9 common legal issues in business and how to prevent them

Regardless of their size, businesses are determined to maximize their profits and use existing capital and revenue to keep growing. Unfortunately, things don’t always go to plan, and companies often need to take unexpected financial blows like the costs of an employment lawsuit. Since employee lawsuits have seen a 400% increase over the past 20 years, companies nowadays have to be extra careful.

It is estimated that settling an employment lawsuit costs businesses $200,000 on average - but depending on the case, costs may be a lot higher. That’s a lot of money which, under different circumstances, could have been invested in improving the business. 

The best way for businesses to protect themselves against legal claims is to be aware of the different reasons businesses get sued. This blog posts lists the 9 most common legal issues faced by businesses - including legal problems encountered by small businesses as well as global legal issues concerning multinationals - and describes ways to avoid getting into legal trouble.

Legal issues are matters, questions or problems that can have legal implications and, potentially, result in a lawsuit. In business, legal issues arise whenever the business fails to comply with existing laws and regulations. There are many different types of legal issues in business, such as employee issues or registration issues. 

It’s important not to confuse legal issues and ethical issues, which are also a common concern for businesses of any size. In contrast to legal issues, ethical issues are not necessarily related to law, but rather focus on values and one’s perception of what is right or wrong. 

Since legal problems can quickly turn into expensive and lengthy lawsuits, they usually take priority over ethical issues. Here are the most common legal problems faced by businesses.

mployee misclassification, i.e. the wrongful classification of employees as independent contractors either by mistake or on purpose, is one of the most common legal issues for businesses and concerns both multinationals with global teams and small businesses with a purely local team. 

Every country has different rules and regulations when it comes to distinguishing employees and independent contractors. Businesses should evaluate the independence of the worker in question to see whether they are free to organize their workload as they see fit. Fixed working hours, additional benefits or company-provided work equipment are usually good indicators which help decide whether a contractor is still performing work as an independent external worker, or whether he or she should rather be classified as an employee. 

Since fines and penalties can be as high as several million dollars, avoiding employee misclassification is a top priority for business owners. One way of preventing misclassification issues is to use compliant contractor agreements like the ones provided as part of Lano’s contractor management solution. 

For more in-depth information on employee misclassification, including how to check for misclassification issues and what penalties companies can expect when they misclassify their workers, check out our related blog post “How to avoid employee misclassification”.

Regardless of whether a company works with a globally distributed team or not, it’s crucial to comply with the labor code that prevails in the respective jurisdiction. Unfortunately, the cases where companies fail to do so are numerous and employment law violations are among the most common legal issues faced by businesses. 

Violations of labor laws can take many different forms, such as not respecting weekly rest periods or annual leave entitlement, exceeding the legal limits for overtime or underpaying employees. The latter is an especially common problem when setting salaries for remote workers based in different countries, since different minimum wage rates and compensation requirements apply. 

In order to prevent violations of applicable labor laws, it’s crucial to have an experienced HR and compliance team or work with external legal experts who are familiar with all the regulations in place and keep an eye out for potential employment law changes. When hiring abroad, the best option to ensure compliance is to work with an Employer of Record who takes care of all the legal and administrative employment tasks. 

Looking for a reliable Employer of Record solution to build your global team in full compliance? With Lano, you can hire and onboard employees in 170+ countries in record time.

Strictly speaking, wrongful termination belongs to the wide field of employment law violations, but since lawsuits related to employee termination are much more common than businesses think, they deserve to be mentioned separately. 

Employee terminations should be handled with the greatest care and precaution to make sure that the dismissal is based on a legally valid reason and that notice periods are respected. Although the legal grounds for termination as well as the necessary procedures vary, it’s standard practice in most jurisdictions that employers have to give notice to their employees in due time, deliver an official letter of termination stating relevant reasons for the dismissal and, depending on the employee’s seniority, provide severance pay. 

As with other legal concerns regarding employment law, an Employer of Record can help you handle employee termination in full compliance with local laws, should you decide to reduce the size of your global team. When operating within only one jurisdiction, make sure your HR department is up to date with all the laws in force and consult an employment lawyer when in doubt. 

Another common legal problem for businesses that is closely linked to wrongful termination are employee lawsuits based on alleged discrimination. Discrimination lawsuits can either be filed by employees who feel like they were discriminated against during the termination of their employment or by job candidates claiming that the company’s decision not to hire them was based on their race, gender or ethnicity.

Since cases of discrimination can weigh heavily on a business’s reputation, avoiding any lawsuits in that field is crucial. To achieve this, businesses must establish a fair hiring process and make sure to keep the CVs and other application-related documents of declined job candidates. 

However, sometimes discrimation during hiring and termination processes is based on unconscious bias, which is why businesses (regardless of whether their teams are based locally or globally distributed) should promote diversity and cultural competence.

Businesses are responsible for creating a safe working environment for their employees. Failure to do so can result in nasty lawsuits with substantial penalties (including compensation for lost earnings, medical expenses, compensation for suffered pain etc.), depending on the severity of the injury suffered by the suing employee and the level of negligence demonstrated by the company.

To avoid lawsuits for wrongful injuries at the workplace, businesses should make sure they fulfill all the health & safety regulations that apply in their line of work and draft up internal protocols and guidelines to keep employees safe. Further measures include providing adequate safety gear where necessary, making sure new employees receive proper instructions and training and, of course, taking out a good workers’ compensation insurance.

Although not always on a business’s radar, intellectual property infringement is a surprisingly frequent legal issue that affects businesses. Intellectual property (short: IP) refers to intangible property that usually stems from someone’s creativity. In the world of business, IP violation lawsuits usually involve copyright, patents and trademarks, and can become quite costly for a company because they often last for several years. 

To protect themselves from lengthy lawsuits, businesses should do their due diligence when developing and naming new products by checking for existing patents and/or trademarks. The same goes for the use of written copy, images and other visual material.  

IP enforcement may not be a common legal issue in the jurisdiction where your company is headquartered, but as soon as you start expanding internationally, you should definitely watch out for potential IP violations - especially when doing business in the United States, where IP lawsuits happen almost daily.

Employment contracts, independent contractor agreements, service contracts with other businesses, contracts with clients… Regardless of the sector they operate in, companies have to conclude many different contracts on a daily basis. This means making commitments to many different parties and, consequently, accepting an increasing risk of violating the agreed terms. 

Contract breaches are divided into different types (e.g. minor breach of contract or material breach of contract), which influence the consequences of your failing to adhere to the terms of the agreement. The latter can range from financial compensation to cancellation of the contract in question. 

What companies can do to prevent breaking existing contracts is to carefully examine employment contracts and contractor agreements before signing - global businesses can seek help from an Employer of Record to make sure contracts are in order. With regard to all other types of contracts concluded by the business, there should be mechanisms to regularly review existing contracts and ensure the agreed terms are fulfilled.  

Whether it’s creating a subsidiary in a different country or starting a whole new venture, setting up a business is always a challenge and comes with various legal issues. One of the legal problems businesses face in the early stages of company formation is choosing the right company structure. 

Business structures vary from jurisdiction to jurisdiction, which makes global expansion even harder. Not to forget the ever-pending risk of being classified as a permanent establishment by the local authorities, which can have unwanted tax implications too. But even when setting up shop locally, it’s crucial to be familiar with the different available options. 

Other common legal pitfalls are missing business licenses (here, the requirements also vary greatly, depending on where you set up) and incomplete registration processes. In severe cases, not having the necessary licenses to operate your business could lead to business closure. As to business registration, make sure you complete all the necessary processes, including registration with the competent tax authority, statistics office and social security authorities when you hire employees.