Business Law, employment law, Legal

4 Common Legal Mistakes by Small Businesses:Legal Reasons #72

1) Failing to “put it in writing” early

Before founders do any significant work together, it is essential to put into place a written agreement which outlines the roles and obligations of each respective party. Founder Agreements provide clarity regarding critical aspects of the work relationship, including but not limited to ownership percentages, salaries, removal grounds and procedures, governance and management, voting protocol and profit-sharing.

2) Failing to carry out buy-sell provisions

The decision by one founder to leave the company can lead to internal turmoil, customer erosion and disruption in revenue flow. These issues also could arise in the event a founder passes away or experiences long-term disability.

Simply put, failing to plan for the end is planning to fail. A properly drafted buy-sell agreement executed by the founders of the business at the outset (in conjunction with a founder agreement) can effectively account for how the company will proceed in the event of unanticipated change.

3) Using inadequate employment agreements

It is critical to invest in properly drafted agreements that can serve as the foundation for the employment relationship. Common terms included in an employment agreement include, among other things, the length of employment or whether the employment is at-will; the classification of the worker (i.e., employee/independent contractor, exempt/non-exempt); and rights and restrictions upon termination.

Employers should be mindful to not expose the company to liability by disregarding any prior-employment related obligations of job candidates, including any restrictive covenants and/or obligations to return sensitive documents that belong to the prior-employer.

4) Misclassifying workers

Many employers hire independent contractors rather than employees and/or misclassify employees as exempt under the Fair Labor Standards Act in an effort to avoid the payroll obligations that come with the traditional employment relationship, such as the duty to pay minimum wage and overtime. Serious liability can result from these misclassifications, including substantial wage repayment going back as far as three years and other harsh penalties.

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