A Crash Course in the Business Legal Terms You Need to Know

The business legal terms you need to know

Below are more than 30 legal terms you’re likely to come across relating to employment; sales and marketing; intellectual property; contract law; and general laws affecting all businesses. With these words in your vocabulary, you’ll be better prepared to address legal matters as they arise.

Employment issues

When federal and state employment laws compete, state employment law almost always has supremacy. State laws normally extend upon federal employee protections and rights on issues such as drug testing, workers’ compensation and hiring practices. At the very least, make sure you know your state’s employment laws.

Here are five employment law terms you need to be familiar with:

• Comparable worth: This is the legal principle, sometimes called “pay equity,” that requires companies to set salaries according to skills and responsibilities. Although it’s well-intentioned, this principle is difficult to apply and often subject to challenges. For example, if you run a supermarket, how do you put an hourly value on register work versus someone lifting heavy goods to and from trucks? Some roles aren’t comparable, but you should ensure people with the same duties are paid equitably.
• Constructive discharge: Also known as constructive dismissal, this is when an employee’s working conditions become so intolerable that they are forced to leave their role. For instance, if a person of color quits after overhearing racist comments by co-workers and reporting them to a manager who took no substantive action to stop the comments, this resignation could be considered constructive discharge.
• Minimum wage laws: The federal minimum wage in the U.S. has been $7.25 per hour since 2009. If a state has its own minimum wage, employers must pay the higher of the two. In 20 states, $7.25 per hour is the minimum wage. In the other 30, the minimum wage ranges from $8.75 per hour in West Virginia to $15 per hour in California.
• Misclassification of employees: This is when employers and employees misclassify their arrangement as that of a client and an independent service provider. Unlike with a salaried W-2 employee, an employer taking on a 1099 contractor doesn’t have to provide employee benefits, contribute to their retirement or health insurance or pay payroll taxes.  A business owner may have to pay criminal financial penalties if the IRS determines they have misclassified employees as contractors.
• Overtime compensation: With a few exceptions, you must pay 1.5 times an employee’s hourly rate after they’ve worked 40 hours in one week. Check if your state requires you to pay more, and view our small business guide to overtime laws to learn more.

Employment law in the U.S. is complex. You should keep all contracts, correspondence and records of conversations with employees to defend yourself in the event a current or former staffer raises a complaint. Keep the number of an employment lawyer close at hand in case of such instances. If an employee files a complaint, don’t immediately defend yourself against it – reach out to your lawyer instead. And, if you do want to fire a team member, get your attorney to draw up a termination contract to ensure your legal bases are covered.

Sales and marketing

One major area of business law relates to protecting consumers from false or deceptive advertising. These laws have been kept pretty much up to date as the internet continues to transform how companies find new customers.

Here are some key legal terms for sales and marketing:

• Advertising unavailable stock: If you constantly advertise stock that you no longer have just to get people into your shop, particularly at lower prices than your competitors, this is a breach of consumer protection laws. 
• Bait and switch: This is when you advertise a product at a much lower price than you would ever be prepared to sell it at.
• CAN-SPAM law: The Controlling the Assault of Non-Solicited Pornography and Marketing Act prohibits businesses from sending email marketing campaigns to consumers who have opted out of receiving them.
• Endorsements: Endorsements, product recommendations and reviews affect people’s buying choices. If you pay anyone to endorse your products or services, you both need to make that clear in the endorsement. This requirement applies to social media influencers.
• False advertising: This is marketing that intentionally contains untrue or misleading information – for example, if you promise in an ad that every customer can pay for a product or service over 12 months but you don’t extend that offer to a particular consumer. 
• Free gifts: In business, a free gift is an item given free of charge as an incentive to make a purchase. Notably, you can’t increase what a consumer pays on a 2-for-1 offer. For example, advertising a single box of detergent for $10 and then running a 2-for-1 offer where you charge $15 is likely to be a legal breach.
• Made in USA labeling rule: Under this rule, set by the Federal Trade Commission in 2021, you can advertise a product as being made in the United States only if at least one of three conditions are met: either all or nearly all of the product’s significant components have been made in the U.S., the product was subject to “significant processing” in the U.S., and/or its final assembly took place in the U.S.
• Mistakes in advertising: Every now and again, a company will inadvertently advertise a product at the wrong price. Companies don’t have to honor mislabeled prices, but they do have to correct them as soon as possible. 
• Telephone Consumer Protection Act (TCPA): For telemarketing campaigns, you must not call any number on the National Do Not Call Registry. You also need consumers’ permission before you contact them via a text message marketing campaign. [The best call center services and top text message marketing services can help you ensure compliance.]
• Pricing comparison: It’s OK to compare prices against your competitors in marketing campaigns, but the comparison must be like for like. Also, your competitors’ prices should be current, but if they’re not, they should have sold a large quantity of the product at the price you’re quoting.

Keep records of all your promotions and advertising campaigns as a matter of course. Ideally, you should do this anyway to determine which campaigns are successful so you can run the best ones again. Beyond that, you should take notes on how each campaign complies with legislation to the best of your knowledge. If you later believe you made a mistake, keep a record of when you found out and what you did to make it right. Authorities are likely to go easy on you for a first violation, but you should engage a lawyer if an advertising recipient or government body threatens to sue you.

Intellectual property

Intellectual property (IP) is an idea, process, design, invention, service, product or other item of work that you’ve developed over time and that belongs to your company. U.S. law protects the owners of intellectual property so they have an opportunity to profit from the hard work involved in its creation. 

