By Philip Pryor & Bob Selden – Family Business Central
A recent article in RNZ “What to know about working for your family” mentioned that as “margins tighten, some small and medium-sized businesses are turning to family members to help keep their operations running. However, legal risks can arise when a family "helper" is later found to have effectively been an employee.”
From our experience in Family Business Central of working with family businesses over the last two decades in New Zealand and Australia, we’ve found this to be true. However, this is only half the story. In addition to the legal implications and requirements of the employer/employee relationship mentioned, there are significant family issues that can arise.
Since the advent of family businesses (which is probably when “business” itself started), family members have always been asked and usually quite willingly been happy, to jump into the business on an as-needed basis. Historically, there have been quite strong expectations that family members get involved, particularly the “oldest son’ syndrome that, “He should take over the business” and so on.
However, this is often “expected because they are family and that’s the way it’s always been done”, with little thought of formalising these roles (or sometimes, changing roles). So, conflict may emerge when family member’s informal work roles overlap or perhaps something “falls through the cracks” and the finger pointing then starts.
In addition to documented expectations, all family business members (Mum and Dad included) must be clear about the role they are to play in the business. And these too, need to be discussed, agreed and documented (as Role/Position Descriptions) so that all legal employer/employee requirements are met.
Agreeing and documenting expectations of family members is crucial
What all family businesses need to know, as well as the legal implications, is that they must be clear about the expectations both the parents and the kids have. This is about - pay or no pay, amount of pay, when they get paid (often pay will be promised “when things get better”) - and of course if there is pay, the legal processes must be followed.
We often find that most siblings don’t mind helping out when times are tough, but families really need to be clear about what they are expecting, manage the fairness issues, pay when they can and if they make a promise to pay/reimburse at some point, they have to do it - and, they must write it down. Memories are appalling and it’s very easy for the kid to remember one agreement and the parents (or perhaps another sibling) to have a completely different memory of what was promised.
Managing ‘fairness’ in family businesses
A key issue is fairness. What if one sibling helps out but the others don’t? You then may have potential allegations of, “Well I helped Mum and Dad out and you didn’t!” down the line. This is even more potent if they were not paid and the other siblings had opportunities that the working one did not get.
For example, we’ve worked with one very successful family business where one brother ran the business (with support from his parents) whilst the other brother went off to university for four years and then took a year travelling before coming back to work in the business. Some years later when we were helping the family set up a Family Charter (a documented family agreement process of all the systems, procedures, roles, values, succession/transition plans etc., needed for the family business’ future success), there was a sticking point. Fairness.
The first brother wanted to be renumerated (in addition to his share of the profits) for the time he spent running the business. His memory was that he’d been promised pay by his parents who did not remember it the same way. As you might expect, this took some time to resolve. What was the missing element in this family business from the start? Agreed and documented expectations.
In summary, successful family businesses, just like other businesses, must ensure their employer/employee relationships are legally correct. But, and it’s a big “BUT”, family businesses who go through the discussion and documentation process of agreeing expectations and roles have an advantage over others – the “process” invariably improves their family relationships and ultimately often the success of the family business.