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Let Your Business Do the Hiring and Protect Yourself from Liability

By Catherine Gordon, JD | April 23, 2013

No matter what type of business you’re in, hiring the right employees is critical to your company’s success. However, the world of hiring is filled with legal landmines, often hidden and just waiting for an employer to step on. Therefore, an employer must do everything possible to minimize the risks inherent in employing others.

Familiarizing yourself with the potential legal liabilities of the hiring process is only one part of protecting yourself. Once you understand these risks, you can work to avoid them.

The other part of the process involves being ready when one of these employer problems strike. In such a case, you want liability to end with the business itself, and not extend to you as owner. The best way to ensure this protection is to establish a formal entity structure for the company, separating the owner from the entity. A business owner operating a business as a corporation or limited liability company (LLC) can have the entity hire the employee and safeguard against potential personal responsibility.

Discrimination Issues Can Easily Emerge During the Hiring Process

When you make the decision to hire, you need to ascertain the job qualifications for the position being filled (experience, education and ability). While qualifications are necessary to determine an applicant’s fitness for a position, employers can run into legal trouble if their job qualifications are deemed discriminatory. Similar discriminatory issues can arise in connection with job descriptions and interviews.

Federal laws prohibit hiring discrimination. Generally, federal laws prohibit employers with 15 or more employees from discriminating against applicants and employees in all aspects of employment — including recruiting and hiring—on the basis of race, color, national origin, religion, or gender. Also, employers of 20 or more may not discriminate on the basis of age against applicants or employees who are 40 or over. Protections also exist for disabled individuals.

And be aware that if your job qualifications screen out the members of a protected group—known as “disparate impact”—you may very well be guilty of discriminatory practices, even if the result is unintentional, unless you can successfully show business necessity.

Job descriptions must be neutral. Practice caution as well if you use a job description as part of your hiring process. To avoid discriminatory claims, the description of the position should focus on the job rather than any of the traits of the person who will fill it.

Interviews require proper planning. Be careful about what you ask, say or write down when conducting an interview. Inquiries or even passing remarks made during the interview can be considered discriminatory and may give the applicant grounds for suit if he or she is passed over for the job.

State laws expand reach of discriminatory prohibitions. Many states have anti-discrimination laws expanding upon the federal rules, but which apply to employers with as few as a single employee. Every state has laws pertaining to employment discrimination and many of these laws protect groups in addition to those protected by federal laws. Complying with these state laws can be particularly tricky if you do business in more than one state.

Employment Contract Suits Can Be Costly

It’s a fact of life that if you use employment contracts in your business, chances are good that at some point you will be sued by an employee for violating or not fulfilling a provision of this formal agreement. In addition, employees regularly bring lawsuits against employers for violating an agreement that the employer didn’t knowingly enter. The “implied contract “ is often created during the job offer part of the hiring process and can be based on an oral statement that you made or on a written statement in your hiring or orientation materials, including employee handbooks, usually regarding the length of employment.

Employers can (and do) incur sizable legal fees to defend and pay damage awards in connection with lawsuits brought under both express and implied employment contracts. The financial implications are even more severe when there is no entity protection from substantial damage awards under employee contract claims. Employment contracts between the entity and the employee (arguably, even when implied) provide protection for the business owner’s personal assets.

Negligent Hiring Claims Cause Devastation

Your business can be legally liable for negligent hiring if you fail to uncover a job applicant's incompetence or unfitness through various background checks and screenings, and that incompetence or unfitness is the cause of a person’s injuries. Negligent hiring suits can be brought by customers or clients, other employees and any third-party injured because of what you should have known (or did know but disregarded) about the employee’s background.

Pre-employment background checks, screenings and reference checks can be used by employers to avoid negligent hiring claims, but are far from a perfect solution to this threat. Background checks are subject to legal restrictions on both the federal and state level, as are screenings such as drug tests. Employers may find themselves between a rock and a hard place when trying to balance the fine line between applicants’ right to privacy and making a questionable hire.

Businesses in which employees have contact with customers or clients (particularly children, the elderly and vulnerable adults), deal with finances, or drive a vehicle as part of their employment duties must be especially vigilant during the hiring process. However, exposure to negligent hiring claims is not reserved for certain businesses and employees. Generally, absent specific statutory requirements, the standard that an employer is expected to meet when conducting pre-employment background checks is reasonable care. Therefore, even in states where following statutory steps creates a presumption against negligent hiring, there is no guaranteed protection against such a claim.

The costs of defending negligent hiring claims alone can be significant and, coupled with an unfavorable outcome, crippling to a business. Depending on the circumstances involved, liability in negligent hiring cases can bankrupt a business, as well as the business owner personally if he or she and not the business hired the employee.

Operate as a Corporation or LLC to Limit Your Personal Liability

It is pretty clear that hiring employees can allow your business to reach new heights of success or bring it to its knees. Similarly, choosing the right entity structure can protect your personal assets from hiring liability claims while choosing incorrectly can spell disaster.

Choosing to operate your business as a corporation or an LLC allows you to create an employment relationship between an employee and the entity. Of course, you can participate in the hiring process as an agent of the entity, but because the entity itself is considered the employer, you have limited liability for the business’s debts.

Ready to form a corporation or LLC? Protect your assets and formalize your entity structure now.

Office & HR

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