An Introduction to the Legal Environment
The legal environment of business is a term that is used to describe the effect of law and regulation on business behavior. This environment encompasses all jurisdictions and all businesses and can include federal, state, and local laws, regulations, and case law (court opinion). It includes anything from constitutional amendments to state enforcement and regulatory policy, and is influenced by government advocacy, the position of social groups, and religious institutions . In the modern American legal system, it is one of the most important aspects of business.
Understanding the legal environment, and what businesses are required to do to meet various legal standards, is critical for businesses today. From understanding employment practices to market behavior, companies that hope to establish a successful organization must do so while remaining compliant with the law.
Significant Legal Factors Affecting Businesses
A variety of legal factors directly impact their operation. Most laws, regulations, and cases impacting businesses will fall under one of two broad categories: 1) contract law; or 2) regulatory law.
Contract law relates to agreements between parties on certain behavior or actions, and may be expressed orally, in writing or assumed based upon the parties’ conduct. Companies engage in a broad scope of transactions every day that require contract law, but three of the most common include: Compliance with contract law is necessary in each of these examples to minimize risk and liability, and the effects of noncompliance can be dramatic. For example, a majority of commercial lawsuits are outgrowths of contract disputes, at an average cost of $91,542 (per lawsuit). Without proper contractual protections in place, business would be exposed. Therefore, it is critical to understand the general principles of contract law and how to use them to your company’s advantage.
Regulatory law refers to legislation that directly impacts certain business practices or industries. Again, there are numerous types of regulation that directly impact businesses, but three primary examples include: The general principles of regulation as they affect the business environment are fairly simple. They are designed to maintain a certain level of standardization, consistency, protection and ethical conduct within the business environment. Companies that do not comply are subject to penalties in the form of lawsuits, fines, loss of public confidence or license revocations.
The Influence of Government Regulation
The legal environment of business is constantly shifting and evolving based on new laws and regulations, impacting the actions of firms and individuals across the country. The U.S. government breaks down its legal regulations into three categories: regulatory agencies, market entry barriers, and legal structure. It is important for businesses to not only understand how government regulations impact their own practices, but also their clients and customers. At the federal level, the Securities and Exchange Commission, the Federal Trade Commission, the Bureau of Competition, and the Office of Thrift Supervision are just a few of the agencies with important regulatory oversight. The Federal Reserve Board is another important federal agency, providing oversight at the state level. And because laws regulating business are commonly written and enforced at the state level, individual states may have their own agencies that police business practices. Regional and local governments can also impact the legal environment of business for organizations and individuals. For example, a state may impose certain registration requirements or licensing for a particular type of business. These two scenarios can create both impediments to market entrance as well as compliance issues for customers and clients. Furthermore, private organizations such as trade groups and associations actively lobby governmental agencies and legislatures to shape the legal environment of business to favor their members.
The Importance of Contracts
Contracts are essential to any business that engages in transactions with other persons. These documents provide the basic legal skeleton for relationships between employers and employees, companies and clients, partners, and many other parties that have reason to engage with each other. From these documents can stem various obligations and expectations, and they can be referenced when disagreements arise between the individual entities. While a judge may eventually decipher the documents and rule in favor of one party or the other, it is helpful to know that there is something in place that establishes the basic boundaries of interactions-that is, the contract.
Essentially, contracts exist as legal protection. They present formalized goals and functions of an operation, along with the expectations for each party. If someone deviates from the rules outlined in the contract, the other portion can turn to it for legal backing. Otherwise, the same measure does not exist, and nothing exists to stop one entity from going about any endeavor in any way that it wants. Additionally, the parties are not held to any defined roles, which can lead to confusion about who should be doing what.
Intellectual Property Issues
The law of intellectual property rights has evolved to protect business innovations so that entrepreneurs have the ability to form viable businesses that remain competitive as they grow. The defense of trade secrets provides legal protection to businesses in the form of the protection against misappropriating the secrets held by a company even from employees who may have legitimately acquired the information. The patent system provides protection through the exclusive rights granted to an inventor for a period of time for the invention or any improvements on the invention. The laws also provide some exceptions to independent improvements by a new competitor. No matter the method of protection, the protection provided by intellectual property laws are easily circumvented or rendered ineffective through the expiration or loss of the protection and can be further impaired by the emergence of common law rules that are different from statute with respect to what constitutes infringement and unfair competition. Business owners should be aware of the basic provisions of intellectual property law even if they rely on other professionals for more in-depth legal analysis.
Employment and Labor Law
Employment and labor laws heavily influence business operations. These regulations range from workplace safety to discrimination in the workplace and employee compensation to whistleblower protections.
Businesses must avoid discriminatory hiring practices. The state and federal government prohibit them from hiring or firing applicants based on sex, race, national origin, and ethnicity. Employers should be familiar with anti-discrimination employment laws and should not conduct criminal background checks until after the employee has been given a contingent offer of employment. This discretion balances the employer’s need for safety against the employee’s rights to personal privacy and to job opportunities.
