How To Protect Your Small Business

Your small business is humming along smoothly, providing a service or product that’s keeping your bottom line—and your customers—happy. Suddenly, a serious issue arises with an employee, a vendor, or a business partner. Chances are it will lead to a thorny legal problem you’d prefer to avoid but forced to confront.

Now what?

Legal issues for small businesses can vary widely, from understanding what’s in a contract to trademarking a logo. Simple forms downloaded off an online legal site can sometimes substitute for an attorney, but litigation is another matter entirely.

Exhibit A: The recent court case involving A. Bright Idea, an advertising and public relations agency based in Maryland and with an office in Glen Ellen. Earlier this year, the company went to trial in Sonoma County Superior Court to seek damages from one of its former employees. The original complaint filed by A. Bright Idea in March 2016 alleged that the employee breached his fiduciary duty with the agency after taking a position as marketing director for a winery tasting room in Sonoma called Corner 103. The suit also alleged that the employee intentionally interfered with the daily business operations at A. Bright Idea after redirecting prospective clients to his own start-up business, all while still employed by A. Bright Idea. (The employee resigned from the agency in June 2015.)

Litigation is last resort

“In 21 years of business, our agency had never encountered a situation like this. It was the first time we’d had to take a drastic move like litigation,” explains T.J. Brightman, president of A. Bright Idea. “It was shortly after David resigned that we learned he’d taken the job with Corner 103 many months before. By way of the complaint we filed against [the employee] and later in litigation did we further uncover that while he was employed by us, he was diverting away business from the agency. We were happy with the judgment we received against him.”

Brightman and his wife, CEO and founder Anita Brightman, uncovered past emails and other evidence showing that the employee had been conducting business on the side with some of the agency’s clients. “It stupefied us that he was so blatant about it while also failing to cover his tracks,” says Brightman. “He was offering the same services we performed but at a reduced price, and farming out some of the duties he wasn’t able to do himself.”

In June, Judge Allan D. Hardcastle awarded a judgment and damages in favor of A. Bright Idea. Brightman chose not to disclose the amount of the settlement for this story, but says the lawsuit was never about financial gain or recovery.

“It wasn’t about money, because the judgment was pale in comparison to what we spent to defend ourselves and our staff. It was about validating David’s actions and behavior, subsequently defending our agency name and the many creative employees who work alongside us everyday. It’s true we suffered financial losses of direct business, in addition to lost business resulting from the confusion created in the marketplace.”

The legal process to bring the case to court was “ponderous and time consuming,” adds Brightman, taking two years and culminating in a four-day trial.

Trust issues

A. Bright Idea’s attorney in the case, Jarin Beck of Beck Law P.C. in Santa Rosa, has seen a rise in similar class-action lawsuits over the past decade. “There’s a phenomenon growing among employees who feel more empowered by regulations that are in place for their protection, such as working too many hours without being paid overtime, or rest and meal breaks,” he says. “In small businesses we are also seeing a form of embezzlement in which there is no actual theft in the typical sense, but an employee uses his or her role in the company to divert business away for their own gain.”

Beck has also seen other cases where employees were placed in trustworthy positions within small companies and actually did embezzle funds. “The owners of small businesses can sometimes be more trusting of their employees, and perhaps not as savvy or sophisticated to tackle the problem, as a much larger company might be.”

A small business can feel like a big family sometimes, Brightman says, with company owners frequently socializing with their employees. “But you reach the point where you have to separate employees from being part of your actual family, because you still have to manage them.” (A. Bright Idea has approximately 40 full-time employees companywide.)

Placing too much trust in one employee can backfire, as the Brightmans discovered. In 2008, they had hired the employee in their Maryland office part time, shortly after he graduated from college. He was quickly promoted to full-time, and in 2013 the Brightmans relocated him to their Glen Ellen office, where he worked in “a senior sort of capacity with a lot of latitude,” says Brightman.

“We believed it was important to have someone who had already been part of the company to help grow our business in Sonoma County. A lot of trust existed between us for many years, but in this case we trusted a little too much and got burned.”

Get smart

Attorney Teresa Cunningham, a partner at the Napa law firm of Gaw Van Male, practices in the area of employment and labor law. “That’s my entire day, every day––dealing with these types of issues for small business owners. When an employee files a wage and hour claim at the labor commissioner’s office, for instance, I can’t undo what’s already been done. The law is the law, no matter the size of the company, but I can give these small businesses proactive guidance to avoid such problems.”

Cunningham recommends that new business owners educate themselves in labor law. One way to do that, she says, is to visit the California Chamber of Commerce website and download its “California Labor Law Digest” (also available in print). “Small business owners need to do their homework and learn what laws apply to them. The California Chamber is a great resource for general employment law information, and its Labor Law Digest Digest covers many topics they may encounter as employers.”

