Litigation Affects Small Businesses In America

Small businesses are affected by the rising cost of litigation lawsuits. Small businesses can no longer afford the skyrocketing increases in insurance premiums due to litigation lawsuits. Litigation insurance is second only to the cost of health insurance for small businesses today. Small businesses are impacted by the federal government's minimum wage regulation and regulatory tax laws. This research paper will look at and discuss each one of these issues that impact the small businesses today. Lawsuits The litigation faced by small businesses challenge their survival and success.

Not only are these businesses struggling to pay for costly lawsuits brought against their company, but their time and resources are also being consumed while fighting against these lawsuits. Some of these potential lawsuits include discrimination, harassment, and grievance cases. Discrimination claims can be brought against employers with regard to race, gender, age, disability and a number of other factors. Hardin (2000) said, "while claims based on race or sex discrimination or sexual harassment dominate court dockets, the number of age discrimination cases and disability discrimination cases have increased" (p.49).

Hopper (2001) made a good point when referring to California small business owners, "[they] continue to be in negotiating the choppy waters government stirs for them, nothing can smash their ship of enterprise against the rocks like a frivolous lawsuit" (p. 47). Some employees join a company with hidden motives of bringing a lawsuit against them. These individuals target small businesses because their resources are scarce compared to larger companies. Griffin Bell Jr. says that the average jury award is $250,000-which could be crippling to a small enterprise (cited in Hardin, 2000).

If the company fails to have insurance, they can be put out of business. Although small businesses can sometimes win in an unwarranted lawsuit, they will settle out of court to limit their overall loss. Small businesses are a constant target for individuals with a "get rich quick" mind set. However, there are certain practices these small businesses should put in place in order to lessen the risk of a lawsuit. This includes hiring only after excessive screening, implementing policies that prohibit discrimination and workplace harassment, consulting legal counsel before terminating an employee, and many other practices.

"A small business owner has to be the leader of his or her family of employees – you have to be fair but firm. You have to enforce the rules in an even-handed manner. If you do that, you can stay out of trouble" (Hardin, 2000). Liability Insurance Small businesses owners face many obstacles to remaining viable, one of which are frivolous and legitimate lawsuits. According to Jackson (2003) "On average, every time a small-business owner gets taken to court – win, lose or draw – the cost is more than $100,000" (para. 4).

The fear of getting sued has made litigation insurance extremely important to small business owners. Bowers (2005) said, "We're seeing EPL (Employee Practices Liability) becoming a standard coverage that many companies-public or private, large or small-are feeling they have to have because of the litigation picture" (para. 4). For small businesses to survive the owners should be prepared for potential lawsuits. Unlike many large businesses that have legal representation to defend themselves, small businesses must purchase liability insurance or accept exposure to lawsuits.

Small businesses that have liability insurance and are sued could face rising insurance premiums regardless of the lawsuit's merit. In a poll by the National Federation of Independent Business, nearly 50% of small business owners involved in a lawsuit were strongly urged by the insurance carrier to settle the case out of court (William, 2004, p. 4). The business is then penalized with higher insurance premiums. To avoid this, some owners elect to defend their business without the assistance of their insurance carrier. However, this activity costs the owner in terms of time to defend the suit.

This negatively impacts the business because the time normally spent to enhance productivity and profit, is now absorbed by the litigation process (William, 2004, p. 5). Minimum Wage Public Union leaders, welfare recipients, women's organizations, advocates of the working poor, and liberals use the following arguments for occasional minimum wage increases: it decreases wage inequalities, it does not cause unemployment and serves "to 'shock' low-paying employers into upgrading products and processes in order to achieve compensating productivity increases" (Heyes, 2003, p. 77).

Conservatives and small business owners, on the other hand, use the following argument against a minimum wage increase: it will cause unemployment and small business failures because added labor costs will exceed the profits generated by a product or service. The study performed by the Levy Institute in 1999 found no evidence to support the allegation of massive unemployment. The Levy Institute interviewed 536 small businesses in 1999 and asked them specific questions on the affects of the minimum wage legislation.

According to Oren Levin-Waldman (1999), in his assessment of the survey, "Of the 72 firms (13.4 percent of the total number surveyed) . . . (15. 3 percent) said they would be forced to lay off workers" (p. 89). The survey suggested that small businesses were more likely to stop hiring additional workers than lay off current workers. A study performed by Jason Heyes and Alex Gray (2003) further collaborated this fact and found small businesses would instead increase their training to offset the labor costs. They concluded that a minimum wage "provided a stimulus to the training effort of small enterprises through what might be referred to as a 'shock effect'" (p. 84).

A study conducted by Jerold Waltman, Allan McBride, and Nicole Cambout for the Journal of Economics Issues (1998), concluded that "there seems to be no discernible correlation between minimum wage increases and a rise in business failures" (p. 221). In fact they found the evidence leaned the other way and suggested that there must be other variables in play to explain the failures. Perhaps they are referring to the 'shock' affect (Heyes, 2003). Oren Levin-Waldman does warn of not reaching "a 'tipping point' at which considerable negative employment consequences will begin to occur" (p. 87).

This "tipping point" will occur when the minimum wage approaches the "market-clearing wage" (p. 95). The findings of these individual studies suggest there is no evidence to support the negative impacts as advocated by the conservative groups. An occasional minimum wage hike, which stays clear of the market-clearing value, does not cause an increase in business failures compared to any other normal year, and does not cause massive unemployment. Therefore, these conservatives' views should be disregarded.