Small business owners hear a lot about legal danger. Handbooks, policies, personality, “culture fit” – it can all sound like one big landmine field. But most lawsuits that hit small businesses don’t come from dramatic moments. They come from quiet, routine decisions that aren’t aligned with the rules, and from the absence of a paper trail that shows you acted fairly.

This guide is a straight line through the noise. I’ll show you where real liability lives, what usually doesn’t trigger lawsuits on its own, and how to put simple guardrails in place without turning your company into a bureaucracy.

What Actually Gets Small Businesses Sued

Misclassification: Titles Don’t Decide the Law

The number-one source of trouble is misclassification – calling someone “salaried” or “exempt” when they don’t meet the legal criteria, or labeling someone a contractor while treating them like an employee. Titles and intentions don’t matter; duties and control do. If an “exempt” employee doesn’t meet both the duties and salary tests, you’re on the hook for unpaid overtime, penalties, and interest. If a “contractor” works under your direction, on your schedule, using your tools, they’re likely an employee in the eyes of the law. The fix: understand the tests, don’t guess, and document why each role is classified as it is.

Wage-and-Hour: Small Gaps, Big Bills

Timekeeping and pay rules seem simple until they’re not. Late final paychecks, missed or short meal breaks, off-the-clock work, or “averaging” hours to avoid overtime – these are common mistakes with steep consequences. If you have hourly employees, you must keep accurate records. Without them, you have no defense when someone claims extra hours or missed breaks. Choose a timekeeping method your team will actually use, train everyone on it, and audit it occasionally.

Retaliation: It’s About How It Looks

Retaliation claims outpace most others because they’re tied to perception. An employee raises a concern – about pay, treatment, safety, or discrimination – and soon after their hours drop, they lose a project, or their manager goes cold. Even if your intent is innocent, the timing and documentation tell the story. When someone raises a concern, pause. Acknowledge it, route it to the right person, and avoid any changes that could look punitive while you sort it out.

Inconsistent Treatment: The Fast Track to “Unfair”

You can hold high standards – that’s not illegal. But treating similar situations differently can be costly. If one person gets a pass for being late and another gets written up, expect scrutiny. Consistency doesn’t mean rigidity; it means you can explain why two situations were handled differently and show that you considered the same factors each time.

Documentation Gaps: If It’s Not Written, It’s Hard to Prove

The law weighs what happened – and what you can prove happened. If performance has been an issue, but there’s no record of feedback, coaching, or warnings, a termination may look like retaliation or discrimination, especially if the person is in a protected category or recently took leave. Keep it simple: a short note after a conversation, the date, the topic, and any expectations or deadlines you set. You’re not building a case; you’re preserving context.