7 Hidden Legal Risks in Everyday Workplace Decisions

It was Scott Belsky who said, “It’s not just about having ideas, it’s about making your ideas happen.” Business leaders know all too well that every decision turns an idea into an action with tangible consequences - that is risk.

It could be financial risk, reputational risk, operational risk, etc. However, many of the risks businesses face can lead to legal issues.?

Legal risk refers to the possibility of facing adjudicatory action or becoming subject to punitive measures such as paying fines and damages as a result of non-compliance or violations of legally binding contracts and laws.

Also, when legal risks materialize, it can create a domino effect for all other forms of risks to materialize in the business. For example, a legal issue can result in financial losses or operational disruptions.

7 Hidden Legal Risks Every Business Leader Must Know

When making everyday workplace decisions, business leaders run the risk of activating a legal issue.?

Here are 7 categories of issues that can create legal risk in everyday workplace decisions:

1. Employment Risk

Employment issues arguably create the most legal risks in the workplace. This is because of the various complexities that arise from managing human capital.?

These employment law risks are usually associated with employment contracts, company policies or lack thereof, and compliance with regulations concerning employment in the given jurisdiction.

Constant changes in work trends and employment laws further increase this risk. Even more, in a global labour market where remote work and gig workers have created a vast network of cultural and regulatory compliance issues for employment law.

Here are some employment law risks human resource managers and business leaders should look out for in the workplace:

1. Employment Agreements?

Employment contracts are usually the basis for the employment relationship between an employee and the business, whether verbal or written.?

For employment agreements, some key areas that establish the responsibilities of parties include restrictive covenants such as non-disclosures, non-competes, and non-solicitation clauses; compensation; ownership of intellectual property rights; and scope of work which involves work duties and work schedules.

Generally, entering any form of agreement automatically creates a legal risk. Legal issues may arise where parties violate the terms of the agreement or the interpretation of the contract terms is in issue.?

For example, if employees working under an employment contract that provides for a fully remote work schedule are required to resume onsite without consent, this may pose a legal risk because affected employees may want to raise legal action.

Another legal risk of employment contracts can arise from changes in the law which affects the legitimacy of the terms of the contract.?

In 2024, the US banned non-competes nationwide. This invalidates employment contracts that impose non-compete on past and present employees.

The law regarding such restrictive covenants in Nigeria is that the scope and application must be reasonable. This means an employee may bring an action in court challenging the validity of the restrictive covenant to determine its reasonableness and fairness.

2. Vicarious Liability?

Vicarious liability implies that an employer is liable for the actions of employees when such actions are done in the line of duty.

Whether the employee’s actions were done intentionally or negligently, the employer is said to be responsible, except if they took steps to stop the action or if the employee acted outside the scope of their employment.?

The rationale is that the employee is an agent of the employer, therefore the employer is responsible as though they did the action themselves because the employee acted as their representative.?

In the workplace, vicarious liability can arise when an employee harasses or discriminates against another employee or even a third party such as a customer or vendor.

Conversely, the House of Lords in Macdonald v Advocate General for Scotland held that employers are also vicariously liable for third-party harassment that occurs as a result of customers or vendors harassing employees in the workplace.?

The implication of this is a broadened net of legal risk for businesses. This type of employment law risk can be addressed with work policies, sensitization programs, and other prohibitory measures that show the employer's commitment to stop the actions that lead to such vicarious liabilities.

3. Involuntary Termination?

Termination may constitute a legal risk when it falls under either of the following - dismissal, redundancy, or wrongful termination.

Typically, companies have policies and processes for involuntary termination. This may include a panel hearing before a summary dismissal, documented investigations, prior disciplinary actions or warnings, or consultation meetings before redundancy layoffs.

Employees may seek legal remedy against an employer if processes are not properly followed or if the process or the reason for the termination is considered unfair and unjust.?

For example, the court ruled in favour of the claimant in Olufemi v FCMB that the disciplinary committee process leading to the discharge of Mr. Olufemi was unethical therefore the termination was wrongful and two million naira was awarded in damages.?

Issues regarding termination may also occur when compensation and benefits are affected. For example, employees may be entitled to redundancy or severance packages which may be subject to negotiations or dispute.

4. Data protection

Companies collect personal details of employees at various points of the employment relationship such as during onboarding or annual database updates.

These details are vital for human resource processes such as compensation and payroll, HRIS management, performance evaluations, etc.

Employers are expected to handle such personal details with utmost discretion. Data privacy laws like the Nigerian Data Protection Act (NDPA) impose mandatory compliance on businesses to ensure employee data are protected from security breaches.

Also, employers are not to use the data for the wrong reasons. The employer must obtain the permission of the employee to collect data and inform the employee of the purpose.

An example of serious infringement on employee data privacy is where confidential health status is leaked to third parties which may cause the affected employee to face discrimination.

5. Workplace Wellbeing?

Workplace wellbeing can be regarded as a workplace culture issue. This may apply when there are reports of a toxic culture, poor working conditions, or health and safety concerns.?