IP falls into the following four categories, and business owners should know these legal terms:

• Patent: This is the legal right to an invention. When a company holds a patent over a process or a design that provides a new solution to a problem or a new way to achieve an outcome, they have 14 to 20 years of exclusive rights to exploit that patent for commercial benefit.
• Copyright: Copyrights protect original works, like music, artwork, novels, architecture and computer software. Copyrights can apply for up to 120 years.
• Trademarks: A trademark can be a logo, design, phrase, word or combination of some or all of these that distinguish your business from your competitors. Perhaps the most famous trademark in the world belongs to McDonald’s for its golden arches logo. [Read related article: Understanding Trademarks vs. Copyright.]
• Trade secrets: This is confidential information that has commercial value but whose value would sharply diminish if the secret became known and competitors used the secret for their own benefit. Famous examples include KFC’s secret ingredients, the recipe for Coca-Cola and exactly how Google determines its search results.

If you use others’ intellectual property without permission for any reason, this is intellectual property theft. The same can be argued if, for example, you brand your burger restaurant as “McDougall’s,” your primary logo is a joined pair of incomplete ovals in the shape of an “M” and you call your signature dish “Bigger Mac.” McDonald’s would contest that you are mimicking their intellectual property for profit and thus reducing the value of the company’s trademark.

If a company makes an IP accusation against you, claiming you are using or mimicking their intellectual property, they will usually send you a warning letter from their lawyer before taking formal action. Get in touch with your own attorney immediately for advice on how to proceed.

Contract law

Contracts often govern your relationship with clients and suppliers and your responsibilities to each other. Sometimes, the parties in a contract can disagree because the wording in the agreement is ambiguous and open to interpretation. Other times, one party changes their mind unilaterally and wants to get out of the contract.

Here are some terms you’re likely to come across in contract law:

• Alternative dispute resolution (ADR): ADR clauses require that all parties agree to find a way to resolve a dispute without going to court first. Make sure you include the chosen method for dispute resolution in the contract and a specific time frame for handling the matter.
• Breach of contract: If one party doesn’t hold to the agreement, this may void the contract in full. If this happens, the other parties may demand financial compensation as a remedy for the breach.
• Caveat emptor: This Latin phrase translates to “buyer beware.” Each party in a contract needs to make sure that the other parties are capable of delivering what they promise and that what they have told you is truthful.
• Confidentiality clause: This requires one or more parties in a contract (including you) to keep the content of the contract secret. You can even require that all other parties keep the existence of the agreement secret. 
• Entire agreement clause: Also referred to as “whole agreement,” this means a contract supersedes all other contracts between the parties that came before this one.
• Force majeure: French for “major force,” this term refers to something extraordinary that stops a contractual duty from being carried out, like an act of God or a business disruption that was not the fault of a party in the contract.
• Indemnity: This makes one party liable to pay compensation if an action they took (or didn’t take) caused financial loss to other parties in the agreement.
• Joint and several liability: If you take out a loan to expand a business and you have two partners, all partners are liable for paying back the debt. However, if the other two parties go missing and you’re the only one who remains, you’re liable for paying back the entire amount yourself. This is particularly important for unincorporated businesses.

If possible, always use a lawyer for any activity requiring contracts. For example, you should get your own terms and conditions checked before asking customers to sign them, to make sure they’re legal and enforceable. Also ask your lawyer to review the terms and conditions your suppliers, especially business loan providers, want you to sign.

General laws affecting businesses

In the statute books, there are tens of thousands of laws covering business behavior. You should be aware of the following six laws and their associated terminology:

• Antitrust laws: These prevent businesses from working together to fix prices or control distribution. So, if a competitor contacts you and suggests that both of you sell a particular product for the same price, this would violate antitrust laws. If your competitors get significantly more favorable terms than you on price and stock allocation for no reason, this also may be a violation.
• Class-action lawsuit: If a group of people or businesses launches a class-action lawsuit against you, they believe your products, services or advice put them and/or the public at large at severe risk of injury and/or financial loss. In other words, do not give out advice that you’re not qualified to give or that you do not have insurance to cover.
• Environmental laws: Before you open your business, check whether you need permits to operate and comply with laws such as the Clean Air Act, the Clean Water Act, and the Resource Conservation and Recovery Act. As new legal requirements are introduced, make sure your business stays in compliance.
• Insurance laws: Federal law requires you to have disability, unemployment and workers’ compensation insurance to protect your employees. Your state may require additional insurance policies as well.
• Permits and licenses: Before you start operating, make sure you have all permits, licenses and registrations in place. Failure to do so puts you at risk of being shut down and fined. For example, there are certain licenses required for construction companies.
• Tort: A tort is a form of economic injury caused by one business against another. Common torts include maliciously spreading “injurious falsehoods” about a business or interfering in an existing business relationship in a way that disrupts each business from fulfilling its contractual obligations to the other.

When your business needs a lawyer

As a business owner, you need to be prepared to work with lawyers regularly. They’re a necessary expense, and you’ll come to appreciate what they do when you need them to defend you. You’ll need to hire a lawyer to start your business and set up your company, which includes applying for any necessary permits and licenses and drawing up the governing agreement that defines the roles of all shareholders in the business.

Try to hire a business lawyer who has experience with your sector. They may be able to see risks and opportunities you’re unaware of, particularly if this is your first business. On more specific matters, like intellectual property or environmental laws, seek specialists. They may be more expensive than standard lawyers, but you’ll receive better advice.

Many law firms now offer fixed-fee monthly consultation services with unlimited calls to attorneys on employment and HR issues. This will probably be cheaper than using an employment lawyer on an ad-hoc basis. If you are sued, most flat-fee service providers offer big discounts on fees to defend you. At any rate, by at least understanding the terms highlighted above, you’ll be better equipped to comprehend whatever legal predicaments you face as a business owner.