How Small Businesses Can Avoid Employment Litigation Risks

As a small business owner, that moment when you’re able to hire your first employee is a measure of success, because it usually means demand for your services has exceeded what you can provide on your own. But as you take on employees, you also take on new legal risks.

Maryland state law establishes minimum pay rates, overtime requirements, worker classifications, and guidelines for employing minors. Additional federal laws that apply to workplaces with 15 or more people protect job applicants and employees from certain unfair and discriminatory labor practices. However, some of the federal laws apply to all workplaces, including minimum wage and equal pay laws, the Occupational Safety and Health Requirements and Immigration requirements.

Small business owners that unknowingly violate state or federal laws may become entangled in lawsuits and end up paying a hefty sum for their mistake, sometimes to the government in terms of fines and taxes, and potentially also to the employee. The following are some of the most common reasons employees file complaints of unfair or discriminatory practices, and some strategies for avoiding litigation.

Worker Classification

An independent contractor, exempt employee and non-exempt employee all have unique legal rights.

  • Independent contractor: These workers are not subject to direct employer control; they decide what tools to use and, while they may have a deadline, they determine when they want to work. Businesses do not pay into Social Security or Workers’ Compensation for their contractors, nor are they required to pay payroll taxes or benefits on contractors’ behalf.The United States Department of Labor has found many businesses have misclassified workers as contractors, when the workers actually are employees. If a relationship of control exists, the employer may trigger a legal responsibility to treat the contractor as an employee.
  • Non-exempt: This classification means an employee is paid hourly and is entitled to overtime pay. Some Maryland businesses are not required to pay overtime pay, but, generally, overtime must be paid at the rate of 1.5 times the hourly wage.
  • Exempt: Exempt employees earn a salary and the same amount of pay regardless of whether they work 40 or 60 hours per week. That also means employers cannot legally dock their pay for leaving work an hour early. In Maryland, some non-administrative, non-professional workers who receive a salary are considered “hourly-type” employees, meaning they are entitled to overtime pay. A new overtime regulation goes into effect on December 1, 2016 requiring that for an employee to continue to be classified as exempt, they must be paid at least $47,476 per year. If an employee is paid less than this annual wage, the employer must comply with overtime regulations and can no longer not pay overtime if the employee works over 40 hours per week.


Title VII of the Civil Rights Act of 1964 prohibits discrimination against someone on the basis of race, color, religion, national origin, or sex, and prohibits businesses from retaliating against an employee who complains about such discrimination. Title I of the Americans with Disabilities Act of 1990 expanded these same protections to people with disabilities, and additional federal laws protect workers from discrimination based on pregnancy or age. State and local laws in Maryland also prohibit discrimination and these laws often provide no exemption for small employers.

The Equal Employment Opportunity Commission investigates claims of discrimination, and when it finds discrimination has occurred, it may file a lawsuit against an employer on behalf of a job applicant or employee. In 2013, the EEOC filed suit in U.S. District Court for the District of Maryland, Baltimore Division, against Toys“R”Us for discrimination against a deaf job applicant. The suit claimed a Toys”R”Us store in Columbia violated the federal law that requires employers to provide a “reasonable accommodation” for people with disabilities, when it refused to provide an interpreter for the job applicant. Instead, the woman’s mother provided interpretation services during the job interview, and Toys“R”Us refused to hire her, despite her job qualifications. The company was ordered to pay $35,000 in relief to the job applicant and to train managers and supervisors at its 24 other Maryland and Pennsylvania stores about compliance with disability rights laws and non-discriminatory interviewing and employment practices.

Proper Documentation

Your employee handbook is one of the best tools you have for protecting yourself from litigation, but a poorly drafted employee handbook can create problems for an employer. Describe in detail your anti-discrimination policies and how employees are expected to abide by them. If one employee alleges discrimination or harassment by another employee, your formal policy can show that you did not encourage or contribute to the discriminatory behavior.

Specify progressive discipline policies in the employee handbook and carefully document each stage of progressive discipline for employees, having them sign an acknowledgment of any warnings. Proper documentation is important evidence, should an employee claim wrongful termination.

How Small Businesses Can Avoid Employment Litigation Risks

Lusk Law, LLC, specializes in assisting small business owners, helping to avoid litigation when possible and actively representing our clients facing legal complaints or litigation. Our experienced attorneys have provided legal counsel and representation to business owners in Maryland, Virginia, Pennsylvania, and the District of Columbia. Please call us at 443-535-9715 or fill out our contact form if you have any questions about this topic.

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