Business owners with very few employees, because they are so small, sometimes believe they can resolve a legal problem all on their own, says Magdalena McQuilla, an associate with the law firm of Geary, Shea, O’Donnell, Grattan & Mitchell P.C. in Santa Rosa. “Having to go to court shouldn’t be the first time a small business owner speaks to an attorney. Litigation doesn’t always escalate into a courtroom setting, but it’s very common, and it’s costly.”

A serious legal issue, McQuilla says, could be avoided after a short consultation with an attorney. “Prevention is always the way to go, although that’s no guarantee a business won’t be forced to defend or initiate a lawsuit at some point. The cost of legal assistance depends a lot on whether a business owner is trying to prevent a problem or already has one. They may shrug off arranging for legal representation until it’s too late to avoid the costs of a lawsuit.”

Asking trained professionals to interpret contracts and lease agreements, for example, can go a long way toward avoiding problems later. “Small business owners need to understand it’s fairly inexpensive to have another set of eyes look over their documents,” says McQuilla, whose practice focuses on civil litigation and small business law. “Maybe they don’t understand exactly what they can utilize and attorney for, or feel it’s out of their reach. But establishing a relationship with an attorney for routine matters is much less expensive than having to defend a lawsuit later on.”

Employee handbook mandatory

The attorneys interviewed for this story all agree that small business owners must develop and maintain a comprehensive employee handbook to avoid potential legal dust-ups.

“Having a clear policy manual about expectations from employees, listing terms and conditions and so forth, is absolutely necessary,” says Beck. “For instance, setting up a policy about using the company’s email and letting employees know there is  will be no expectation of privacy and that emails can be monitored. That’s what ultimately came about in A. Bright Idea’s court case––uncovered emails.”

Generally speaking, he says, an effective employee handbook can be created by a human resources department, but there is legalese in those manuals that really fall within the practice of law. Yet, employee handbooks can be a double-edged sword, Beck adds. “The culture that a small business sets for its employees is very important. Employers have to intend to follow the policies they have set forth. If they don’t, a handbook or policy manual won’t be effective.”

Creating a handbook for employees is one way for small businesses to set up best practices and prevent future problems, says McQuilla. “There are different codes and regulations, often depending on the type of industry. An employee handbook can help a business and its employees understand and follow the relevant laws and help enact methods of best practice. That way, hopefully, you won’t find yourself in a serious legal dilemma saying, ‘Oh, my goodness, I have a big problem.’”

Cunningham says an employee handbook forces business owners to assign accountability to their employees. “If they have policies in place, then the expectations for their workforce are clear. You can be as proactive as possible to minimize your liabilities by implementing procedures and holding employees accountable, but you can’t always anticipate what one employee might do. Being a small business owner and employer is not for the faint hearted. Hell hath no fury like an employee scorned.”

Brightman says A. Bright Idea has used an employee handbook for some time. “From a business operations standpoint, our company is extremely buttoned up. While we want to maintain a family-style atmosphere, we have systems in place so that we are fully documented.”

Be prepared

“Just as you have your vendors— IT support, marketing, financial, etc.— you also need legal support. Small business owners should utilize an attorney as general counsel just like larger companies.”

Legal matters touch all areas of our lives, but many business owners are intimidated by attorneys, says McQuilla. “It’s a misconception that small businesses aren’t important enough to have general counsel or don’t deserve to. Most attorneys are happy to meet with potential clients for a free first consultation. And it’s like any other service you pay for––you want a professional with a good reputation. Personal references are best, and the Sonoma County Bar Association is also an excellent source for attorney referrals.”

In addition to having legal representation, small businesses can also benefit from the services of a human resources support firm, says Brightman. “Our company isn’t quite large enough to have an HR person on staff, so we’ve used an HR consulting firm for several years. It’s important to have this type of support fully in place, and it’s money well spent. I’m a creative by trade, but as a small business owner I find myself spending about half my time dealing with HR-related matters.”

Listen to your gut

A. Bright Idea’s recent court case was a learning experience for the company, leading it to beef up its cyber security. “We now limit our employees’ access to proprietary information,” says Brightman. “Prior to that, pretty much anyone could access the server for anything they needed. Now we’ve locked down certain documents.”

To avoid potential legal entanglements, he recommends that small businesses find a go-to legal team, have an HR firm in place and hire an IT company to keep sensitive information secure. “You don’t want to always be in reaction mode,” he says. “But as I look back on our experience, you can never be too invasive when it comes to your business or your employees. If your gut is telling you something isn’t right, it probably isn’t.”