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9 December 2010 Family businesses and employment law - How problems arise and how to prevent them

By Warwick Ryan, Partner


In Brief - Employment problems related to the size of a family business

Family businesses typically encounter employment problems once they reach a certain size. These problems can arise because of shortfalls in HR training, workforce management, communication channels, employment procedures, criteria for promotion or procedures for investigating inappropriate behaviour, underperformance and complaints.


How family businesses evolve

Family businesses are characterised by a number of features which are the result of the way they evolve. Many successful family businesses started in the garage of the family home. They achieve success through the initiative and hard work of two or more members of the same family, typically siblings or parents and their children.  

By definition, such businesses are based on values of inclusion, client service and loyalty. As the business grows and begins to employ staff, these early employees absorb and adopt the values they see being upheld by the founders of the business.  

While the enterprise remains small, employees have considerable interaction with the owners of the business and are thus constantly reminded of its core values. These values are a driving force for the company as it employs more people. It is common for family businesses to have a workforce which includes a number of very long-serving and faithful employees.

Rapid business growth and expansion of production

During the initial phase of evolution of family businesses, employment law problems are relatively rare. Such problems typically arise once the business reaches a certain size. The larger the company becomes, the less direct contact employees have with the family members who run the company and the less likely they are to absorb the values on which the business was built.  

This means that the business owners need to establish formal communication channels with employees to articulate core values explicitly. Such measures ensure that all staff are regularly reminded of what makes the enterprise so special and what is expected of anyone who works within it.  

Once a business has around 40 employees, it is critical to its long-term sustainability for owners to focus not only on production, but also on management of the workforce. Unfortunately, many family businesses in their growth phase are so busy expanding production that the owners do not have the time to attend to communicating with staff or managing their workforce properly. Instead they operate on the assumption that their own goodwill will set the tone in every corner of the company, no matter how big it grows.  

Many business owners are naive enough, and optimistic enough, to believe that all employees will have a positive attitude to their work and will treat the people around them with respect. This is not always the case.

No formal HR training, no employment policies

Most owners of family businesses do not have formal training in HR and view employing a specialist to fulfil this function as an unnecessary expenditure. This can result in employment procedures lacking rigour. It can also mean that individuals can be promoted to management positions for which they lack the necessary skills and to which they are temperamentally unsuited.  

Coupled with the lack of formal hiring policies in developing family businesses is the absence of procedures for dealing with underperformance or inappropriate behaviour. Business owners who are extremely busy can excuse the bad behaviour or poor performance of particular individuals for a very long time, relying on the hope that a few informal chats will solve the problem and everything will somehow sort itself out.  

The absence of formal procedures and management training can give problematic members of staff the opportunity to harass and intimidate other employees at will. It is very common for family businesses to wait too long before addressing workforce problems. As a result, the solution can be far more costly than it needs to be. 

Family business case study - an expensive fix to an employment problem

A recent family business scenario involved a successful transport company which had been in existence for over 30 years and employed over 150 staff. The business made the mistake of appointing a depot manager who was unable to cope with the stress of her role. Her volatile and belligerent attitude towards her staff was the subject of numerous complaints.  

Whenever the founders of the business spoke to the depot manager about the complaints being made by staff, she would be extremely pleasant and assuage their concerns. Consequently, no action was taken about the staff complaints. While the business owners realised that they had made a mistake in promoting this person to a management role, they were unsure of how to rectify the situation.  

The business owners did not have the HR skills to perform a proper analysis of what was going on. Unfortunately they took such a long time to engage the services of an HR consultant that they were ultimately faced with a threatened walkout by all of their staff.  

In the end the company was forced to pay a considerable amount in legal fees in order to terminate the depot manager's employment and resolve workplace problems. It was also forced to pay the depot manager an exit fee which was considerably higher than would have been necessary if decisive action had been taken earlier.  

When they took stock of the events which had unfolded, the owners of the business admitted that they had simply wanted to be "nice to all the staff". This is an unrealistic expectation which is common in family businesses and which creates a vulnerability typical of the sector. You can respect all the staff, but you can't expect to be able to be nice to all the staff.

Lessons for family businesses
  • Be aware that the larger your business grows, the greater the likelihood that you will have employment law problems.
  • Establish communication channels with your staff and use them. Formal or informal meetings, email updates and the intranet can all be good ways of reaching your employees.
  • Establish procedures for employing, promoting and terminating staff and for responding to staff complaints.
  • Bring in an HR consultant when necessary if you don't have HR skills yourself.
  • When you suspect that something is amiss, act swiftly - don't wait for problems to escalate. Be aware that the larger your business grows, the greater the likelihood that you will have employment law problems.

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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