have a Comprehensive Insurance Portfolio

Running a company is risky business. Having insurance is one of the only ways to truly protect your business assets in the event of a lawsuit. Regardless of your industry, here are some basic policies you should consider:

  • General Liability: This policy will protect your business against third-party injuries and property damage, like a slip-and-fall accident.
  • Workers Compensation: Often mandated by states if you have at least one employee, this policy pays for medical and rehabilitation costs if a worker is injured on the job.
  • Professional Liability: This policy is essential if you provide advice to clients. Should you give advice or provide services that result in a financial loss for your client, this policy will cover legal defense fees and settlement costs.
  • Employment Practices Liability Insurance: This policy is specifically designed to protect your business against claims of discrimination, harassment, retaliation, and wrongful termination.

What Should You Do if Your Business is Sued?

Despite all your best efforts, you may still find yourself facing a lawsuit. If you do get sued, here some steps you should take:

  • Contact your lawyer immediately so they can walk you through the legal process and advise you on the necessary steps to control the situation.
  • Call your insurance provider. If there’s a lawsuit against your small business, make sure to reach out to your insurance carrier as soon as possible so you can file a claim.
  • Gather information. Make sure you have extensive records of the situation like emails, receipts, or invoices. You’ll likely need these documents as evidence if your case goes before a judge or for when you file an insurance claim.

Final thoughts

While running a business, it can be easy to get caught up in the day-to-day operations, but it’s just as important to step back and take a look at the big picture. Take the time to assess the risks your business faces and take the appropriate steps to minimize your liability. If you are sued, remember to stay calm. Your lawyer and insurance agent are there to help you get through it, so make sure you use them as a resource to minimize the damage.

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Written by: Emily Lazration, CoverWallet

Emily is the Content Marketing Specialist at CoverWallet, a tech company that makes it easy for businesses to understand, buy and manage commercial insurance online. She has written for several outlets including Inc., Ooma, and Fundera covering small business news and advice.

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