Get the basics right in family business employment law

Family businesses often grow in an unstructured way, leading to a culture of informality. As a result, basic employment law documents can get overlooked and family members are not issued with employment contracts or subject to formal policies. This can leave the business exposed when issues arise as neither the business nor the family member have a ‘rule book’ to follow.

We always recommend that employment arrangements are documented. Not only is it a legal requirement to provide all employees with a written statement of certain employment terms, typically presented in an employment contract, it will assist in resolving any dispute. While a family business may think—and hope—it will never be in a situation where it needs to serve notice of termination on a family member, having a contract in place which clearly sets out what he or she would be entitled to in such an event materially reduces the risk of disagreement and/or a claim.

It’s also important to remember that the law applies in the same way to family members as it does to any other employee. Just because they are part of the family, does not mean that they are not entitled, for example, to receive national minimum wage, have rest breaks and take paid annual leave. Again, this can often get overlooked and end up being a source of tension.

Clashing interests

Conflicts can easily arise within a family business. The reasons are numerous: younger family members frustrated with their older relatives’ running of the operations; competing siblings who both have their eyes on the ‘main prize’; as well as a result of everyday family arguments.

To help avoid conflicts, it is important for family members’ roles and responsibilities to be clearly defined and communicated to others.

Where possible, it might also be helpful for family members to undergo formal appraisal and performance evaluation processes to ensure that the right and appropriately skilled family member is carrying out the right role. This should help avoid a situation where others perceive that he or she only has the job due to nepotism, which can often escalate tension.

In addition, ensuring people are appointed based on merit and not due to their connections will generally reduce the risk of others—including non-family members—alleging that they have been treated unfavourably, which could give rise to claims such as discrimination.

The business might also want to consider having an informal committee where family members can meet to discuss the direction of travel and business operations. Having a forum which allows family members to speak openly and honestly about workplace issues, could allow them to be ‘nipped in the bud’. 

When things go wrong

Sometimes, despite taking the measures above, things can go wrong: a family member may just not be the right fit for the job, but he or she refuses to accept it; relationships between certain relatives breakdown to such an extent that one of them needs to go to safeguard the business; the son who was forced to follow in his father’s footsteps is no longer interested in the family business.

How the business deals with such issues will always be fact dependant. However, if matters cannot be resolved informally, the business will need to take formal action. The key to dealing with these difficult situations is to have a clear disciplinary and capability policy and procedures in place. A disgruntled family member being asked to leave the business might contemplate suing and he or she will typically have the same rights as other employees , such as unfair dismissal, so it is important the business takes the relevant steps to reduce the chances of a claim.  

Planning for the future

Finally, it is important to anticipate that a family member’s employment will come to an end at some point, especially those in senior roles who may have led the business for some time.

While businesses need to be alive to potential age discrimination risks, such as being seen to be forcing older employees into retirement, it is advisable to have succession planning discussions with relevant employees to ensure a plan is in place for when they go. The business should also think about how it can retain the knowledge and talent of those senior members: moving senior members into a reduced advisory or consultancy role in their final years can help ensure that the younger generation are fully prepared to take the business forwards.