A family employment policy is a formal document that governs the hiring practices of family members in a family-owned business. It is a good idea to have these formal procedures in place to govern how family members may enter and exit a business, and yet it seems that virtually none of them do.
In a Kreischer Miller survey conducted in November 2013, we asked whether family businesses had a formal family employment policy. None of them said they had a fully formalized policy. Nine percent said they had some policies in place, and a staggering 91 percent said they had no formal policies or procedures in place.
So why even take the time and effort to draft an employment policy? The biggest issue is with the evolution of the family and each passing generation. As the family grows, so do the natural complexities as the dynamics of running a family become intertwined with running a successful business. The employment policy provides specific guidance on how the company will handle the entry of family members into the business and also what to do if a family member who is currently employed is not working out.
Unfortunately, most employment policies that are created arise as a reaction to a sensitive situation, rather than being part of sound proactive governance. To help you get started, here are five key sections that a successful employment policy should cover.
1. Purpose and Philosophy – This section simply lays out what the policy will and will not cover. It also provides insight to family members as to why the policy is being written and sets the overall tone. It is important to clearly define who is considered family. This can mean lineal descendants, in-laws, or even close friends.
2. General Conditions of Employment – This portion defines who is considered family and how a family member goes about applying for a position. It also addresses any minimum requirements a family member must have in order to apply. A key decision to address is whether the family wishes to include outside work experience requirements. Best practices suggest that outside work experience of two to five years is ideal for businesses to consider. This time frame has been shown to allow enough time for an individual to develop some working experience and gain outside perspective. Studies have also shown that getting outside work experience helps to increase one’s level of self-confidence and self-worth.
Another key decision to address is the application process. Will family members go through the normal channels of applying for a job or will they be expected to submit requests to existing family leaders in the business, such as the President or CEO?
3. Employment Conditions and Performance – This area dictates the general expectations of employment, including compensation and the evaluation process.
4. Disciplinary and Termination Process – This part addresses the process for how disciplinary action or termination would occur for a family member. Identify who is involved in the decision and the steps for how the process will be carried out. It is not uncommon to require a vote from the family member shareholders prior to terminating a family member employee.
5. Education Process – The educational section is often overlooked and underappreciated. It is important, though, as it explains the family’s means of communicating about the business and its philosophy on developing the firm’s future family leaders.
Creating an effective family employment policy is a crucial element in developing sound family business governance, and is best addressed well before it is actually needed.