Family businesses: Employment risks and how to avoid them
People can be your business’s greatest asset, but they can also pose your biggest risk, and that’s particularly true in family businesses. Although the shared values and loyalty of family members can be a tremendous strength, HR issues and conflict management in family businesses can also be a major stumbling block, particularly given the informality of the employment relationships.
Not all family-run businesses have a full HR team with knowledge of how to identify and navigate or minimise the risks. With that in mind, Jessica Wallace, People Partner of Moore Kingston Smith People Advisory, identifies some of the potential employment risks and offers advice on how to manage a family business successfully.
Understanding the unique dynamics of family businesses
The dynamics in families are often complicated enough, but when you throw in a workplace scenario, they can sometimes cause problems that jeopardise the company and impact other workers.
At their best, family businesses can be rewarding and nurturing environments. You’re collaborating with people you care about and trust who are equally committed to making the business a long-term success. The work environment is often relaxed and you may benefit from more workplace flexibility as there’s a greater understanding and appreciation of each other’s commitments outside of work. That type of strong, tight-knit organisation can be successful for generations.
However, the unique dynamics in family-owned businesses can also have a downside. Family members may feel they can get away with doing less than other workers or be promoted ahead of more suitable but unrelated employees. That can lead to anger and resentment and is a common cause of HR issues in family businesses. Another risk is that a lack of diversity among senior employees can lead to groupthink. There may also be a reluctance to make difficult decisions that benefit the company but negatively impact family members.
Key employment risks in family businesses
If you’re wondering how to manage a family business successfully, there are a few key risks to look out for.
Neptosim and favouritism
Like every business, you should put robust recruitment processes in place and job adverts must not include any discriminatory language or duties. However, when hiring or promoting family members, the same rules do not apply. That’s because UK employment law protects against discrimination based on a ‘protected characteristic’, such as age, disability, race or religion. Family relationships are not a protected characteristic, so you don’t have to worry about discrimination claims.
However, favouring related employees can still lead to HR issues and conflict in family businesses. Non-family staff can become disengaged and demotivated if they see undeserving family members being rewarded ahead of them, potentially leading to a high staff turnover and quiet quitting. Familial favouritism can also become a legal issue if a business states in employment contracts that promotions are based solely on merit when they don’t appear to be, potentially leading to claims for unfair constructive dismissal or breach of contract.
There can also be issues around the company’s disciplinary processes. For example, if you treat family members differently when they underperform or engage in misconduct, that can further damage the trust and motivation of non-family employees.
Lack of clear roles and boundaries
Taking an informal approach to employment relationships can be another source of HR and conflict management issues in family businesses. Family-owned companies do not always issue employment contracts or put formal processes in place to regulate the workplace. That can cause misunderstandings about assigned tasks and conflict around roles and responsibilities.
Family-member employees may also not be provided with a set of company policies and procedures, as it can feel inappropriate or unnecessary to do so. That can lead to legal issues and create HR problems further down the line. You should put clear guidelines and expectations in place related to issues such as absenteeism, working hours and general standards of conduct.
Job security and performance issues
Another common cause of HR issues in family-run businesses are problems associated with performance. Family members should set a good example to the rest of the team by performing at a high level and following all company policies and procedures. However, the relationship works both ways. As a company, you shouldn’t expect family members to work additional hours ‘off the clock’ without receiving overtime pay. Not only is it unlawful, but it also sets the wrong example for your other employees.
In terms of performance, you should be wary of making one family member the direct manager of another, as it can create problems around bias and preferential treatment. You should also avoid creating jobs for family members that wouldn’t otherwise exist just to provide job security. If family members aren’t up to the job, keeping them on can lead to disillusionment and a lack of job satisfaction among other workers.
Strategies for conflict management in family businesses
Although family-owned businesses come with plenty of risks, they can also be extremely successful. Family businesses account for 90% of the UK’s total private sector firms and employ 14 million people in the UK, which shows that with the right help, those risks can be managed.
Establishing clear roles and boundaries
One of the first steps when considering how to manage a family business is to set out standard policies and procedures for employment issues and apply them to all workers. That includes what you expect from employees, how you will treat them and how you determine pay rises and promotions.
You must also define everyone’s roles and responsibilities so they understand how they fit in the hierarchy. You can do that by issuing updated job descriptions that clearly explain what their parameters and limitations are. For example, just because an employee might be the business owner’s brother, it should not mean he has the power to hire, fire or promote workers unless it falls within their assigned responsibilities.
Keeping everything clear and transparent in that way – from who is related to who and how decisions are made – can help you create a happy, engaged and productive workforce.
Ensuring fair treatment and opportunities
To avoid family relationships getting in the way of a successful business, you should adopt a clear and fair approach to the treatment of all workers. You can do that by encouraging competition for promotions and awarding senior roles based on skills, experience and performance. Failing to do so could lead to an exodus of your unrelated best performers and leave you with high staff turnover and a skills shortage.
You should also make it clear that a senior position in the family does not necessarily equate to a senior position in the company. Unrelated employers and younger family members should be able to leapfrog senior family members and receive higher pay rises based on their performance. Appraising senior management, including family members, can be challenging, which is why using an outsourced HR consultancy service can be beneficial.
Planning for conflict resolution
Personal disagreements among family members can and do continue into the workplace. The steps we’ve detailed so far, such as having clearly defined roles and responsibilities, can reduce the risks, but personal conflicts can still cause considerable harm. That’s why having a pre-planned approach to conflict management in a family business is essential.
The best time to create a dispute resolution process is long before any conflict begins. That will help to avoid accusations of bias and prevent emotions and personal loyalties from getting in the way of good business practice.
If personal relationships break down irreparably, for example, through a divorce, you should also have pre-defined exit strategies in place. That should include elements like messaging, severance and changes to equity, so family members can leave fairly without causing undue harm to the business. Using a third-party moderator can be advisable when emotions are running high.
How we can help
Our People Advisory team helps organisations by advising on policies and processes to navigate the specific risks you face. HR issues in family-run businesses are often overlooked, but when it comes to perceptions of favouritism, dealing with misconduct, employee engagement and personal relationship breakdowns, it pays to be prepared.
Take our family business diagnostic to identify the strengths and weaknesses of your business, read more about our family business services or get in touch to discuss your challenges with our team.