Hiring family members for your small business can be a strategic move or a potential pitfall. This comprehensive guide is designed to help you navigate the complexities that come with employing relatives. From understanding nepotism and its implications to exploring the pros and cons of family employment, we discuss various aspects that can impact your business operations.
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Legal & Tax Issues
As with hiring any other employee, there are legal implications you must consider when hiring family members. You must still adhere to all relevant employment laws and treat family employees as you would any other employee. Make sure you’re hiring correctly and setting up policies for successful growth.
Employee Misclassification
It may be tempting to hire family members for vague or ill-defined roles, but you need to be certain that you’re classifying them correctly. One of the best ways to get into trouble with government agencies is to misclassify employees as contractors.
Many small businesses use independent contractors for various projects. However, be sure that you’re not crossing a line and turning an independent contractor into an employee. Make sure the scope of work is clearly stated in the contract and that there is no employer-employee relationship.
It is also necessary to ensure that the work is performed in accordance with independent contractor standards. Even if your contractor is a family member, you cannot direct them on when or how to do the work or you risk misclassification fines and penalties. Independent contractors are best suited for projects outside the scope of your daily business needs and may not be the best idea for family members.
Employment Law & Pay
First, don’t hire your children or other family members if they are under the legal working age—these aren’t chores around the house. Hiring minors comes with its own challenges and legal considerations. The exact age a child can be employed without restriction varies by state but is generally around 16 years old. Some states allow children over 14 to work minimal hours, although not in certain industries. Even though some states are rolling back child labor protections, it’s best to avoid even the appearance of impropriety.
Second, avoid paying your family members under the table with cash. Not only does that create potential tax problems for both of you—including limiting their ability to build their Social Security base—but it can also create a bad situation if they were to get injured on the job. Since they’re being paid under the table and not officially as an employee, your workers’ compensation insurance wouldn’t cover them. Any family member you hire needs to be paid just like any other employee.
Finally, keep accurate time records for your family members. Just because they’re your family doesn’t mean you can avoid paying them overtime or ask them to work “off the clock.” Not paying employees correctly is illegal, regardless of their familial status.
Tax Implications
If you’re hiring your spouse, child, or parent, it could also alter your tax responsibilities. It’s best to consult with an adviser regarding complex tax rules, but here is a general guide to help you determine what taxes must be withheld in certain situations.
Operational Considerations
You may also have some operational issues to consider when hiring family members, primarily around ensuring that every employee is treated equally.
Here’s the bottom line: Other employees will assume your family members get special treatment, so you need to go out of your way to show that’s not the case. From the interview process and performance reviews to salary increases and disciplinary actions, your family members have to be treated the same as every other employee. In fact, to overcome the appearance of favoritism, you may even need to be stricter with your family.
Consider these examples:
Example 1: Unequal Workload Distribution: Let’s say you’ve hired your nephew in your small business. If you consistently assign him fewer tasks or less challenging work compared to other employees because he’s family, this is favoritism. This can lead to resentment among other employees who may feel they are being treated unfairly.
Example 2: Preferential Treatment in Promotions: Imagine you own a restaurant, and your daughter works as a server. A position for a manager opens up, and despite other employees having more experience or skills, you promote your daughter. This is a clear case of favoritism and can lead to discontent among your staff, potentially causing high turnover rates.
Example 3: Ignoring Mistakes: Suppose your brother works for your company. If he makes mistakes that negatively impact the business or team, but you overlook them because he’s family, you’re showing favoritism. This not only affects the quality of work but also can demoralize other employees who are held to different standards.
Favoritism can erode trust, damage team cohesion, and ultimately impact your business’s bottom line. Therefore, it’s crucial to treat all employees equally, regardless of their relationship to you. Implementing policies that ensure fair treatment and regularly checking in with your team can help keep favoritism in check.
Favoritism in and of itself is generally not illegal—although, at the extreme, it can become illegal if your actions discriminate against other employees of protected classes. Favoritism could also violate your company policies, such as an anti-nepotism policy, which we discuss below.
Anti-nepotism Policy
Your company’s reputation is important and needs to be protected. Many owners like the feeling of a family business, but that can turn some potential employees away as they may feel non-favored or out of the loop.
We recommend having a good anti-nepotism policy, which can help avoid conflicts of interest and allay employee concerns by laying out straightforward guidelines for how to handle familial relationships in the workplace. Such a policy seeks to ensure family members are not directly involved in hiring, evaluating, disciplining, or promoting one another. It should also establish, as discussed earlier, that family members will be held to the same standards and required to follow the same processes and procedures as non-family members.
Some anti-nepotism policies go even further and simply prohibit the hiring of close relatives of any employee. This completely eliminates any issues that may arise from hiring family members.
