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Crain's New York Business

Stopping Suits Before They Start

By Tina Traster

June 8, 2008 - Legal suits are almost impossible to predict.

Dennis Bosco, chief executive of Chelsea Floor Covering, found that out the hard way. His company, which lays floors in commercial buildings, was sued in 2006 by an electrician who said he'd slipped and gotten hurt at one of Chelsea's job sites.

“We were not even [working] at the site at the time of the claim,” observes Mr. Bosco, who can prove his point with both internal records and building logs obtained during a deposition. “Fortunately, we kept good records, but this suit has cost us a lot of time and aggravation.”

More than two years after the case was lodged, it's still dragging on in court.

A lengthy or expensive legal battle can sink small businesses that unwittingly violate safety, health, environmental, tax or employment laws—and even firms that don't. It is vital that small businesses develop strategies to minimize their legal risks, and to survive should those strategies fail.

Here are some tips for getting started:

Tip 1
Prepare for the worst.

Don't wait for the company to be sued before beginning the search for legal counsel. Know the legal basics of the business, and retain an attorney before an urgent need arises.

Tip 2
Wear armor.

Think about incorporating the business. Because a corporation is a separate legal entity, a business owner's personal assets are shielded if the firm is sued or goes bankrupt.

Similarly, those who have entered partnerships should consider setting up a limited liability entity. Otherwise, they'll face the usual danger of partnerships: the fact that they're only as strong as the weakest link. If one partner is negligent in business matters or files for bankruptcy, the other partners are on the hook.

Enterprises that have substantial amounts of debt-free equipment or real estate can spread out their risk and shield assets by creating separate corporations or limited liability partnerships. These entities can hold title to the assets, which can then be leased back to the businesses.

Tip 3
Keep detailed records.

Forget the handshake. Put everything in writing, and ask that clients, vendors and even government agencies do the same. Be especially careful to keep memos or files about problematic customers or employees.

When inking a contract, spell out all the details: deadlines, costs, contingencies. Add language that covers how the parties will resolve disagreements, should they arise. Have an attorney eyeball the agreement to check for loopholes and gray areas. And remember: In New York, if a contract isn't in writing, it is not enforceable by the courts.

Tip 4
Hire cautiously.

Treat all job applicants equally, and ask each the same basic questions. Interviews should focus on a prospective hire's competence and qualifications. Stay away from any questions about health, age, family and other personal matters; a rejected candidate might use such questions as grounds for a discrimination suit.

Before making an offer, check the applicant's references, and conduct background and credit checks. Be sure to obtain written permission to do so.

Rather than take all these steps themselves, some companies are turning to professional employer organizations. In January, Company X Edit turned to Administaff, one of the nation's largest PEOs. For an annual fee of nearly $35,000, Administaff oversees all employment issues at 16-employee Company X Edit.

“There are so many things about HR that are a mystery,” says Rachelle Way, executive producer at the Manhattan-based business. “Not only does the PEO make sure everything is handled legally; it shields us from the risk of a lawsuit, because it is responsible for our employees' legal matters.”

Tip 5
Don't fire anyone until the all the i's are dotted.

Though every business has the right to fire, the risks of doing so can be huge. Sacked employees often turn to the courts with discrimination suits, and juries tend to be sympathetic toward fired workers. If a business loses its case, it could be on the hook for back pay, reinstatement, attorney's fees, even monetary compensation for emotional distress.

Try to get the employee to resign. If that fails, put him on notice, giving him the opportunity to improve.

Tip 6
Classify employees properly.

Under federal labor law, employees must be correctly identified as “exempt” or “nonexempt,” to avoid disputes involving overtime pay and tax withholding. Wage-and-hour litigation—in which employees claim that they weren't paid for overtime or given breaks under the Fair Labor Standards Act that covers nonexempt employees—is now surpassing discrimination and harassment suits in sheer volume.

Tip 7
Play it safe—literally.

Minimize work accidents by emphasizing on-the-job safety and honing training procedures. Distribute a written safety plan. Report claims immediately; waiting even a week can cause settlement costs to soar.

“I walk the floor constantly and keep cameras in the warehouse to make sure everything is working properly, so we can avoid having accidents,” says Joe Lopopolo, president of Gun Hill Beer Ltd., a Bronx-based beer distributor.

Tip 8
Insure survival.

Firms with basic insurance coverage get more than financial protection against loss; they also get an attorney. If they are sued, the insurer must provide counsel to fight the claim.

KEEP OUT OF THE COURTHOUSE

Litigation should be a last resort. A courtroom is an expensive and often a bad place to resolve a dispute, whether a business is suing or being sued. Whenever possible, use mediation or arbitration to resolve a problem. Short of that, try for a settlement, even if it's with an unhappy customer who has an unjustified complaint.

In the event that it's necessary to file a lawsuit, do not write a letter to an adversary bluntly stating the company's legal position. Successful litigation involves elements of surprise. Say simply that the company intends to pursue “legal remedies.”

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