Small business owners often don't think about legal issues until they get hit with a lawsuit or decide to sue someone. Unfortunately, once they arise, costly court actions can destroy companies, particularly startups and underinsured and undercapitalized businesses. But suits can also be prevented, with some foresight and planning. Smart Answers asked several attorneys who work with small companies what they considered the top legal pitfalls for 2010 and how they can avoided.

The risk: Employee lawsuits.

"The top challenge for a small business owner in 2010 is avoiding employment lawsuits, which are skyrocketing as more and more employees are being laid off," says Eli M. Kantor, an employment law specialist in Beverly Hills, Calif.

Marjorie Jobe, an El Paso (Texas) attorney and author of Business Law Battle Plan for Entrepreneurs, agrees: "Plaintiffs' lawyers are increasing the filings of employee discrimination and wrongful termination suits across the country, and this will only escalate. Juries will be receptive to finding fault with the business community and corporate America as the economy struggles and companies downsize."

Employee claims filed with the Equal Employment Opportunity Commission increased 9% in 2008—a record jump—and were up 15% over that in 2009, says Hanna Hasl-Kelchner, a North Carolina attorney and author of The Business Guide to Legal Literacy: What Every Manager Should Know About the Law. "Age discrimination claims led the pack, with retaliation claims following in the No. 2 spot," she says.

Add into the mix an aging workforce, a beefed up EEOC budget (increased 7% for 2010), and the fact that employees can now start the filing process online, and companies that are lax in their EEOC compliance are in for trouble, Hasl-Kelchner says.

The fix: Do a preventive audit of your employee payroll practices before the U.S. Labor Dept. or your state labor commissioner decides to perform one. "While many small businesses are fully compliant with wage-and-hour practices, others find the cost-cutting pressures of a sputtering economy and cut-throat competition overwhelming," Hasl-Kelchner says, and they lose track of appropriate employment policies.

Common mistakes to look out for are minimum-wage violations, working-off-the-clock violations, and failure to compensate properly for overtime hours. "Quite often small business owners misclassify nonexempt employees as exempt. Just because you call someone a manager and pay him a salary does not automatically make him exempt" from being paid overtime and getting required lunch and rest breaks, Kantor says.
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