For an example of an anti-nepotism policy, see this article from Legal Services Corporation.
Pros & Cons of Hiring Family Members
| PROS | CONS |
|---|---|
| Immediate and absolute trust | Relatives may not be the most qualified for the job |
| Relatives have a vested interest in your company’s success | Family may expect special privileges and special treatment |
| Close relatives can be a confidant | Other employees might feel like outsiders |
| Working together can be fun | Relatives can be less productive |
| Family members often share the same vision | Difficulty separating business and personal lives |
| Family may be willing to work more flexible hours | Lack of diversity |
Family members are often hired by small business owners because it’s easy. Your family members, especially your spouse, may intimately know your challenges and be willing to help. Many times, family members will pitch in to help with bookkeeping duties and other behind-the-scenes tasks that ease the administrative burden on you. Just make sure your family member understands the work you need them to do and has the skills required.
Your family members also have a vested interest in your business succeeding, so you can trust them to do accurate work. With any other employee, they’ll need to gain your trust over time. Since you already trust your family members, you can have them work on confidential matters that you may not have other employees handle.
However, hiring family members can lead to production and morale issues—and the larger your business, the more likely it is that problems will arise.
When Hiring Family May Be a Good or Bad Idea
Hiring family members can either be a boon or a bane for your business, depending on the circumstances. Let’s consider two fictional scenarios.
Scenario 1: A Good Idea
Imagine you run a small marketing agency and are in dire need of a talented graphic designer. Your cousin, Jane, has just graduated from a prestigious design school with honors. Over the years, at family gatherings, she has often showcased her work. From beautifully designed invitations to family events to creating captivating digital graphics for her personal blog, you’ve been consistently impressed by her creativity and dedication.
Moreover, Jane’s experience goes beyond family projects. She has garnered more than seven years of graphic design experience working in-house for various organizations. Her portfolio, which includes a variety of soft and hard products, demonstrates her exceptional eye for detail.
In this case, hiring Jane could be an excellent idea for several reasons:
- Talent and skills: Jane is undeniably talented and trained in the latest design techniques. Her skills would be a valuable asset to your agency.
- Trust and loyalty: As family, there’s a higher level of trust and loyalty. You know Jane personally and believe in her integrity and dedication.
- Understanding of company culture: Being a family member, Jane already understands your work ethic and company culture.
Before making the decision, you should consider whether Jane is truly interested in the job and if she’s comfortable working with a family member.
Scenario 2: A Bad Idea
Now, let’s imagine another situation where your brother-in-law, Mark, has recently lost his job at a retail store. He’s been an operations manager in a completely different industry and expresses interest in the open operations manager position at your company, a marketing agency.
Despite the family connection, hiring Mark may not be the best decision for these reasons:
- Lack of relevant experience: Mark might have experience as an operations manager but not in your industry. The skills required might be significantly different, which could lead to performance issues.
- Potential for favoritism: Other employees might perceive Mark got the job because of his relation to you, leading to resentment or claims of favoritism, even if that’s not the case.
- Difficulty in maintaining professional boundaries: If Mark underperforms or causes issues, it could be challenging to reprimand or fire him without causing tension in the family.
Instead of hiring Mark, consider opening the role to external candidates, if you haven’t already. Seek candidates with relevant industry experience and proven track records. This way, you ensure your operations manager has the necessary skills and avoids potential family conflict.
Frequently Asked Questions (FAQs)
There are no specific legal restrictions on hiring family members. However, businesses must comply with anti-discrimination laws, which means they cannot hire a family member over a more qualified non-family applicant solely due to their familial relationship. Businesses must also comply with child labor laws when employing children.
Maintaining professionalism with family members in a work setting involves setting clear boundaries between personal and professional relationships. This can include having formal job descriptions, setting performance expectations, and maintaining objective communication within the workplace. Essentially, treat a family member employee as you would any other employee.
No—compensation should be based on the role, responsibilities, and qualifications, not on personal relationships. Paying family members more or less than other employees with similar roles and responsibilities could potentially lead to legal issues and damage morale within the company.
Disputes between family members in the workplace should be handled professionally and objectively, just like any other workplace dispute. It may be beneficial to involve a neutral third party, such as an HR professional, in resolving these disputes.
Bottom Line
If you decide to hire a family member, keep it professional so you can separate your work and family relationships. While there are many reasons to hire the most qualified candidates for a job, sometimes a relative can be a good fit, even temporarily. Ultimately, if you hire a family member, do it right by following the law and treating your relative as you would any other employee. Even though hiring a family member might seem like the best and easiest choice, carefully consider the impact it will have on your business.
