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

The business legal terms you need to know

We’ve selected and defined more than 30 important legal terms relating to employment, sales and marketing, intellectual property, contract law, and general laws affecting all businesses. With an understanding of this terminology, you’ll be better prepared to address legal matters as they arise.

Employment issues

When federal and state employment laws compete, state employment laws almost always have supremacy. State laws normally extend 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.

Thom Pryor, founder of Lawsuit Legal, told business.com that minimum-wage laws often cause confusion for employers. “Where both state and federal minimum wage rates exist, covered workers are entitled to the higher of the two wages,” he said. “Employers can often fall afoul of the minimum-wage laws unintentionally.” 

Common violations include paying the federal minimum wage instead of a higher state minimum wage, assigning unpaid “off-the-clock” work, having day-rate workers whose pay does not meet the standard for hours worked, and unintentionally misclassifying employees as exempt, he said.

According to Pryor, the costs of getting minimum-wage laws wrong are more than just financial. “In our experience, there is a sense of betrayal and anger from employees who seek legal action against their employer,” he said. “The relationship breaks down between employer and employee because they feel that trust was violated in a significant way. As employers, take care of your people, and they will take care of you.”

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

• At-will employment: In most U.S. states, the employer or employee can terminate employment whenever they want for no reason or for a legal reason. Terminations shouldn’t violate anti-discrimination laws, breach an implied contract or be as the result of constructive discharge. As an employer, you need to be careful that an employee cannot argue that they were terminated, for example, after they filed a workplace safety complaint.
• 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 working the register versus lifting heavy goods to and from trucks? Some roles aren’t comparable, but you should ensure people with the same duties are paid equitably.
• Misclassification of employees: This happens when employers incorrectly classify their workers as independent contractors. For 1099 contractors, employers do not have to provide employee benefits, such as health insurance and retirement plan contributions, or pay payroll taxes as they do with salaried W-2 employees. If the IRS determines that an employer has misclassified employees as contractors, the business may have to pay criminal financial penalties.
• Overtime compensation: With a few exceptions, you must pay nonexempt employees 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.
• Reasonable accommodations: The Americans with Disabilities Act requires employers to make provisions for qualified employees with disabilities unless it would be financially ruinous to do so. For example, these accommodations might include adaptations to the workplace or modifications to work schedules and responsibilities. 

Pryor also noted that many employers have gotten into trouble over constructive discharge cases, which “is when an employee is forced to quit either through a hostile work environment, intolerable working conditions or as a result of employer pressure that results in an involuntary resignation,” he explained. “Employers are not able to engineer a worker’s involuntary resignation instead of firing them to avoid potential legal exposure.”

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 that a current or former staffer raises a complaint. Make sure you have an employment lawyer to contact if such an instance arises. 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 updated 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 unavailable stock 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 are 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. [See our picks for the best email marketing services.]
• Endorsements: Endorsements, product recommendations and reviews affect people’s buying choices. If you pay anyone to endorse your products or services, you must make that clear in the endorsement. This requirement applies to social media influencers, too. [Read related article: Has Influencer Marketing Peaked?]
  
• False advertising: This is marketing that intentionally contains untrue or misleading information — for example, if your ad promises that every customer can pay for a product or service over a 12-month period but you don’t extend that offer to a particular consumer. 
• Free gifts: In business, a free gift is an item given for free as an incentive to make a purchase. Notably, you can’t increase what someone 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 the 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: Occasionally, 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: 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 the top text message marketing services can help you ensure compliance.]
  
• Price comparison: It’s OK to compare prices against your competitors in marketing campaigns, but you must compare equal products. 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 of your promotions and advertising campaigns. Ideally, you should do this anyway to inform your campaign strategy. Beyond that, note 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 the 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 work that you’ve developed over time and that belongs to your company. U.S. law protects IP owners 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: A patent 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: How to Submit a Trademark]
  
• Trade secrets: Trade secrets consist of 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.

Intellectual property is a minefield, according to Rob Holmes, a private investigator and founder of MI:33. If you find someone else using your IP, evaluate the situation before you contact them, he advised. Consider these questions: 

• Was it an honest mistake? 
• Were they blatant and deliberate? 
• Are they a big or small player? 
• Will they have the finances to litigate, if needed?

“Once you’ve assessed the situation, it is common to send a cease and desist notice (or C&D),” Holmes said. “If they don’t respond in 30 days, send another, then another in 30 days. At this phase, you may consider filing suit or threatening litigation.”