For example, the video game company Activision Blizzard and fashion giant Victoria's Secret have each been sued for the sexual harassment, discrimination, and retaliation culture in the organization.

In Adamu Babangida vs Slava-Yeditepe Projects Limited, the claimant employed as a wielder sued to claim damages for work injuries sustained due to bad safety protection.

While affected employees can bring individual claims with respect to workplace well-being issues, trade unions, and watchdog organizations also sue companies under these circumstances.

However, similar to other forms of employment law risk, strong policies, training, and provision of safety and preventive measures can help curtail these issues.

2. Contractual Risk

Contractual risks are based on the likelihood that a party to an agreement may default on their obligations under the contract, or that the interpretation and accurate performance of the terms of the contract are disputed.

Any part of a contract can lead to issues. For example, the quality of services or production materials for a project may be called into question, or a party may default in payment or time of delivery.

Also, problems with an existing contract can affect third-party transactions which creates further legal issues.?

For example, if a supplier defaults on the delivery of production materials to a manufacturer. It may trigger a chain reaction of defaults in delivering the products on the part of the manufacturer who has existing orders to fulfill.

When contractual risks happen, parties may seek remedies in court such as claims for damages or specific performance. This can lead to financial loss or disruption of operations.

To curtail risks, commercial contracts are drafted to manage the burden of liability parties are exposed to. This is done through integral clauses such as the indemnity clause, insurance liability clause, Force Majeure clause, etc.

3. Taxation Risk

Taxation law risks can arise through the tax management system of a business. This can be in the form of late payments that attract penalties. Also, wrong income reports can affect your tax calculations.?

When such happens, a tax audit may turn up the irregularities in accounting which may lead to penalties from regulatory authorities.

Another legal risk associated with taxation occurs when there is tax evasion. Ordinarily, businesses can legally reduce their tax burden using strategic tax avoidance schemes.?

However, when you fail to pay tax or resort to illegal means to underpay tax, you run the risk of incurring legal liabilities as a tax evader.

Also, criminal activities such as fraud, bribery, or kickbacks to tax officials may lead to run-ins with regulatory bodies and prosecution.?

4. Regulatory Compliance Risk

Regulatory compliance risk implies that a company may suffer consequences such as fines or operational disruptions as a result of non-compliance with the law or changes in regulations that affect the business.

For example, the 2002 introduction of the Sarbanes-Oxley law in the US established stricter accounting standards and penalties for violations, forcing businesses to re-evaluate their accounting processes or face the consequences.

Also, in Nigeria, regulatory changes to the authorized minimum share capital of financial institutions in 2024 meant that such businesses had to increase their equity capacity or become non-compliant.

Another issue with regulatory compliance risks is that contracts held with third parties may be affected and create further legal issues for the business.

For example, a change in data privacy laws may affect existing contracts with third parties for data-sharing access, which may lead to claims for breach.?

5. Intellectual Property Risk

Every serious business knows the importance of protecting its intellectual property (IP). This could be IP rights relating to trade secrets, product patents, or trademarks for company designs and brand names.

The idea is to protect brand image and prevent competitors from unduly benefiting from the company’s intellectual property.?

In 2021, the Adidas v Thom Browne trademark infringement case displayed the importance of swift protection of IP rights.?

The courts held that Thom Browne wasn’t in violation of Adidas’ trademark rights because the three-parallel stripe design in question had been in Thorne Browne’s brand for 15 years prior.

It was indicated that Thom Browne reached out to Adidas in 2007 and since Adidas intentionally remained silent throughout the growth stage of Thorne Browne, they could not claim infringement.?

While it is important for businesses to take measures to protect their intellectual property, they must also take care not to be found in violation of the IP rights of others.

To prevent this, thorough research and due diligence should be followed to ensure the originality of intellectual property and that there are no existing licenses held on the IP.

This could also be controlled through contracts that highlight confidentiality and ownership of intellectual property over products and designs. Especially, where vendors, contractors, or professional staff are involved in the creation of designs and products.

6. Consumer Protection Risk

The customer may not always be right but the law makes provisions that protect customers from certain violations. In Nigeria, the Federal Competition and Consumer Protection Act (FCCPA) administered through the Commission oversees the protection of customers.

Consumer protection laws ensure that businesses provide adequate and truthful information on products and the terms and conditions of their service.?

Also, products and services provided are expected to be safe and to meet customers’ expectations.

This means that when advertising products and services or even at the point of sale, the information provided must be accurate or the consumer can claim deception or harmful practice.

This is the reason consumer goods have information on ingredients used in production and people advertise products with an “As Is” caveat.?

Also, data privacy laws can come under consumer protection rights. According to section 24(1) of the Nigerian Data Protection Act (NDPA) 2023, the collection of personal data must be for a specified, explicit, and legitimate reason.

This implies that businesses must fully disclose all the data they are collecting and how the data will be used. Failure to disclose and obtain customer’s consent for specific data usage may lead to privacy violation claims.

