Legal Tips for Shielding a Startup from Employee Termination Lawsuits

Business.com / Legal / Last Modified: February 22, 2017

Employee termination can lead to a lot of problems, in this piece we have covered some legal tips that can help you prevent from loss.

Courts in the United States are jammed with court cases involving disgruntled (former) employees attempting to get back at employers.

Thankfully, many legal disputes can be avoided completely by carefully considering the company’s founding documents, and instituting a standardized disciplinary procedure that leads to a transparent termination process.

Two critical steps to protecting your fledgling startup from the costs associated with an employee lawsuit are:

Taking Care When Terminating Employees

A startup or SMB is most vulnerable when terminating employees. An involuntary termination of employment is usually the result of a horrendous employee/employer relationship.

It’s easy for inexperienced business leaders to let their tempers reach a boiling point, resulting in the unlawful termination or treatment of an employee. Because of this, it’s been reported that “…wrongful termination lawsuits are on the rise and they are the single most frequent labor claim.” Focus on protecting the organization from blowback when terminating employees.

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I recommend following these guidelines:

  • Is the state where your company operates an Employment At-Will state? If so, your company is largely protected from litigation resulting from the termination of an employee.
  • Follow standardized, HR approved disciplinary procedures prior to termination.
  • Fully document the events leading up to a termination. Verify with all parties that the notes in an employee’s record are accurate.
  • Consult an attorney regarding any termination that involves a new set of circumstances. Even a routine termination, if it’s your first time carrying it out, is better handled with competent legal guidance.
  • Include a designated HR representative in the termination process. The extra pair of trained eyes on the situation will minimize the risk of violating an employee’s legal rights.

Action Steps:

Create a standardized termination process, including disciplinary procedures that must be followed to the letter. Ensure accurate records are kept of all workplace incidents. Seek guidance from professionals on proper termination procedures.

Carefully Considering the Legal Formation of Your Company

In an interview with a representative from Hurwitz Law Group, it was mentioned that “…the most vulnerable businesses to an employee lawsuit are ones that have yet to incorporate, or have used a structure that provides little to no legal protection to their Founders and investors.” Understanding the ins and outs of legal incorporation can be a complicated affair.

Related Article:No Stopping Us: 9 Newbie Mistakes Your Startup Can Avoid

In the United States, there are four major types of corporations:

  • Sole Proprietorship: It’s very inexpensive to register as a sole proprietorship. This is for companies with a single owner. This provides almost zero protection from legal action against you or your company, as they are one in the same. If you fail to satisfy the debts incurred by your business, your personal property can be seized. A single tax return is filed for both your personal and business income / expenses.
  • Limited Liability Company: This provides greater flexibility in terms of taxation, but the corporation’s profits and losses are transferred directly to the owners. This formation also provides legal protection from lawsuits and creditors; the corporation and its assets are the only liable parties to any legal agreements (unless a personal guarantee is provided).
  • Corporation: By filing Articles of Incorporation and paying a fee to your state and the federal government, a company can be incorporated as an independent entity. Taxation is handled at the corporate level, with personal profits being taxed on a personal income tax return once they are transferred from the corporation. This can result in double-taxation, but provides the company with additional protection and potential tax benefits. You can think of a corporation as an independent entity with its own rights and responsibilities, completely independent of the ownership.

Action Step:

Depending on your country, incorporation can be a complicated step. It’s incredibly important to get it right the first time. Consult an experienced business lawyer in order to identify the best incorporation strategy for your company. For companies in the UK, consult this government document, as well as an experienced solicitor.

Related Article: Raise to Launch: Using Equity Crowdfunding to Raise Startup Funds

From Incorporation to Termination, a Strong Shield Is Available

Lawsuits will happen. Sometimes when an employee is terminated, their anger blinds them to the legal costs and limitations of a lawsuit. But, if your company improperly handles a termination, or lacks the legal protections of a proper incorporation, you could find yourself on the line for a significant settlement or court judgment.

Take the time to meet with a competent attorney that can guide your startup through the process of incorporation. You should also be sure to discuss proper termination and disciplinary procedures that may be specific to the state where your company operates. The investment in these legal shields can pay off in a big way if your company is ever dragged into a lawsuit related to an employee termination.

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