Legal Pitfalls

Jon L. Farnsworth

Felhaber, Larson, Fenlon & Vogt, P.A.

jfarnsworth@felhaber.com

felhaber.com

Topic: Legal

Businesses are inundated with important decisions each day. Unfortunately, seemingly “easy” decisions could result in unforeseen liability. Avoid these five common legal pitfalls to mitigate your company’s risk:

1. Failing to properly execute contracts.

Companies sometimes fail to properly execute contracts. For instance, a contract may be improperly signed personally and not on behalf of the company. The proper way to sign on behalf of a company is as follows:

Correct:                                                                

XYZ Company, LLC

Signature:   __________________             

By: Jane Smith                                             

Its: President

Incorrect:

Signature:  __________________

By: Jane Smith

With respect to the example on the left, XYZ Company, LLC is the entity responsible for the contractual obligations; however, on the example on the right, Jane Smith is signing the contract personally.

 2. Signing a personal guaranty.

A primary reason to incorporate is to limit personal liability for business obligations. However, once a personal guaranty is signed for a business debt, the individual becomes liable for it.

Personal guarantees are not always conspicuous. They may be found in a contract’s “small print.” Business owners sometimes can eliminate a guaranty through contract negotiation. However, guarantees may be a mandatory condition of the transaction and are commonly required in loans, leases, credit card applications and some vendor/supplier agreements.

 3. Overly relying on non-competition agreements.

A non-competition agreement (NCA) is a contract that limits employees’ ability to compete with the employer. Such agreements are commonly used in an attempt to prevent employees from absconding with trade secrets and starting a competing business. However, NCAs are only contracts. They can be breached, and require judicial intervention for enforcement.

 While NCAs are one tool to protect against unfair competition, Minnesota law disfavors them and they are often difficult to enforce. Courts may invalid NCAs that are overbroad in scope or duration, or signed without an exchange of something of value. Ultimately, even the best drafted NCAs cannot guarantee employees will not compete or abscond with trade secrets. Arguably the best method for protecting trade secrets is to retain key employees, and implement reasonable safeguards that restrict and monitor employees’ access to sensitive information.

4. Overlooking wage and hour issues.

Companies are increasingly exposed to liability for failure to pay overtime due to misclassifying non-exempt employees as exempt. Employers’ liability for these claims can quickly mushroom. An inadvertent failure to pay a few hours of overtime may result in a class action where one employee seeks recovery on behalf of all other employees, including their attorneys’ fees.

Under the Federal Fair Labor Standard Act (“FLSA”), employees are entitled to overtime pay unless they earn more than $455 per week and fall within one or more discrete exemptions; including but not limited to the administrative, executive, professional, and computer exemptions. These exemptions are unfortunately somewhat counter-intuitive. Not all professionals or business executives qualify for the “professional” or “executive” exemptions. Similarly, administrative employees or IT professionals who use computers to complete their job duties often do not fit within the “computer” or “administrative” exemptions.

A careful analysis of employees’ job duties is needed to determine their eligibility for an exemption. Businesses are wise to enlist the assistance of capable human resource personnel and employment attorneys to review such matters. 

5. Failing to maintain and protect an online presence.

 In the age of Twitter and LinkedIn, a company’s online presence is vitally important. Unfortunately, many businesses fail optimize and protect their online presence. Some common mistakes include:

• Failing to monitor your company’s and competitors’ search engine results.
• Failing to create your business listing in Google Maps; it is free.
• Failing to monitor consumer review sites like Yelp.
• Failing to renew your website’s domain name.
• Failing to implement a social media policy for your employees. 

Much like other problems in the workplace, with caution and care, these mistakes are easily avoidable. For free legal business advice for small companies in Minnesota visit legalcorps.org.   

Jon L. Farnsworth is an attorney at Felhaber, Larson, Fenlon & Vogt, P.A. in St. Paul, felhaber.com. He acts as an outside general counsel to privately held companies in business and litigation matters, and has a niche in computer law matters. jfarnsworth@felhaber.com