How can you avoid legal and HR pitfalls in family businesses?

family businesses

Almost half of the private-sector workforce is employed by family businesses. While many such companies are successful, sound policies are needed to avoid nepotism and claims for breach of contract and unfair constructive dismissal from non-family employees. Ed Stacey, a partner and head of the employment legal team at PwC, offers tips on good practice. 

You hear that a mother has just promoted her daughter to a senior position in your company. What are your first thoughts? Are they of nepotism and favouritism, or of the vital role that family businesses play in the UK economy?

Family businesses are often criticised for being nepotistic, with relatives and friends being promoted over better-qualified colleagues.

However, companies that are owned and run by families make up a huge and crucial part of the global economy. In the UK alone, the Institute for Family Business estimates that family businesses employ about 12 million people. This works out at almost half of the private-sector workforce.

So, managed successfully, it is clear that family businesses can be a tremendous success. The personal relationships that underpin them can lead to exceptionally high levels of trust, commitment, and communication within the organisation. They can also lead to the development of sustainable business models, as family members work to create a business they can pass on to their children.

Is it legal for family firms to promote family members preferentially?

It is perfectly lawful for family businesses to employ and promote family members preferentially – even when non-family members would have been better qualified, more experienced and better suited to the role. This is because UK anti-discrimination law only protects people from workplace discrimination when the discrimination concerns a “protected characteristic” (such as race, sex or religion) – and “family relationship” is not a protected characteristic.

So, a long-serving employee who, for example, is overlooked for promotion in favour of the CEO’s inexperienced son, won’t be able to claim in an employment tribunal he has been discriminated against because his is not a member of his employer’s family.

However, choosing to employ or promote relatives above more talented non-family members can cause problems for family businesses. Perceptions of favouritism and nepotism can lead to employees becoming disillusioned and demotivated at work. Employee turnover can become high, with employee satisfaction and engagement low as a result.

In addition, where employees are led to believe that decisions about their promotions will be based on merit alone, the business may breach its contractual duty of trust and confidence to its employees if it then takes into account family ties.

This could ultimately lead to the family business having to defend claims for breach of contract and unfair constructive dismissal from non-family employees.

What do you do if a family member is behaving badly?

Another problem for family businesses is what to do when a family member is behaving badly. It can be especially hard for somebody to call out inappropriate workplace conduct when that person is a relative. Just imagine finding out that your boss is embezzling money from the company you work for – and now imagine that the boss in question is also your father. Family ties can make it more tempting for business partners and employees to close ranks and hide wrong-doing, to protect their family members from trouble.

Similarly, the very same personal relationships which can make family businesses so successful can also prove to be their undoing.

There have been several cases in the media recently of married business partners who have divorced – and who have then had to split up their business as part of their divorce settlements.

For family businesses, difficulties in personal relationships can quickly translate into professional difficulties.

What is best practice in family businesses?

It is best practice for businesses to have transparency within their organisations, but it is especially important for family businesses if they want to avoid employees becoming disillusioned and angry about favouritism.

There should be as much clarity as possible about who is related to whom and how decisions are made. Family businesses should have clear policies in place, which set out how decisions are made and how contentious issues (such as employee grievances, promotions and recruitment) will be dealt with.

Compliance with these policies should then be ensured, resulting in happier, more engaged employees who feel fairly treated at work, and who are therefore much less likely to bring a claim against their employer for breach of contract or unfair constructive dismissal.

To avoid personal relationships getting in the way of business, there should also be clear policies that set out what will happen if things go wrong – both in terms of how misconduct will be dealt with, and what will happen to the business in the event of personal relationship breakdowns.

It is far better to agree how matters will be dealt with in advance, with
a cool head, than in the midst of disaster when emotions may get in the way of good business practice.

It is clear, then, that family businesses have a set of particular challenges that they face, when it comes to perceptions of favouritism, employee engagement, and dealing with misconduct and personal relationship breakdowns – but that, managed well, family businesses are tremendously successful, and hugely beneficial to our economy.

Ed Stacey is a partner at PwC and heads the employment legal team.

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