Mastering the Art of Managing Friends and Relatives on the Job

​In the television series "The Office," actor Steve Carell portrays Michael Scott, a dysfunctional office manager who believes the employees he supervises are his friends and family. When Scott manages, hilarity ensues, with many lessons learned—and many not.

The reality isn't so funny, as plenty of managers and small business owners wind up in scenarios where they have to manage family or friends on the job.

"I've never realized how much of a struggle managing one's friends and family could be until I tried it out myself," said Simon Elkjaer, chief marketing officer at avXperten, an Esbjerg, Denmark-based consumer electronics retail platform. "When you employ friends and family, a change in dynamic is bound to happen. Once, you were equals, but when you're working together, one of you is on the higher end of the business hierarchy."

A canvassing of employers and managers who have hired friends and relatives reveals plenty of ups and downs from the experience. Here are the experiences that resonated most with business leaders who hired a friend or loved one—and learned much from the engagement.

Boundaries are critical. The worst mistake Elkjaer made was talking about personal issues with friends or relatives while on the job.

"This muddled the boundaries of our relationship to the point that it became awkward to talk about any topic, work-related or not, with one another," he said.

It's best to have an honest talk with your friend or loved one about topics that are off-limits at work, he said.

"Both of you need to set rules and limits while still making it easy to be critical of your friend's performance at work," Elkjaer added.

Make sure it's a good fit. Ben Taylor, founder of Homeworkingclub.com, a remote and freelance work advice portal based in Kent, U.K., said he's hired plenty of friends and ex-colleagues over the years.

"It's best to avoid trying to help somebody out by giving them work that they're not a natural fit for," Taylor said. Don't "try too hard to help people out by trying to fit square pegs into round holes. You really do need roles and tasks that fit their experience. If not, you will always know you could have had better results from hiring somebody more suited to the job."

Don't play favorites. Hiring or managing friends may lead to scenarios where those employees try to solicit favors based on their personal relationship with a manager.

That's not a good idea, said Karen Condor, a human resource manager and insurance expert with USInsuranceAgents.com, a digital insurance rates company in Seattle.

"Years ago, I befriended a co-worker, and was then promoted to managing that friend two years later," Condor said. "Our friendship included going out to lunch together and attending events for which she received free tickets from her second job at a radio station. I also went to her apartment once a week to watch a television show with her and her roommate and have dinner and drinks."

Condor gradually learned that to prevent jeopardizing her authority, she needed to keep work and personal time separate. "We didn't discuss work outside of work, and didn't discuss personal situations at work. Most importantly, in order to not create resentment and cause negative behaviors that could damage team productivity, I did not show favoritism."

To ensure there were no personal relationship issues interfering with work, Condor requested management training, which helped Condor find her way. "My mentor and fellow co-workers advised me to redefine the friendship a bit more formally and to spend free time with my work friend a bit less frequently."

Get the big issues in writing. Early in his business career, Peter Gray, president at Pyramid Real Estate Group in Stamford, Conn., hired his best friend into a high-level position.

"We were able to work together successfully and keep our friendships intact, but in one case, there was an intense conflict that nearly ended our friendship," Gray said.

"I was, at that time, running a staffing firm, which was growing quickly," he said. "I invited my best friend to join me in a sales role."

Gray's friend proved valuable.

"His sales were more than double anyone else's, and he wanted to take his career to the next level," he noted. "We agreed that we would launch a new division of the firm that he would lead. We also agreed that he would receive 50 percent of any profit or loss that came out of the partnership."

Just as Gray and his team were putting the last pieces together, the dot-com bubble burst.

Our losses were fast and furious," Gray said. "With eight people plus my friend on payroll, at an average of $50,000 a year apiece, our losses were $37,500 a month. We disassembled the team as fast as we put it together to salvage what we could."

After the losses were all counted, a check for $10,000 came in from a client.

"My friend wanted half and I felt differently, not wanting to absorb 100 percent losses only to split the income on a 50/50 basis," he added.

"Each of us felt very differently about how the compensation should be handled," he said. "After arguing back and forth with increasing intensity, we took a break to cool off."

During this period, Gray remembered that his attorney had drafted an agreement with the employee before he was hired.

"Although we both thought the agreement didn't cover this type of issue, when we reread it together, we found that it covered it exactly," Gray said. "It was crystal clear that we would share all gains and losses on an agreed upon percentage basis. We drafted the agreement in simple and professional language.

"To this day, I am not sure it was legally binding, but I do know that it was ethically binding to us and it saved our friendship," he said. "Having that agreement and hiring a friend with integrity worked for us, and I advise other managers to do the same thing."

Tread carefully. Hiring and managing a friend or relative can work, but the manager must efficiently balance that "boss and best friend" experience.

That's what Brian Litz, president at Lyv Fin, a life insurance agency in Hampton, Neb., experienced when he hired a friend who was placed under his management.

"Before long, he took a three-hour lunch and came back to work like nothing had happened," Litz said. "When I asked him where he had been, he snapped and said it was none of my business. I reacted poorly to this, as I took it as a challenge. I yelled at him on the sales floor in front of everyone. I then wrote him up and threatened to fire him if he did it again."

That escalated the situation, and Litz's friend walked out. "The next day, I stopped at his house and apologized for my reaction," Litz said. "I explained to him why it was a big deal, and he apologized. He came back to work the next day, and all was water under the bridge."

The takeaway for Litz? Managers have to play it straight.

"Like any employee, managers have to show appreciation for friends or family on the job and recognize the things they do right," he said. "When they do things wrong, a manager can also treat the experience like any regular employee."

Brian O'Connell is a freelance writer based in Bucks County, Pa. A former Wall Street trader, he is the author of the books CNBC Creating Wealth and The Career Survival Guide.