Entrepreneurship is risky business: how to avoid 10 potential pitfalls

When it comes to operating at peak performance, today’s entrepreneurs face a variety of obstacles that can prevent them from meeting their business goals. In addition to federal and state employment-law compliance, there are other systemic pitfalls than can expose a burgeoning company to risk and distract entrepreneurs, managers, and employees from what should be their primary focus: growing their company.

There are many consequences of ignoring foundational risks. Obviously, company exposure to financial losses due to fines for non-compliance is top of mind to most entrepreneurs. However additional outcomes such as negative publicity and reduced customer confidence can also have a detrimental impact.

Here’s a list of 10 potential pitfalls, with tips to help you avoid them:

Risk #1: Company managers

Managers represent the company to employees. As such, they can create “strict liability” if they take action that is inconsistent with company policy or is in violation of laws or regulations. They can also have a profound impact on employee success and retention.

Recommendation: Train your managers on the basics. For example, train managers on recruitment and selection, coaching and managing performance, addressing discipline in a consistent and productive manner, delivering difficult messages, and ending the employment relationship properly.

Risk #2: Poor or inconsistent selection process

Inconsistency breeds risk in the workplace. An inconsistent selection process can lead to applicant complaints and possibly EEOC actions, not to mention lawsuits. It can also result in poor hiring decisions.

Recommendation: Establish a consistent hiring practice. Follow uniform processes, conduct proper background checks, use trained interviewers, and create offer letters that provide mutual understanding.

Risk #3: Poor or inconsistent onboarding of new hires

Inconsistent or incomplete onboarding opens the door to claims of discriminatory practices and can lead to unhappy and/or unsuccessful employees, as well as retention problems.

Recommendation: Create a standard employee onboarding checklist. Implement a process that includes a sign-off at the conclusion of each phase, supplemented with departmental or role-specific training requirements.

Risk #4: Inconsistent compensation practices

Wage claims are on the rise and the Department of Labor has increased staffing under the current administration. Additionally, the Equal Pay Act requires equitable pay practices for positions that require similar skills, have similar responsibilities, and are of similar importance to the organization.

Recommendation: Tie compensation to competitive market rates. Doing so will bring consistency and objectivity to decisions around pay. Variability in pay should be based on education, tenure, merit, and skill set.

Risk #5: Employee misclassification

The Fair Labor Standards Act (FLSA) and some state laws mandate, among other things, that certain employees receive overtime pay for overtime worked. Incorrectly classifying employees as exempt from these protections, when they should be non-exempt, can result in awards of back wages, fines, and penalties against the company. Additionally, incorrectly classifying a worker as an independent contractor can result in similar risks and penalties.

Recommendation:  Seek legal counsel with experience in employment law for guidance on FLSA and independent contractor classifications. Federal and state laws regarding classification of employees are tricky, and employee classification issues should therefore be referred to experienced outside counsel. The IRS and many other state and federal agencies use very specific tests for determining what constitutes an independent contractor, so contractor/employee issues should also be referred to experienced outside counsel.

Risk #6: Insufficient documentation of performance or behavioral issues

Documenting performance issues is a key step in addressing misconduct or poor performance and protecting the company. Failing to properly document incidents leaves employees unaware of the need for improvement, creates problems for managers, and may lead to liability for the company.

Recommendation: Use a “Record of Counseling” or “Corrective Action Notice” to document performance issues as they arise. It is important to seek objective, experienced human resource guidance before taking disciplinary action to help avoid emotional or knee jerk decisions.

Risk #7: Lack of a performance management system

A performance management system improves communication and ensures each employee’s activities and focus are aligned with the company’s objectives. It also documents accomplishments or misses, and provides objective, observable guidance for merit increases, and incentive compensation.

Recommendation: Reward and pay employees based on deliverables. Provide performance input to the executive team regularly through a documented performance management system; develop shared expectations around performance ratings to ensure consistency in evaluation of performance; use goalsetting templates and performance review forms in developing a performance management system. A well documented performance management system can be a key vehicle in executing a company’s business strategy.

Risk #8: Nonexistent or incomplete job descriptions

Clear, easy-to-understand job descriptions encourage the accomplishment of business objectives and protect the organization from charges of discrimination and unfairness.

Recommendation: Use a job description questionnaire to assist in gathering information. It’s important that your job descriptions cover essential work functions, including the physical ones along with any other requirements each position requires. This is imperative in order to be compliant with the American’s with Disabilities Act (ADA).

Note: Don’t underestimate the value of leveraging experienced incumbents in each position to outline the realistic day-to-day
responsibilities and requirements for each role.

Risk #9: Failure to follow published policies

Consistent policies and procedures help set expectations and are essential for smooth operations. Evaluate and implement policies specific to your company’s situation, and then follow them.

Recommendation: Ensure appropriate policies are documented and accessible to employees. Implement only the policies that will be applied consistently throughout the entire organization.

Risk #10: Failure to train on harassment prevention

Harassment prevention training sometimes limits the company’s liability and partially fulfills an employer’s obligation to take reasonable steps to prevent harassment in the workplace under various laws.

Recommendation: Conduct harassment prevention training every two years and in the on-boarding process for new hires. Training can be delivered online or in-person. Either way, make sure to document participant names, and the date and location of the training.


Companies have options to protect themselves from significant risk, but they can sometimes feel overwhelming at first. Here are some guidelines:

  • Conduct an HR assessment to identify areas where improvement is possible.
  • Choose your battles and prioritize those issues most affecting the company’s risk and/ or bottom line.
  • Create a realistic timeline for accomplishing your risk management goals.

Editors note: This was a guest post from Trinet. TriNet serves as a trusted HR partner to growing businesses, helping them to contain costs, minimize employer-related risks, relieve administrative burden, and keep focused on their core business functions.

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