I view entrepreneurs as visionaries who make their own luck. Many people fail to recognize when the window of opportunity opens. Others fail to act quickly before the window closes. The successful entrepreneur anticipates the opening, plainly sees the opportunity and courageously leaps through the window without knowing whether she will land softly on a grassy hill four feet below, or plummet five stories to the pavement.
In order to minimize the risks associated with a hard landing, effective entrepreneurs learn from the mistakes of others. Over the past 20 years representing management clients in labor and employment matters, I have encountered common mistakes that can produce devastating liabilities. I offer the following brief synopsis of some of the most common human resource errors that can crush a nascent enterprise.
Sexual Harassment. Illinois is the only jurisdiction in the country that imposes strict liability (i.e., you lose—write the check) for sexual harassment of any employee by any supervisor. The supervisor need not serve in the chain of command over the victim or even work at the same location for liability to attach. To minimize risk, the entrepreneur should: (1) adopt a strict policy prohibiting all forms of harassment and providing meaningful alternative mechanisms for employees to register complaints; (2) post and periodically redistribute the policy; (3) train employees and supervisors upon hiring and on an annual basis; and (4) prohibit supervisors from dating or attempting to date any employee.
Misclassifying Employees as Independent Contractors. For a host of reasons, entrepreneurs often seek to engage individuals over whom they exercise control as independent contractors instead of W-2 employees. Various state and federal enforcement agencies apply a host of different standards in determining whether a person truly serves as an independent contractor. The harshest test is being aggressively applied by the Illinois Department of Employment Security, which is on a statewide crusade to address this issue. Unless a person owns her own business, works for others, supplies her own tools, functions with little direction, and faces both the opportunity for profit and the risk of loss on an engagement, she likely is not an independent contractor.
Failing to Pay Overtime-Exempt vs. Non-Exempt. Many entrepreneurs erroneously believe that merely paying employees on a salary basis renders them exempt from the overtime provisions of state and federal wage and hour laws. While an employer is free to pay any non-exempt employee on a salary basis (provided the employee receives at least minimum wage and overtime for all hours worked in excess of 40 in a work week), to be exempt from overtime requirements, an individual must satisfy very specific, detailed duties tests. Importantly, these tests are significantly different under state law versus federal law. The State of Illinois opted out of the employer-friendly aspects of the most recent amendments to the white collar exemption regulations under the Fair Labor Standards Act. Accordingly, many individuals who may properly be considered exempt under federal law are not exempt under state law. This issue presents one of the most dangerous traps for the unwary entrepreneur and, ironically, the fastest growing source of entrepreneurial litigation for plaintiff’s attorneys.
Failing to Protect Proprietary Business Information. Oftentimes, entrepreneurs remain so focused on developing their business models, creating innovative products and services, establishing critical price points and profit scenarios, and identifying meaningful business prospects that they forget to take steps to protect this very information from faithless employees and ruthless competitors. Few moments frustrate an entrepreneur more than when a trusted employee betrays her and steals the fruits of her creative labor. In order to avoid such a result, every entrepreneur must take reasonable measures to safeguard confidential proprietary business information.
Such measures include: (1) strictly limiting access to confidential information to those with a need to know; (2) frequently changing computer access codes and passwords; (3) clearly marking digital and hard copies “confidential”; (4) keeping hard copies under lock and key; (5) requiring that desks remain clear of confidential documents any time an employee leaves her office or when others enter it; (6) requiring all employees to sign a confidentiality agreement prior to beginning work; (7) requiring all contractors with access to your offices, including cleaning services and maintenance workers employed by a landlord, to sign a confidentiality agreement; (8) adopting a document retention and destruction policy that requires all confidential documents to be shredded; (9) requiring key employees to enter into nonsolicitation and noncompetition agreements; (10) prohibiting discussion of confidential business information and display of such information on portable electronic devices in public places; (11) prohibiting attachment of external data storage devices to the company’s computer systems, including laptop computers; (12) formally disciplining employees who violate your confidentiality policies; and (13) finally, periodically training your employees on maintaining the confidentiality of the company’s proprietary business data.
While many entrepreneurs view their company’s human resource function as a guardian of their human capital investment, few business owners fully appreciate that the human resource department serves as a profit center, not a cost center. Every dollar spent defending a lawsuit that could have been avoided, or that could have been anticipated and better managed at the decision-making stage, represents a dollar that should be added to the bottom line. By learning from the mistakes of others, and taking a proactive approach to human resource management, the effective entrepreneur makes her own luck, maximizes profitability, and avoids the distraction and inconvenience of avoidable employment litigation. iBi