A Family Affair

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We often say or hear, "It’s nothing personal; it’s just business." Because the workplace is built on relationships, "It’s just business" doesn’t always ring true, particularly in family-owned businesses where the personal and the professional are inextricably intertwined.

Many strengths of family businesses flow from the proprietors’ emphasis on relationships. Although there is substantial diversity among family businesses, they often share strengths, such as greater cultural fit, stronger commitment and work ethic, and flexibility in hard times.

But as we know from performance appraisals, the flip side of strengths often are weaknesses. For instance, greater informality in family businesses can lead to greater legal exposure, the focus on relationships may result in some unhealthy conflict avoidance, and family membership all too often trumps competency.

HR professionals can help family members recognize and minimize functional behaviors from home that become dysfunctional—and potentially unlawful—at work.

First, give some thought to how the children are treated. Be careful that traditional gender roles in the family are not replicated in the workplace. HR managers should, for example, guard against succession plans that give sons priority over daughters. Gender roles at home can easily become gender bias at work.

Leaders in some family businesses encourage or require the "kids" to work away from the business before they work for the business. This helps them find themselves on someone else’s dime. It is important for establishing credibility with others when they work for the family-owned business.

Working Overtime

When the children join the workplace, employers often send the message that they need to work harder than others to prove themselves. This may result in long hours without additional compensation.

The Fair Labor Standards Act does not include a broad exclusion for children of employers. To the contrary, it includes only a narrow exclusion for businesses that employ only immediate family members. Other family members do not fit within the narrow exclusion.

Even if your company falls within the federal exclusion, your business still may be subject to state wage and hour laws. Many states do not include any comparable exclusion to coverage.

Hence, most nonexempt family members must be paid minimum wage and overtime. Even nonexempt family members cannot be required, encouraged or permitted to work off the clock.

Double Standards

Leaders in every family business must consider whether employment is a privilege or whether it must be earned. Many say that it must be earned, but in some cases family members with minimal qualifications may be hired.

Be honest with yourself and others in terms of whether family members get preference with regard to hiring and promotions. If they do, don’t lose credibility by telling other workers that they don’t.

A related issue: what to do if a family member engages in misconduct that in the ordinary course would result in termination—for example, theft. If you don’t terminate the family member for misconduct, retention of the employee becomes the equal employment opportunity (EEO) comparator for the adverse action taken against a non-family member who engages in the same or similar misconduct. To minimize the risk, document the reasons for leniency—the employee’s family member status.

This double standard isn’t pretty. But it’s usually not unlawful, and pretending it does not exist may deprive the employer of a viable defense in litigation.

Family Lingo

Executives at some family businesses try to increase inclusion by telling non-family members that they are considered family, too. They sometimes go even further and provide assurances of job security by saying, for example, "So long as I am here, you have a job."

While well-intended and sincere, these statements may come back to bite the employer. A terminated employee may argue that he or she relied to his or her detriment on these assurances by staying with the company and may bring a claim for promissory estoppel or detrimental reliance.

Facing this kind of claim, the family business often lacks the legal benefit of clear at-will language in the application for employment and the employee handbook. Family businesses should include appropriate legal protections in their documents and avoid oral assurances that may be seen as promises.

Be careful of family lingo, such as referring to owners as "Mom" and "Dad." Using family lingo sends a "you’re in-you’re out" message inconsistent with increasing the inclusion of non-family members.

Dating

We all know the risks involved when a supervisor dates or attempts to date a subordinate in any business. Potential sexual harassment risks arise, regardless of whether the subordinate says "yes" or "no." For this reason, some businesses prohibit or at least restrict supervisors from dating or attempting to date employees whom they supervise or have institutional authority over.

In a family business, family members who are not supervisors may have comparable apparent authority. Just as an employee might be afraid to say "no" to a request for a date by a supervisor, an employee might be afraid to say "no" to a request for a date by the owner’s daughter.

At a minimum, discuss with all family members the risks of their dating or attempting to date employees. And, consider suggesting prohibitions that apply to all family members.

Benefits

Sometimes, the informality of the family business cascades into benefits administration and it becomes much too easy for any family member to participate in sponsored benefits plans.

The plan document determines eligibility to participate in a benefits plan. Most provide that only eligible employees may participate. Allowing an individual to participate in a plan, even though the individual does not qualify as an eligible employee or as a spouse, dependent or domestic partner of an eligible employee, creates business and legal risks: The insurance company may deny the individual coverage if officials discover that the individual is not an eligible employee. If the insurance carrier makes this discovery after payments have been made, the carrier may claim fraud and seek repayment and other damages.

If an employer wants to include family members who are not employees or otherwise eligible to participate in their group plan, the employer should negotiate with the carrier the right to do so.

Transfers

The informality in many family businesses also applies when transferring employees from one family-owned business to another. Whether temporary or permanent, these transfers create three primary legal risks.

Tax issues. Clearly identify the company responsible for tax withholding.

Joint employer liability. Both companies may be viewed as employers of the employee if an employment dispute arises.

Pierced corporate veil. These transfers may be used as evidence to "pierce the corporate veil" in an action by a third party. That is, they may help support the argument that myriad companies are really one enterprise for purposes of liability to third parties.

To minimize these risks, when making temporary transfers, employers should determine how much time an employee performs for "the other employer" and account for it in salary, tax withholdings, benefits contributions and insurance. When initiating permanent transfers, the employee should be terminated by one company and rehired by the other.

Religion

The faith family members share represents an important cultural aspect of some family businesses. Indeed, it is not uncommon for family members to try to run their businesses in accordance with their faith.

Family members do not have to leave their faith at home. That’s often neither desirable nor possible.

But, as in all businesses, family members have to be aware of the messages they send and how employees of other faiths—or no faith—may perceive them. In addition to the business value of maximizing inclusion relative to spiritual diversity, legal risks emerge along with the perception that those outside the faith are disfavored. Discrimination claims may result if someone outside the faith does not get what he or she believes he or she deserves, such as a promotion.

To the extent that religious practices are common, it’s possible that they may be seen as creating a hostile work environment for someone who does not share them. This is particularly true if participation is mandatory.

Family members who have a faith-based business need to practice and discuss their faith in ways that do not exclude others. Acknowledging that others have different faiths but are equally valued remains essential.

Dispute Resolution

In my experience, claims by family members against the business are less common than claims by non-family members. However, when they happen, they often are so incendiary—because of their overlap with family issues—that they can literally destroy the business.

For this reason, HR professionals may wish to develop guidelines for when family members will be terminated from employment. For example, separation or divorce from a family member may be cause for immediate discharge. Do you really want someone who is suing your sister to have access to confidential business information on an ongoing basis?

Because claims by family members almost always include personal family issues, keeping these claims as private as possible may be desirable, so consider mandatory alternative dispute resolution. Be aware, though, that despite the benefits of mandatory arbitration, it has been the target of proposed legislation on Capitol Hill, some enforcement agencies and some litigation.

It can be uncomfortable to plan for disputes between family members at work. But we often have prenuptials for our unions and wills for our deaths. Ending an employment relationship pales in comparison, yet participants in family businesses often avoid discussing, let alone planning for, this real possibility.

Leaders of family businesses can’t bury their heads in the sand on this one. Can these types of conversations be uncomfortable? Without question—because it’s never just business. It’s always personal when relationships transcend the workplace.

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The author is a partner with Duane Morris’ Employment, Labor, Benefits and Immigration Practice Group in Philadelphia. His practice focuses on counseling, training and strategic planning to maximize compliance.