Employment Law Risks for Family Businesses

One of the benefits of operating a family business is the opportunity to work closely with other family members on a daily basis. However, it is important to remember that a family member is just like any other employee in the eyes of the law and should be treated as such.

There are numerous federal, state, and local laws that govern the employer-employee relationship. Below are common areas of challenge for family-owned businesses.

Hiring and Training

All employers should endeavor to hire the most qualified individuals for every open position regardless of familial status. When considering a family member for a particular position, it is important to evaluate that person’s experience, background, and qualifications just as you would for any other candidate.

If background checks or drug screens are performed on other applicants, the same process should be followed when considering a family member. Not only will this reduce the risk of a “negligent hiring” claim, carefully vetting applicants will help avoid all sorts of problems that can arise when someone is simply not a good fit for the job – despite their DNA.

Once hired, family-member employees should be taken through the same onboarding process as any other employee. This includes harassment and discrimination training, which is a legal requirement in some jurisdictions. Family-member employees should also be provided with a set of company policies and procedures, many of which employers are legally required to provide.

Clearly Defined Roles and Performance Evaluations

A family member’s role and responsibilities should be clearly defined. Just because an employee happens to be the business owner’s brother, for example, may not mean he has the authority to hire or fire other personnel. Family members should have a clear understanding of their assigned tasks and responsibilities.

The parameters and limitations of their positions should be clear to the rest of the company, as well. Thoughtfully drafted and updated job descriptions should be maintained for all positions, including those held by family members.

In addition, family member employees should undergo the same performance evaluation process as other employees. Both the business and the family member will benefit from honest feedback about strengths and areas for improvement. When possible, include input from non-family members to limit the perception of bias.

Compensation

Wage and hour laws apply to family members just like all other employees. Do not allow family members to “volunteer” their time until the business is more profitable. Narrow exceptions may exist for family members operating in a bona fide executive capacity who own a sufficient amount of equity in the company. However, this arrangement should be carefully reviewed.

In addition, non-exempt/hourly family member employees should be prohibited from working “off the clock” and should receive overtime premiums as appropriate. Failure to do so is unlawful and sets a bad example for the rest of the company.

Finally, all equity, bonus, and other compensation agreements should be in writing and reviewed by legal counsel.

Avoid Special Treatment

Family members should be required to follow the same policies and procedures that are in place for the rest of the company. Special treatment related to such things as absenteeism, expense reimbursements, or general standards of conduct can lead to morale problems among non-family member employees.

In addition, inconsistent treatment can give rise to discrimination claims in some circumstances. Insist that family members set a good example for the rest of the company by following all company policies to a T.

Conflict Resolution

Unfortunately, personal disagreements among family members have a way of bleeding into the workplace. While training, well-defined roles, clear boundaries, and the avoidance of special treatment may reduce the risk, it is wise to assume that at some point conflict among family member employees will arise, and there should be a plan in place to deal with it.

Consider having regular “family council” meetings where family members can meet to discuss the direction of the business and raise any personal grievances before they escalate. Using a third-party moderator may be helpful to work through certain issues when emotions are running high.

In more peaceful times, create a dispute resolution process that everyone will agree to follow. Be mindful of the impact familial discord may have on non-family member employees.

Succession Planning and Exit Strategies

It is important to anticipate that a family member’s employment will come to an end at some point. Whether through retirement or a family member’s desire to try something new, succession planning should be a frequent topic of discussion. In some instances, it may be necessary to orchestrate a graceful exit for a family member who is not working out or who has lost interest.

Consider whether a family member’s skill set is better suited to serve on an advisory board or as a consultant. A clearly defined exit plan that contemplates messaging, severance, confidentiality, and any changes to equity ownership will help ensure a more smooth transition.