Date posted: 27/03/2024 5 min read

Family business: Hiring family members as employees

Business owners can avoid future headaches by following these best-practice guidelines for hiring family members.

Quick take

  • Employing relatives in a family business can offer many benefits, as long as they’re the right person for the job.
  • Clear communication and adherence to governance protocols are essential to mitigate the risk of wrongdoing and potential disputes.
  • It’s important that employers communicate and document a job description, salary, performance expectations and more, as they would with any other employee.

There are many great positives in the employment of family members in family businesses, says Joanna Oakey, managing partner of Aspect Legal and author of Buy Grow Exit: The Ultimate Guide to Using Business as a Wealth-Creation Vehicle.

“If you’re employing your older kids, it’s a great opportunity to teach them what happens in a workplace,” Oakey says. “It also allows family business owners to support the career prospects of people in their family, and to create a working environment that meets their own personal needs.”

In terms of succession planning, a parent who sets up a business and brings in their children can experience great flexibility in terms of sale options in the future.

“So, it’s a fantastic option, if you can make it work,” she says.

If you can’t, there can be serious consequences. The courts are filled with stories of employment gone wrong in family businesses.

One story, from Taylor Shaw Barristers and Solicitors in Christchurch, involved a male business owner and his wife, who helped out from time to time. When the relationship broke down, she successfully sued his company for unfair dismissal and NZ$40,000 of holiday pay.

Another, from Human Resources Director magazine, tells the tale of a sizeable penalty against a Vietnamese restaurant in Hobart, after the underpayment of visa-sponsored relatives by its owner.

Gavin Debono CA, private business and family advisory partner at Pitcher Partners Melbourne, says he has seen the employment of family members turn sour. Debono agrees with Oakey that, if it is managed well, the employment of family members can be a great positive for the business and for the family behind it.

Best practice when employing relatives

“Where I’ve seen it work really well is when the lines of communication between all family members is open and clear, the governance protocols around bringing a family member into the business are solid and it’s never about giving a family member a job, but rather about what’s right for the business,” Debono says.

“The governance piece breaks down when a role is provided to a family member simply because they’re a family member, rather than them being best suited for the role,” he says.

If this occurs, there must be clear communication with the rest of the team. Even then, sometimes it simply won’t work and can create resentment and a poor team culture.

Exceptional clarity around the role description and the appointment of an individual to that role, Oakey agrees, is a vital ingredient in the recipe for success when it comes to the employment of family members.

“What is the job description?” she says. “Why are you employing someone? What does the business expect out of the role? What is the salary? All of these things and more require clarity.”

Although Oakey says businesses don’t absolutely need to create a formalised employment agreement, if they have an existing template they should use it. Either way, she adds, the reality is that you should have these discussions because it’s good to prepare the family member for the business’s expectations.

“From my decades of experience, what leads to dispute is ambiguity and you don’t want disputes within families,” she says. “The way you deal with minimising the likelihood of a dispute is to ensure that things are clear, to take away that ambiguity.”

Family business: compliance matters

Whether the relative employed is a 15-year-old daughter or an 85-year-old father-in-law, compliance matters, Oakey says.

“If you do it in a way that doesn’t comply with the employment legislation, you are setting yourself up for the risk that there might be some allegation by a family member in the future, or by their related family members,” she says. “You’re simply creating a future risk.

“It’s a temptation to deal with family members in an ad hoc way but you need to keep a lens as a business owner on running the business in a compliant way.”

This doesn’t mean you’re reducing your employment flexibility, she says.

“You just need to be clever and strategic about making the right decisions. If part of the benefit for you is the ability to hire family, then go ahead and do that,” Oakey says. “But keep compliance in mind at the same time.”

Clarity also helps set expectations and boundaries, Debono explains. From the job description and salary to performance expectations and ways success will be measured, it helps to not only discuss such matters openly, but also to ensure those discussions are documented.

“There’s a communication piece that we talk through with larger family groups,” he says. “Some businesses might want to formalise processes in a family charter, which sets the ground rules in the way they make decisions, the way people join the business, the way family members can invest and other decision-making protocols.”

It is typically best to ensure remuneration is about rewarding the person for the role they’re playing in the business through a traditional salary or part-time payment structure, just as non-family members would expect. This is as opposed to other options such as an exclusive distribution of profits through a trust structure.

“In simple terms, clear governance and clear communication is the key,” Debono says. “That solves a lot of the issues where communication breaks down, which is usually where problems start to occur.”