To those of us who haven't made it our profession, "human resources" has that ring to it—the ring of something that can be ignored, handed off to a chief financial officer or, worse, another employee who's already wearing five different hats. "In small businesses, no one gets up every morning and thinks about HR issues," says Daniel Blake, an employment attorney in the Boston office of Bulkley, Richardson & Gelinas. After all, drafting policies to handle allegations of harassment, keeping on top of health insurance regulations, and writing noncompetes aren't the sorts of things that get the entrepreneurial juices flowing.

They are, however, exactly the sorts of things that can turn into big expensive headaches if not handled properly. Attorneys say employment-related litigation is booming. Jury awards have ballooned. The median award in an employment case was $276,711 in 2005, up from about $150,000 in 1999, according to Palm Beach Gardens (Fla.)-based Jury Verdict Research, which tracks and analyzes litigation. Then there are attorneys' fees, which San Francisco law firm Littler Mendelson estimates at about $95,000 for employment suits that settle just before trial. The tab for cases that make it to trial: $250,000 and up. Add fines and penalties from government agencies such as the Labor Dept., and HR issues suddenly seem a lot less boring.

It's not just the money. It's the time and aggravation. Few entrepreneurs have in-house counsel, and without one, "the owner will be the one to spend their time with this huge distraction," says Rebecca Klemm of Washington (D.C.)-based Klemm Analysis Group, which in 2005 did a study for the Small Business Administration on the impact of litigation on small companies. Many business owners surveyed in Klemm's research said they became less trusting of employees after a suit. Angela Murray, who with husband Francis owns amusement park Happy Tymes Family Fun Center in Warrington, Pa., says her company's experience with a sexual harassment claim by a former employee was "horrendous," and that the stress of the case gave her heart palpitations. Says Murray: "It felt like they were attacking me personally."

What follows are five HR hot spots that entrepreneurs need to pay close attention to—right now.


What makes an effective noncompete agreement? Stephen Skertich found out the hard way. In 2001, Skertich bought Pro Med Staffing, an Orland Park (Ill.) nurse staffing company with about $3 million in sales. He drew up noncompete agreements for his six employees, a standard practice in the staffing business. In 2006, when one of his scheduling managers bolted to a competitor, Skertich was glad he'd taken precautions—especially after nurses who had been using Pro Med to find work switched to the competitor. But when Skertich consulted with his attorney, he learned his noncompetes probably wouldn't hold up in court. They were too broad, limiting neither time period nor geography. "Even though we hadn't been hurt that badly this time, I realized next time it could certainly be worse," says Skertich. His new noncompetes run for one year and cover seven nearby counties.

As Skertich discovered, the devil is in the details. States differ in their approaches to noncompetes. In California, they are practically unenforceable; in other states, such as Illinois, they can work just fine. But all courts frown on overly broad agreements. Your noncompetes will be stronger if they apply to employees whose specific expertise—close ties to customers, knowledge of trade secrets—means their defection could cause real damage. If you are in a state where noncompetes are hard to enforce, consider other ways to cultivate loyalty among key employees. When hiring, ask candidates if they are subject to anyone else's noncompetes—potentially saving you from a court battle or from having to ditch someone you've invested in.


It's scary to think that your company's own e-mails could work against you in the event of a lawsuit. But recent Supreme Court actions mean business owners have reason to be particularly uneasy if they suspect that incriminating e-mails have been deleted.

In December, 2006, the Supreme Court tightened the rules that govern civil cases in federal court. The new guidelines require attorneys for both sides to meet early in the process to discuss how they will handle electronic evidence. That might not sound like a big deal, but the result is that courts will be less inclined to forgive those who don't move aggressively to preserve electronic evidence, such as computer files and e-mail. "A judge's tolerance of mistakes is going to be reduced," says Robert Owen, an attorney in the New York office of Fulbright & Jaworski. If a company drops the ball, "it will be easier for the other side to stir up the judge on this issue."

And it could have costly ramifications. The most sobering example predates the Supremes' tightening of the screws: Laura Zubulake sued UBS Warburg in an employment discrimination case in 2002, and an issue arose as to the preservation of some UBS e-mail. Two years later, in a key ruling, the judge told the jury that they could assume missing e-mails would have been unfavorable to UBS. The jury found that UBS had discriminated against Zubulake and awarded her $29 million in damages.

Meeting your own obligations in regard to electronic files is relatively straightforward. The tricky part is that you need to start saving electronic files when you have reason to believe you may be involved in litigation—not when you're actually sued (or bring a suit). You don't have to save everything under the sun—you just need to show you've made a reasonable, good-faith effort to preserve relevant information.