Protecting Your Small Business—Hiring People

According to the Small Business Administration, there are over 30 million small businesses in the United States. That is a staggering 99.9% of all businesses in the country. If you are one of the people who own a small business and have been successful enough to need to bring on other people, you need to make sure you take steps to protect your business. Here are 4 tips on how to protect yourself and your business. As you know, laws vary from state to state, so it is important that you speak with your attorney to make sure you are complying with the laws in your state.

1.     Employee vs. Independent Contractor. The first decision you will need to make is whether the person or people you bring on will be employees or independent contractors. There may be tax or other reasons to go one route over the other. You should speak with your accountant and attorney to figure out which way is better. Keep in mind that calling someone an independent contractor may not be enough to make them one. Depending on a number of factors, they may be considered an employee. Courts look to something called the “economic reality test” in helping them make the determination. There are six factors that comprise this test. They are: control; opportunity for profit and loss; investment in equipment and materials; special skill; permanency and duration; and integral part of the business.    

2.     Contract or no contract. Most people who are hired do not have a written contract. They are known as an “employee at will.” They can be fired at any time for any reason (so long as it is not discriminatory or violates some other law). The advantage to a contract is it gives both sides a clear road map as to the responsibilities, as well as certain things that are only enforceable if they are in writing. If you choose to go the written contract route, it is highly advisable that you hire a lawyer to prepare it. While it may cost you a bit of money, it could save you a lot of money down the road.

3.     Confidentiality Agreement. There is a good likelihood that you will be providing your hire with confidential information. That information could be among the most valuable information you will provide. The last thing you want is for the hire to walk away and start using that information for their benefit, which would be harmful to your business. You can protect yourself with a confidentiality agreement. A confidentiality agreement is an agreement that says “you are going to be receiving confidential and proprietary information from me. By signing this you agree that you will keep in confidential and not disclose it to anyone else without my permission.”  The agreement will also normally provide remedies (such as seeking an injunction) if it is breached.

4.     Non-competition/ Non-solicitation Agreements. If you hire people, you are going to want to make sure they don’t walk away with important aspects of your business, such as your clients or other employees. If allowed by the laws of your state, one way to protect your business is to have them sign an agreement that, if they leave, they won’t compete against you or take your best employees with them. It doesn’t matter whether they are an employee or an independent contractor, having them agree to what they will and won’t do is crucial. These agreements are called non-competition and non-solicitation. A non-competition agreement is an agreement that says “if you leave, you agree that you will not compete against me, either by starting your own company or working for one of my competitors.” The non-competition agreement must be “reasonable” in terms of time and geographic scope. The time element is self-explanatory. The geographic element is more difficult. It depends on the good or service you are providing and what is considered to be your normal sales area. The reason for this is because courts look at two factors, your legitimate business interest in protecting your good or service and the employee’s legitimate right to make a living. Depending on your good or service, the reasonable geographic scope might be your city or it might be nationwide. Of course, the broader you try to make the geographic area; the greater scrutiny the court will place on whether it is reasonable. A non-solicitation agreement is where the person working for you says if they leave they will not try to get another of your workers to leave with them. The other thing to keep in mind is that if you are going to have one of these agreements signed, it has to be done at the time you bring the individual on to work for you. You can do it later but, since the worker is giving up something of value (the right to engage in the same business), you will need to provide additional “consideration” (something of value in return for what is being given up) for it to be valid.    As indicated above, while most states allow these types of agreements, some do not allow them and others have staked out a middle ground. As with everything else, speak with your attorney before you have one signed by someone you hire.