Contract law

Contracts often govern your relationship with clients and suppliers and how you interact with each other. However, disagreements arise when the wording is ambiguous or one party attempts to exit an agreement unilaterally.

This happens more than you might think, according to M. Denzell Moton, founding partner of Moton Legal Group. “A breach of contract occurs when one party fails to fulfill their obligations under the agreement,” Moton said. “This can lead to significant financial and operational disruptions, making it crucial to have clear terms and remedies outlined in the contract.”

Moton told business.com that the best way to mitigate these risks is through an entire agreement clause, which “ensures that the written contract represents the full and final understanding between the parties.”

“This helps prevent ambiguities and disputes by excluding any prior agreements or understandings not included in the written contract,” Morton said. “Having this clause also significantly reduces the risk of breach. By clearly defining all terms, both parties have a clear understanding of their obligations, which minimizes the potential for misunderstandings and subsequent breaches.”

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

• Alternative dispute resolution (ADR): ADR clauses require that all parties agree to resolve a dispute without going to court first. Make sure you include the chosen method for dispute resolution and a specific time frame for handling the matter.
• Caveat emptor: This Latin phrase translates to “buyer beware.” Each party in a contract needs to ensure that the other parties are capable of delivering what they promise and that they have been 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. 
• 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.
• Material breach: A material breach occurs when one party’s performance under a contract falls significantly short of the terms both parties agreed on. For example, you might order 10,000 widgets of a product from a supplier that they must manufacture to a particular standard. If the subpar quality prevented you from selling or using the products, this might be a material breach that would allow you to end the contract and seek compensation.
• Nondisclosure agreements: Nondisclosure agreements (NDAs) protect businesses against the disclosure of confidential information to third parties. Businesses use them when onboarding new employees and independent contractors to safeguard sensitive company data and trade secrets. Freelancers often sign NDAs when working with agencies to prevent them from pitching to an agency’s client. Business owners also use NDAs when selling their companies or attracting investors.
• Severability clause: Just because something is in a contract doesn’t make it enforceable. If that’s the case, a severability clause ensures that the rest of the contract remains in effect. For example, you may have a noncompete provision in your employment contracts, as well as a confidentiality agreement and protection for your IP. If your noncompete clause was too broad and couldn’t be enforced, the severability clause would ensure that your confidentiality or IP protection provisions remained unaffected.

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 that your suppliers, especially business loan providers, want you to sign. [See our picks for the best business loan and financing options.]

General laws affecting businesses

There are tens of thousands of laws covering business behavior. You should be aware of the following laws and their associated terminology:

• Antitrust laws: Antitrust laws 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 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. Make sure your business stays in compliance as new legal requirements are introduced.
• Export regulations: Compliance with the rules and regulations regarding the exportation of your products to other countries can be complex and time-consuming. The U.S. also has an active sanctions program that carries stiff penalties.
• Health and safety laws: To ensure that your business complies with the Occupational Health and Safety Administration’s regulations, conduct regular risk assessments and provide health and safety training to all employees. Some states have their own health and safety laws that complement federal rules. [Read related article: Preventing and Responding to Workplace Accidents]
  
• 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.
• Permits and licenses: Before your business starts 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.
• Tax laws: If you don’t file and pay your taxes, you could be subject to financial penalties and audits. The right accountant will show you how to comply with IRS rules and any state-based tax legislation.
• Tort: A tort is a form of economic injury that one business causes another. Common torts include maliciously spreading “injurious falsehoods” about a business and interfering in a 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. Here are the times you need them the most:

• Starting up: You’ll need to hire a lawyer to start your business and set up your company. This process includes applying for any necessary permits and licenses and drawing up the governing agreement that defines the roles of all shareholders in the business.
• Managing contracts: You should consult a lawyer when drafting agreements for your clients to sign and reviewing agreements your suppliers require you to sign. They will spot terms that don’t act in your best interest, as well as protect your firm from legal issues.
• Handling employment and human resources: Many law firms now offer fixed-fee monthly consultation services with unlimited calls to attorneys for employment and HR issues. This will probably be cheaper than using an employment lawyer on an ad hoc basis, especially if someone brings a claim against you.
• Defending your business: If a person or another company takes legal action against your business, you need a strong defense. If you can, 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.

You should always consult an attorney when dealing with legal matters that could affect the future of your company. With their assistance, you’ll be better equipped to comprehend whatever legal predicaments you face as a business owner.