This was demonstrated in the case of Folashade Molehin v United Bank of Africa PLC (UBA), where the court held that UBA violated the data privacy of Miss Molehin by unilaterally deciding to open a domiciliary account for her, using the details of her savings account without her consent.

7. Environmental Risk

Environmental law risks for businesses can arise as a result of pollution.?

Typically, the nature of the business determines the likelihood of environmental threats. For example, a manufacturing factory for essential goods or a business in the extraction industry is prone to cause environmental issues.

However, service-based businesses may also be liable for environmental pollution claims if their operation allows such.?

For example, poor waste management, noise pollution, or poor space management that affects neighbors' right of way, may constitute environmental risks and liabilities for businesses in the hospitality and entertainment industry.

Similar to consumer protection risks, environmental law risks expose the business to both government penalties and private claims from affected individuals and watchdog organizations.

In the case of Compagne Generale de Geophysique (Nig) Ltd v. Anozie, the appellant was sued for causing damages as a result of seismic noise activities emanating from its business operations.

Also, the National Environmental Standard and Regulation Enforcement Act, imposes fines for environmental pollution. And, the Environmental Impact Assessment (EIA) Act prescribes fines for non-compliance with impact assessment regulations.

To manage environmental risks, businesses are adopting smart recycling processes for waste management, and using environmentally-friendly alternatives in their operations.?

Here’s one more for good measure:

Corporate Governance Risk

Business structure, strategic decision-making process, and administration determine the success of a business. Through good corporate governance, businesses are able to run strategically.?

However, risk can arise from bad governance practices such as unethical decision-making, and non-compliance with governance regulations, which leads to financial loss, legal liabilities, and reputational damage for businesses.

For example, the popular Enron scandal that resulted in its downfall was rooted in unethical practices.

In Nigeria, the dissolution of financial institutions such as Afribank and Savannah Bank is attributed to unethical practices and violation of governance principles.

Corporate governance risks may also arise in situations where there are shareholder disagreements. Minority shareholders can petition the court to address decision-making conflicts when internal resolution fails.?

This can also open doors to hostile takeover maneuvers that come about through proxy wars. In this instance, parties start legal disputes against the company in order to destabilize the business and gain controlling rights.

To control corporate governance risks, it is best to implement proper stakeholder management strategies that adequately protect the various interests in the business.

Also, complying with industry-related governance regulations such as ESG reporting, Financial transparency processes, etc, will protect the business from penalties for violation.

How to Manage Legal Risks in Business

The best way to deal with risks is to prepare for it. Now you know certain legal risks in business to anticipate, here’s how you can prepare for them.

• Create a Risk Control Strategy

Assess your business and Identify potential legal risks specific to your industry and business model. This will help you decide on the best approach to avoid or minimize risk.?

For example, if you run a high environmental-risk business like food processing or mining operation, you should adopt recycling and environmental rehabilitation strategies that help you mitigate risk.

You can also implement comprehensive proactive measures for risk mitigation through clear contracts, compliance policies, and internal controls to prevent liabilities and control risk.

• Develop a Risk Monitoring Framework

To ensure your risk control mechanisms are up to date, you must establish a structured system to track legal risks in real-time.?

This may include regular compliance audits; engaging training programs that help discover emerging risks and ways to tackle them, and using automated monitoring tools to detect regulatory changes and potential breaches.

• Prepare a Rehabilitation Plan

Despite best efforts, legal issues may still occur.?

Having a predefined response plan ensures swift action and minimizes financial and reputational damage.?

Your plan should outline immediate corrective measures, stakeholder communication strategies, and steps for legal resolution.

For example, you may decide to implement a settlement-only approach for sensitive cases, to preserve confidential information and protect the company from the public scrutiny that comes with litigation.

Also, having an insurance coverage plan such as a contingency legal risk insurance or legal expense insurance plan can help cover the legal cost and cushion the effect of legal proceedings on your business.

• Involve Professionals

Legal risks are complex and constantly evolving. Regular consultations with legal experts, compliance officers, and risk management professionals ensure your business stays ahead of regulatory requirements and mitigates risks effectively.?

These professionals can provide holistic risk management by helping you develop strong risk control and rehabilitation strategies, as well as monitoring industry and regulatory trends.

You can take a step now by entering a proactive legal partnership to ensure long-term business sustainability.

Learn more about business risks.

End Note:

Adamu Babangida vs Slava-Yeditepe Projects Limited (Unreported suit No: NICN/LA/530/2016)?

Adidas America Inc. v. Thom Browne Inc., 21-cv-5615 (JSR) (S.D.N.Y. Dec. 2, 2022)

Compagne Generale de Geophysique (Nig) Ltd v. Anozie (2018) LPELR-46185 (CA)

Folashade Molehin v United Bank of Africa PLC (Unreported) Suit No. FHC/L/CS/2625/2023

Macdonald v Advocate General for Scotland 2002 SC 1; [2002] ICR 174

Author:

Rachel Onwuchekwa

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