The Legal Side

Category: Government & Law
Published: June 2007

Learn how to give your new business legal protection.

In previous issues, we talked about how to incorporate or file for limited liability company status and how this can protect principals of the business from individual liability. Now let's talk about how to protect the business itself.

The first layer of protection is afforded through commercial liability policies. Insurers provide a business owner's package which is the business equivalent of your homeowner's policy, covering a broad array of liability exposures. Do not think for one minute, however, that if you purchase one of these policies, you are going to be protected from any kind of legal suit which comes to the door. Most business owners have no idea what these policies cover and do not cover and often have a very false sense of security, perhaps fostered by statements made by their insurance salesman. You would be amazed at the exclusions.

I recently went through one such policy at the request of a client to give him an assessment of what was covered and not. The following items were not covered: contractual liability or contract claims, liabilities for personal injury or property damage assumed via contract, pollution, property damage claims of any kind, claims made for delay or failures of performance, libel and slander claims, copyright or trade secret infringement, advertising injury, environmental exposures: asbestos, mold, lead, etc., claims by employees, sexual harassment claims, professional liability and the exclusions went on and on. These are some of the greater risks that a business will encounter as far as getting sued and, in this case, they were all excluded. Having your attorney review these matters and potential liability exposures, before a problem develops, could very well be time well spent.

Any business should have as a very minimum liability coverage limits of $1 million per person, $3 million per occurrence (multiple people injured in the same accident). I usually recommend an excess layer of insurance on top of that. Another three or five million dollars excess insurance can be purchased at a relatively economical rate as compared to the cost of the primary insurance. This is because that insurance will never come into play to pay any claim unless the value of the claim is over the primary limits.

Workers' compensation and disability insurances are not discretionary. Statutory disability provides 50% of an employee's pay, not to exceed $170.00 per week for a maximum of 26 weeks under a standard policy. The last time I looked at the cost, it was $2.75 per month for a male employee, $5.75 for a female employee. If you have multiple employees that do not work full-time, most insurances will let you "stack" the employees up to a total of 40 hours so that they count as one employee. Workers' compensation insurance pays 2/3 of an employee's pay up to $400.00 per week, pays all medical expenses and is generally unlimited in timeframe as far as how long the benefits will be provided, assuming the Workers' Compensation Board finds a causally connected qualifying injury or disability related to an on-the-job accident or injury. The rate is per $100.00 of payroll and depends on the occupation. For example, a secretary's rate is $.31 per hundred dollars of payroll.

For small businesses just starting out, the best recommendation for health insurance would be to pursue the same through "Healthy New York". This is very inexpensive coverage which is provided by different insurance carriers at varying rates. It is also very basic. The coverages were funded as part of monies secured by New York State under the tobacco settlement. You can visit the Healthy New York website at www.healthyNY.com or you can contact your local insurance agent.

Next, you want to be sure that you have the right contracts in place to protect your business. Businesses collapse not only from claims coming from the outside, but also departure of key people on the inside. If your business revolves around the particular skills or talents of just a few key people, what is going to happen if those people leave for whatever reason? Unless you are that key person, you never want to be in a situation where the entire business can be so crippled. You need to protect yourself with competent employment contracts. You need to protect yourself with non-compete agreements. This is part of the contract where the key person or persons agree not to leave the business and startup essentially the same business operations within so many miles of your business and for a certain period of time. Courts do not like to enforce these agreements as they are contrary to the spirit of free enterprise. You might be able to keep a key person from becoming your business competitor for one year and a range of about 100 miles or so. You need a basis that can be articulated to the court. Most typically this comes from key persons signing an acknowledgment that they will be privy to unique proprietary information of the business: particular methodologies, marketing strategies, customer lists, and the like. Courts recognize that these items have considerable economic value and that it would be unfair for someone to secure all of this information, then go out and start a business with the same.

If a key employee does, nonetheless, depart for the purposes of starting up a competing business and you have such agreement, don't wait. You want to commence legal proceedings immediately. The battle is won or lost usually at the preliminary level. If you can get a temporary restraining order and then a preliminary injunction, preventing the person from using your customer list, using your proprietary information in a competing business, that person is going to go away because they can't afford to be stalled for the year or two or three it takes for the action to go through the legal process. The more time that goes by, the less likely you might be to persuade a judge that you will be irreparably harmed unless the preliminary relief is granted.

Consider ways to prevent yourself from ever getting in a legal battle in the first place. Do you have a strategy to prevent any one person or group of people from leveraging control? If your business is dependent on drivers for example, do you have a strategy for sufficient replacement drivers to make up a skeleton crew should there be a strike?

Often times a business will seek to protect itself from exposures by using independent contractors. This is a legal designation of someone who does work, but not as an employee. They are hired to do a particular task such as delivering your product. In law, you are not responsible for the negligence of a true independent contractor, such as when the delivery person rear ends another vehicle on the road. Yet, simply calling the person you hire an independent contractor doesn't make it so. The law will scrutinize the relationship. Key elements are who directs and controls the task. In a delivery situation, for example, if the company determines the delivery routes, the times of delivery, provides the goods and services delivered, takes care of all the payment transactions directly, provides instructions to the driver on delivery issues for particular customers, and similar direction and control, it starts to appear, in the eyes of the law, that the driver is not an independent contractor, regardless of how branded.

Another facet of liability in this arena is whether that person who you are calling an independent contractor is required to have the above referenced workers' compensation and disability coverage. If they do not have that coverage and it turns out that you are going to be responsible for any accidents involving that person, you are going to be the one that pays severe penalties and fines for failing to have the statutorily required workers' compensation and disability insurances. Again, a little time with an attorney setting up the contract and relationship of key personnel as well as independent contractors can save you a lot of headaches in the future.

This article is for illustrative purposes only. You should consult your own personal attorney and tax consultant in any business matters.