Liability and Lawsuits: What Business Owners Need to Know

Starting and running a business can be risky. There are many things business owners need to keep tabs on simultaneously, such as employee scheduling, cash flow, inventory management, and customer satisfaction. On top of the normal course of business, merchants must also protect their enterprises from lawsuits and liability.

With the number of lawsuits against companies increasing year over year, businesses spend an average of $1.2 million annually fighting litigation in a typical year. Here are some common questions that business owners have about liabilities and lawsuits — and how to keep your venture safe.

Common lawsuits against businesses

Unfortunately, many lawsuits lack merit or are more frivolous than others. In 2019, a lawsuit over the tiny amount of lip balm at the bottom of the tube was voted as the most ridiculous lawsuit of the year. In 2017, a man sued Uber for “ruining his marriage” after his wife used the app to see him coming and going from his alleged indiscretions.

Luckily, most lawsuits are less conspicuous. Some of the most common reasons for lawsuits are:

1. Discrimination​ against customers or employees. If a business refuses to serve a customer or hire a job candidate on the basis of that individual’s age, race, gender identity, sex, religion or disability, it may be sued for discrimination.
2. Harassment. All businesses should have an employee handbook that sets forth the rules and guidelines for treating others in the workplace, as well as customers.
3. Breach of contract​ with partners or suppliers. If you fail to deliver goods, pay for goods after you received them, or deliver damaged or incorrect goods, you may be putting your business at risk.
4. Accidents and injuries​ that happen on-premise. Slip-and-fall accidents, or food poisoning, are two examples of liabilities in this category.
5. Payment disputes. For companies that increasingly work with contractors, payment disputes and other labor law violations can put you at risk.

Many of these lawsuits can be anticipated with strong HR policies, employee training, safety precautions and good supply chain management.

The basics of class action lawsuits

A class action lawsuit is a legal case in which one or several of the plaintiffs charge a lawsuit against one defendant on behalf of a larger group (“the class”). These types of lawsuits are designed for instances in which numerous individuals have suffered similar grievances as the result of one defendant’s actions. Usually, class action lawsuits result when the damages claimed by each plaintiff are too small for individual claims to be worthwhile; bundling claims into one lawsuit can give the plaintiffs better leverage to potentially force a settlement.

In 2005, Congress passed the Class Action Fairness Act (CAFA), a law that is meant to protect businesses from “abusive” class action lawsuits. Class action suits can be heard either in federal or state courts, depending on the circumstances. The CAFA makes it easier for a defendant to move their case from state to federal courts.

How to protect your business

While no advice can prevent litigation forever, there are ways to protect your business from a higher risk of lawsuits. Retaining independent counsel well versed in labor disputes can help provide guidance to business owners so they properly understand labor laws. (Disclaimer: this guide is not intended to be legal advice.)

Another best practice is investment in corporate liability insurance. Liability insurance provides the business with protection against claims that result from injury or damage to customers, employees, or property. The insurance policy will cover any legal costs or payouts that your business is found responsible for if legally liable. For instance, if a customer is injured by a falling object at your store, a liability insurance policy may cover the customer’s medical costs and any other damages.

Finally, it’s worthwhile to form your business as an LLC (limited liability corporation) or incorporate your business as a corporation to limit the liability exposure of your personal assets. Corporate limited liability means corporate losses are limited to the business; this protects your personal assets and creates a separate legal entity for your enterprise. As a private individual, under most circumstances you will not be responsible for the legal liabilities of your company.

For more information and resources, check out the U.S. Chamber of Commerce’s Institute for Legal Reform.