Most employment agreements detail compensation, benefits, hours, and other items needed to prevent discrimination lawsuits and to appropriately protect the employer from potential liability. Employers must pay their employees adequately , sometimes at a higher than the mandated minimum wage, and provide appropriate benefits and vacation time. Also, they must assure that working conditions do not put employees’ health and safety at risk and that overtime is paid correctly in accordance with state and federal overtime laws.
Employers may face unions in their industry. Union organizing often triggers a variety of obligations under labor law or RICO — the Racketeer Influenced and Corrupt Organizations Act — obligations and expenses. Employers can have existing union members vote to decertify if they wish to return to an employee-employer relationship.
An attorney will need copies of all employee contracts, employee handbooks, policy manuals, and any other documents that bind the company to its employees. The attorney will be able to advise the employer regarding which state and federal laws are implicated by any threatened course of action by a current or former employee or former employee’s spouse.
Ethics in Business
The concept of ethical considerations is inextricably linked with the legal environment of business. The law not only guides the actions of a business, it serves to promote ethical conduct in impacted sectors and protects those who do behave in an ethical manner. This may be through incentive programs or liability protections.
For example, whistleblower protections exist in both private and public industry. These protect not only employees who file lawsuits against their employers, but also provide reward mechanisms for employees who report on ethical abuses or violations. This is a significant motivation for many to come forward with information they might otherwise be loath to reveal.
There are virtually no positive incentives for a business that is in violation of the law. There is no reward for unethical behavior, no matter the industry. However, a business that behaves in an ethical manner, that strives for not just compliance but to exceed the requirements of the law, can obtain glowing references, enhanced reputation and greater amounts of business that results in increased profits.
Ethical decision-making is an integral aspect of the legal environment of business. The two interact directly, with the ethical considerations factoring into choices that are made. It is important that business leaders make ethical choices, that they strive to excel in their legal duties and responsibilities. Those who take the extra effort to be fair, legal, ethical and social responsible will create a compelling business image that will pay off handsomely in the long run.
Adapting to the Legal Environment
Adaptation is crucial to effectively navigate the changing landscape of the legal environment of business. By being proactive and strategic, businesses can minimize the impact of legal changes on their operations and capitalize on new opportunities. There are several strategies that can help businesses stay informed and adapt to legal changes.
First, businesses should appoint a compliance officer or establish a compliance department to oversee legal matters. This person should have up-to-date knowledge of applicable laws and regulations and should be responsible for keeping abreast of changes that could impact the business. This approach ensures that there is a dedicated individual or team focused on compliance and the adaptation process.
Second, building relationships with legal advisors, industry associations, and government agencies can provide businesses with valuable insights into upcoming legal changes. By nurturing these relationships, businesses can gain access to information and resources that can guide their response to legal developments.
Third, businesses should invest in technology and training that can help them adapt to legal changes. For example, if a new data protection law is implemented, businesses may need to enhance their data security systems or provide additional training to their employees. Implementing such changes will make complying with the new law easier and more efficient.
Fourth, businesses should review and update their internal policies and procedures to ensure that they align with the latest legal requirements. Having clear and current policies and procedures in place can reduce the risk of non-compliance and provide a clear roadmap for employees to follow.
Fifth, engaging in regular internal and external audits can help businesses identify areas of non-compliance and potential vulnerabilities. By addressing these issues, businesses can avoid legal penalties and reputational damage.
Sixth, in their strategic planning process, businesses should consider the potential impact of legal changes on their business operations. By anticipating legal changes and incorporating them into their strategic plans, businesses can be better equipped to handle the consequences.
Finally, businesses should maintain open lines of communication with employees and stakeholders regarding legal matters. By keeping everyone informed, businesses can build trust and reduce uncertainty.
Conclusion: The Legal Environment
As we have outlined throughout this article, the legal environment of business is a complex web of federal and state laws, rules, regulations, and guidelines that are subject to change. The job of the business owner is to know what has or will affect the business and the day-to-day operations. This is no small task, and it can often be difficult to navigate through the unknowns concerning how existing laws apply and how the courts may view new cases and situations. It is important for the business owner to ensure that he or she has an understanding of the legal environment of business, is actively monitoring those changes , and ensuring that he or she is or can be compliant with often confusing legal requirements.
Remember to always work with an attorney who has experience and has a proven track record, similar to many skilled professional services, experience is invaluable, especially when it comes to legal challenges facing your business. Beyond having an attorney you can trust, it is also important to the longevity and success of your business to properly anticipate these issues. Know your own risk and keep up with the general industry standards and procedures. There will always be unforeseen outcomes and surprises in business. But by knowing your legal environment you control more than you may think when the unexpected happens.