Common Sense Family Employment Contract

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Have you ever fired a relative?  I mean really “fired” them.  No coming back!  What happened to the relationship?  Not very pleasant!  What could we have done to prevent such a situation in the first place?  Have you ever wondered why you might need an employment contract with a relative?  To refresh your memory, an employment contract is a document that provides important information such as job and role definition for the family member and defines expectations and security for the company, and can do nothing but improve communications and all-around performance.

Regarding the Relative:

The contract provides peace of mind.  If the employee has to leave a rewarding, well-paying job, a one- or two-year employment contract would recognize his or her need for some security.  When older family members begin phasing out of the business, knowing they will have real responsibility and will be financially secure in their semi-retirement years is reassuring.

It helps to clarify management opportunities.  Females are usually concerned that if they stay without clarifying management opportunities, the company—traditionally managed by the male relatives—will continue to deny them opportunities for growth.

It provides an incentive to be productive.  The contract, by its very existence, says the family business doesn’t have to hire people just because they’re related, that the family member employee is special and that the terms of this agreement are custom-crafted to reflect that.

It offers definition.  For example, one key family manager has an employment contract that guarantees a salary, stock incentives, a car and managing control of the company.

Regarding the Company:

It minimizes the potential for conflict.  This is especially true when more than one family member is involved in the business or when business ownership lies with two or more families or the family and some investors.

It’s a sign to non-family employees that family members are expected to perform.  If a family member doesn’t live up to the terms of the contract, it’s easier to discipline or terminate the person.

It protects the business.  When family businesses have confidential information, such as secret manufacturing processes, recipes or brewing concepts that have been handed down for generations, they usually add a noncompete provision to the contract. If limited in the time period and geographical areas it spans and in the industries it covers, the provisions will generally be enforceable in court.

Any negotiation can create resentment if not presented in the proper fashion.  The contract is intended to protect everyone’s interests.  I encourage the parties to talk about what each wants and what concerns them, and to think through what they want to accomplish in the business.

Put in writing the provisions most important to them.  Even if the provisions are revised during the negotiation, at least the parties have had an opportunity to explain what they’re after and be acknowledged and understood.

 

While it is wise to include a renegotiation clause in the employment contract, the renegotiation itself may never need to take place.  At some point, if the family member is productive and motivated and wins the respect and admiration of senior management, the formal employment contract might be put in a drawer and never see the light of day again.

Until that point, however, written contracts can head off or minimize the dissension and bickering that have wrecked many a family business, their owners and relatives.

This article appeared in Mike Henning’s Family Firm Advisor newsletter.  To purchase a subscription to our newsletter, click here.        Article #212

If you want to know more about leadership and management development assessment tools from the personal side, email us at hfbc@mikehenning.com for more information.

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Mike Henning, is the founder of the Henning Family Business Center established in 1985, a management and consulting firm specializing in business growth, change and future leadership headquartered in Effingham, Illinois.

He is the author of the Family Firm Advisor newsletter, now in its nineteenth year of publication. For more information about receiving one free copy of our newsletter or about our consulting services, please write to Henning Family Business Center, 1006 N. Pembroke Ct., Effingham, IL 62401; call -- 217-342-3728; fax -- 217-342-3728; e-mail -- hfbc@mikehenning.com. Visit us at our web site -- www.mikehenning.com

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