Health Law & Business News

INSIGHT: Easing Conflicts When Hiring in a Family Business

Oct. 8, 2019, 8:01 AM

The use of family offices for investment and charitable purposes is rising, and so is their growth as private employers. Growing employment in this sector brings many of the same challenges that plague private employers, but with some unique issues family-run businesses face.

While the family may agree upon investment goals or charitable purposes, that agreement may not necessarily equate to family agreement on recruiting, retention, and management of existing employees.

Family by its nature carries inherent conflict. Those conflicts may be magnified in the employment context, particularly when non-family members are hired to both manage and take direction from the same family members who directly benefit from and control the organization’s operation.

This double-layer of conflict is particularly challenging for high-net-worth individuals who are in a position to demand a level of service not typically associated with most employers who exist to profit outside shareholders or to achieve a specific charitable mission.

While these employment-related challenges are particularly stark for individuals tasked with managing the enterprise, some guidelines may ease this conflict.

Don’t Blur Reporting Lines

Written employment agreements and offer letters often specify reporting lines for private employers. Family offices are and should be no different. A direct line of authority should be established at the outset of the relationship and dual roles (reporting to two or more people) should be discouraged.

The reason for this specificity is likely obvious—the crux of the employment relationship is the employer’s ability to direct an employee to perform services in a specific way. If an individual receives confusing, conflicting, or worse—countermanding—instructions, conflict is inevitable.

For higher level executives who have written employment agreements, the terms under which an individual may be entitled to severance, such as a good reason trigger, should be drafted to prevent triggers for conflicting orders or nonmaterial changes in the nature of the position.

For most other employees, lines of reporting should be spelled out in offer letters.

While any employee who resigns as a result of a material, but not well considered change in duties, responsibilities, or compensation, may claim “constructive discharge” for purposes of seeking unemployment (or laying the groundwork for a potential discrimination or other employment-related claims), a best practice to manage this risk is the dual clear definition and respect of reporting lines.

Make Hiring Systematic, Not Spontaneous

Family-run operations sometimes make hiring decisions that are systematically flawed. Hire in haste, repent in court.

Family office hiring, for example, often prizes pre-existing relationships over process. This is natural given the family office emphasis (in some cases even hypersensitivity) on confidentiality and trust (particularly if an individual is hired to care for family members).

A family office is, however, still an employer, subject to the employment compliance rules in each jurisdiction in which its employees perform services (which rules are also dictated by the number of employees in the applicable jurisdiction). This means that all the ordinary rules apply—wage and hour compliance, classification of individuals as contractors or employees, applying the correct overtime exemptions, appropriate background, credit, and drug testing hygiene, and management interviewing training (particularly in light of the growing trend banning salary history inquiries).

But it is easy to overlook or ignore one or more of these rules in a hasty or personally motivated hire. Whether an individual family member insists upon the engagement of certain individuals, it is important to resist impulsive hires.

One mechanism to avoid impulse is process—a hiring sequence, perhaps published in an internal checklist, that catches missed steps or shortcuts, such as obtaining the appropriate credit check forms or drug-testing consents for the applicable jurisdiction in which the individual is proposed to be employed.

Those checklists can be incorporated into the hiring process easily so that offer letters themselves indicate they are conditional upon the outcome of the hiring process itself—and recite, for example, the enclosure of necessary items such as confidentiality agreements, arbitration agreements, and any other agreements that are key components of the employment offer.

Family First—and Only—Noncompete Laws and Family Office Work

Many family offices, like any other employer focused on making and growing investments, are rightfully concerned about keeping private the investment details, methodologies, and other proprietary information associated with the successful execution of a family office strategy.

One area of interest in this regard is the use of post-employment restrictions to bar family office employees from accepting employment in certain industries or with certain other family offices or investment firms after employment ends. While post-employment restrictions, such as noncompete or nonsolicitation covenants may seem appealing, it is important to note the growing trend of state restriction on the use of such bans.

While California’s ban is among the most well-known, other states—such as Massachusetts, New Hampshire, and Maryland—may only permit them for certain employees. It is equally important to be aware that, generally speaking, it is the law of the state in which the employee performs services or the state law that is contractually selected that applies (setting aside, for example, statutory choice of law bans such as in California).

It is not entirely clear, in any event, that broad noncompete provisions may serve any legitimate purpose in the family office instance—the key concerns relating to confidentiality can be addressed just as appropriately and effectively through confidentiality agreements or well-tailored nonsolicitation provisions aimed at specific entities (such as investors).

In sum, post-employment restrictions should be carefully considered and always narrowly tailored to suit the circumstances.

Outside Staffing Services and Outsourced Services

Family office managers frequently engage outside staffing services either to source and onboard employees and in some circumstances directly hire individuals who are then assigned to perform services for the family office.

In either case, it is critical to have a clear contractual understanding regarding the financial implications of any employment-related liability (indemnification) as well as acknowledging the reality that using an outside staffing service will not insulate the family office from joint employer liability.

A staffing service that fails to properly onboard or document a hire, or that violates a federal, state, or local wage and hour law, detracts from the service’s value to the family office enterprise. And conflict may arise with staff employees of the agency who receive countermanding instructions from the family office to whom they are assigned.

In other words, outside hiring may lead to a level of conflict that could be magnified in the family office environment. One way to address this type of conflicting guidance is to do so through clearly stated (and written) policies governing employment onboarding and workplace expectations, along the lines of the clear reporting mandate in the direct hire context.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Jen Rubin is a member of the Mintz Employment, Labor and Benefits Section, practicing bicoastal employment law. She represents family office management in navigating and solving employment-related challenges.

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