5 Top Risks for Growing Companies (and How to Avoid Them)

April 11, 2016
5 Top Risks for Growing Companies (and How to Avoid Them)

Business owners know that there is always the possibility for exposure to certain risks associated with running their organization. Many such risks depend on the type of work you do but many other risks can be a direct result of everyday business practices and the actions of team members.  The good news is that potential liability can be minimized with a little foresight.  Here are five examples of common small business risks and the steps employers can take to minimize their exposure to liability.

1) Your management team
Managers represent the company’s culture, expertise and future. Many times, managers are promoted into positions for their technical or functional capabilities, not for their expertise at managing people or their leadership abilities. When employees don’t like working for their direct manager, they usually start to look for other opportunities.  This is true even if they like the company.

Your managers are your most important assets to building a successful organization. Effective leaders drive behaviors and leverage employee talents to achieve results. They have excellent communication skills and share the excitement of the vision to achieve results. Even If only one of your managers has less than stellar leadership skills, your company is at risk.

Recommendation: Do not underestimate the value of continuous employee training and development. Train all levels of management on leadership skills, performance management and communication skills - and make it clear that managers are accountable for providing ongoing feedback to their team. 

2) Inconsistent hiring practices
Inconsistency in hiring can create risk and attrition. Companies often hire an employee for his or her technical skills and end up terminating that same employee for poor cultural fit. The interview process is the best opportunity to identify the right candidate in every category but interviewers don’t always use the time to their best advantage and they may not be aware of the legal risks in conducting interviews.

Take the time to define the job description and make sure everyone involved in the interview understands exactly what type of candidate will be the right fit. Ensure that all interviewers have been trained on the type of questions to ask (and not to ask) and that they focus on cultural fit, in addition to technical skills. Use an offer letter to outline the terms and conditions of employment and be transparent with the perks and additional benefits you offer.

Recommendation: Establish a consistent hiring practice and train everyone involved. Read more tips for successful hiring.

3) Employee status misclassification
Costly wage and hour claims are on the rise. Of these claims, one of the most common allegations is that an employee was incorrectly classified as exempt or non-exempt under the Fair Labor Standards Act (FLSA) and, as a result, was improperly paid. In addition, misclassifying independent contractors or temporary employees exposes the company to potential penalties or fines.

Often we see companies who classify workers as independent contractors for a short “probationary” period, then hire them as “regular” employees. Some companies even classify everyone as exempt because “it’s easier” or they’ve “always done it that way.” These actions can often leave companies exposed to significant liability.

Learn about additional ways to prevent wage and hour lawsuits.

Recommendation: Seek legal counsel with experience in employment law for guidance on employee classifications.

4) Lack of a performance management focus
This is frighteningly prevalent. Small companies often create a culture where they decide they do not want to do anything that seems “corporate” so they dispense with everything that may feel like a formal review. They miss out on ongoing feedback and open communication and end up with employees who don’t know if they’re meeting expectations because no one has set goals, developed a job description or shared the company’s direction.

Even in larger companies, managers have an aversion to spending time on providing feedback and often put it off until the dreaded year-end review, when they try to lump the entire year’s performance into as short of a message as possible. No other area in the company would pull data from one snapshot in time to determine success. Neither should the performance management process.

Recommendations: Provide ongoing feedback to all employees, managers and the executive team regularly. Develop shared expectations around performance. Make sure employees know how they are performing. Identify and recognize employee accomplishments.

Brush up on ways to use performance management to empower your workforce.

5) Insufficient documentation
Insufficient documentation creates a litigation risk because documenting performance issues protects the company. While it does take time and effort to document performance-related conversations with employees, the benefits of having the documentation are worth it.

Recommendation: Send an “as we discussed” email to follow up on verbal discussions with employees and to document topics discussed, decisions and agreements made, and any issues or concerns that were addressed. Make sure more formalized discussions are recorded in writing as well. It’s important to have a well-documented employee file to eliminate any confusion or misunderstanding. Documentation also affords legal protection in the event of litigation.

Where should you begin?
Don’t try to deal with everything at once. Focus on any high-risk areas and develop a realistic timeframe for results. If you’re focusing your efforts on training, identify a few key areas of significant importance. For example, if your company is growing rapidly, focus efforts on training managers to interview and hire the right candidates, as well as training for strong communication and constructive feedback.

For tips and guidance, contact TriNet.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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