The ABCS of Employee Handbooks for Entrepreneurs

By Jawahar, I. M.; Gavin, Stacy | Entrepreneurial Executive, Annual 2003 | Go to article overview
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The ABCS of Employee Handbooks for Entrepreneurs

Jawahar, I. M., Gavin, Stacy, Entrepreneurial Executive


Every organization must have an employee handbook. Depending on the contents, an employee handbook could protect the organization or could become a damaging liability. The primary purpose of this article is to inform entrepreneurs about the significance of employee handbooks. To accomplish this purpose, we discuss a number of key elements including the benefits of handbooks, contents of a typical handbook, the effective use of clauses and disclaimers, concerns with on-line handbooks, and issues that pertain to revisions or additions to handbooks. Knowledge of these key elements and the practical advice we offer will help entrepreneurs develop employee handbooks that contain legally defensible and effective mechanisms for managing employees as well as for protecting their organizations against legal challenges.


Managing human resources is just as important to a small business as it is to a large organization. The threat of allegations of discrimination poses a significant challenge particularly for smaller organizations that do not have the resources to employ specialists, such as human resources or risk management professionals. Instead, the small business owner or entrepreneur has to deal with human resource-related activities, in addition to managing business-related activities. For instance, a small business owner must engage in several human resources activities, such as hiring employees, administering compensation and benefits, promoting employees, resolving conflict among co-workers, disciplining employees, and terminating employees.

Mistakes made in performing any of these activities will expose the small business to potential lawsuits. For instance, disciplining employees in an inappropriate manner or terminating employees in an insensitive manner could result in a discrimination lawsuit or charges of wrongful termination against the small business owner. These types of lawsuits could ruin a small business. For instance, the median compensatory award for a wrongful termination case is more than $200,000. And, since 1992, the number of civil rights employment cases filed in federal courts has more than doubled (Levin, 1998). According to the Equal Employment Opportunity Commission, in 2001 alone, businesses paid over 725 million dollars to plaintiffs who were successful in alleging discrimination.

Given the substantial awards and the litigious business environment, small and big businesses should do everything possible to avoid lawsuits. Avoiding lawsuits is particularly critical for small businesses because a single lawsuit could easily bankrupt a small business. In this regard, employee handbooks are invaluable to small businesses. Employee handbooks not only serve as a deterrent to lawsuits but a well-designed employee handbook could be used to successfully defend a lawsuit.

This article is organized into six sections. In the first section, the benefits of employee handbooks to small businesses are described. In the second section, the contents of a typical employee handbook are noted. Third, the different types of clauses are described and their effective application is discussed. Fourth, suggestions for the effective use of disclaimers in handbooks are provided. Fifth, issues relevant to on-line handbooks are discussed. Finally, the major issues to consider when revising and/or updating employee handbooks are discussed.


Employee handbooks are invaluable to small businesses. Unfortunately, many small business owners/entrepreneurs do not believe that employee handbooks are valuable, or even necessary. We conducted informal telephone interviews with 30 entrepreneurs. The size of their organization varied from 7 employees to 61 employees. Eighteen entrepreneurs (60%) indicated that they did not have an employee handbook in their organizations. To our surprise, sixteen entrepreneurs (53%) indicated that they do not see the need for a handbook.

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