Business Law

Working with Your Family FAQs


Q: Do family and non-family workers need to be paid the same?


  • A:This is a sticky topic and many factors are involved. Most businesses are covered by the Fair Labor Standards Act (FLSA) and the Equal Pay Act (EPA). Under these laws, you have to pay a male and a female worker the same wage if they do the same work. There are exceptions, though, such as when there's a seniority system.

Also, depending on how many employees there are, Title VII of the Civil Rights Act makes it illegal to pay workers differently based on their sex or race, among other things. And most states have anti-discrimination laws that may apply even if these federal statutes don't.

Keep in mind that non-family workers are just as important to the business as family-members, and unequal pay may foster resentment. That leads to low morale and productivity.

The best advice: Be fair when paying wages, and keep track of the reasons why a family member is paid more than a non-family member, such as experience or education background. Make sure your non-family workers know how the payment system works and how much you appreciate their work.

Owners and workers alike should talk to a business law attorney if there's any question about the fairness in the company's pay system.


Q: How do I handle non-working family members?


  • A:Family members who don't work in the family business may cause problems when the business owner retires or dies, especially when other family members work for the business. For example, when one child works for the business and one doesn't.

One way to ensure all family members are treated fairly is for the owner to have enough life insurance coverage so non-working family members are treated fairly when the owner dies, with the business and its assets going to the working family members.

Another tool is to have a business succession plan in place to make sure the business continues after the owner retires or dies without interference from non-working family members.

A business law attorney can help you with any of these issues.


Q: How much and how should family members be paid?


  • A:

As for how much, the best plan is to pay according to their abilities and contributions. Should one child who works hard all day every day be paid the same as his brother who shows up for a few hours a few days each week? No, as a matter of sound business practices. And, the actual amount should be based on what others are paid for doing the same or similar work in other companies. You can get this information from agencies like the Bureau of Labor Statistics and similar state agencies.

As for how, family members should be paid like any other employee. For tax purposes, it's best to pay your employees through a payroll system that withholds the appropriate employment taxes. You should avoid writing checks on the company's checking account or paying cash.


Q: How should private contracts and agreements between family members be handled?


  • A:It's always a good idea to put things in writing. In fact, depending on the statute of frauds in your state, some contracts need to be in writing to be enforceable. A contract that can't be performed within one year is a good example.

For instance, say your father owns a business, he wants to retire, and your older brother already helps with the business. He promises that in two years, after you've graduated from college, you and your brother will run the business together as equal partners. If that contract isn't in writing and signed by your father, you'll likely face an uphill legal battle if your brother doesn't make you an equal partner in the business or excludes you all together.


Q: Should I set up a profit sharing plan?


  • A:
    Profit sharing plans have pros and cons. For example, they're a good tool to attract and keep good workers and they tend to increase morale and productivity. After all, the more profit the company makes through its employees' hard work means the employees get more money in the end. Also, you can replace standard or merit raises with a profit sharing plan, which comes in handy when business - and cash flow - is slow.

On the downside, if the company doesn't turn a profit, the plan maybe worthless to you and your employees. Also, there are payroll and other administrative costs connected to running the plan, including keeping records and filing paperwork with the IRS.

You should talk to your attorney or financial advisor when deciding whether or not to start a profit sharing plan.


Q: What about sibling rivalry?


  • A:It may be nearly impossible to stop or prevent sibling rivalry; it's just a fact of family life. There are things you can do, though, such as:
  • Detail, in writing, each sibling's duties and responsibilities
  • Involve an outside firm or consultant in major business decisions, like expanding the business
  • Hire a non-family member to manage the business while keeping the siblings involved in the operation

In the end, however, it's up to the siblings to resolve their differences and keep the company's best interests in mind.


Q: What if all family workers want to take off at the same time?


  • A:There should be some sort of an agreement about when and how long family members can take off work for vacations, especially when the family members are involved with managing and running everyday affairs. Normally you all can reach a friendly agreement.

If not and no one's willing to budge, you may have only choices:

  • Put someone else in charge and keep the business doors open
  • Close down and let everyone take a vacation

Either option comes with risks. If you're putting someone else in charge, make sure she's capable of doing the job. You don't want to come back to find you've lost customers.

If you're temporarily closing-up shop, make sure you satisfy any contracts or other obligations that are due during the vacation time. For example, if you have a contract to deliver goods or services on a date the shop is closed,fill the contract before you leave or ask the customer for an extension. Otherwise, you may be facing a breach of contract lawsuit when you get back.

Avoid this problem in the future by coming to an agreement before vacation plans are made.


Q: What if family members disagree on how to spend profits?


  • A:Family members, especially equal partners or "50/50" owners, may have different goals. One may want to take a modest salary and reinvest the bulk of the profits in the business, such as by upgrading equipment or expanding the business by buying another business. The other family member may want to take his half of the profits and buy a home or pay for a child's college tuition.

The company's business plan, corporate bylaws, or partnership agreement should discuss how to handle these situations. If not, the best thing to do is to talk to a neutral third party, like a consultant or mediator, to see if an agreement can be reached that makes good financial and business sense.

As an alternative, the family members should talk to an attorney about creating a new agreement about the ownership interests in the business. This way, the member who reinvests his share of the profits in the business reaps more of the benefits (or takes on more of the losses) that may flow from the reinvestment.


Q: What if I want to fire a family member?


  • A:This depends on several factors. First, as a general rule, if the other family member is an employee (rather than a partner or co-owner), and unless there's an employment contract involved, you can fire him at any time and for any reason (so long as it's not a discriminatory reason, such as her gender or pregnancy.) This is called at-will employment.

Also, how the business is structured may make a difference. For example, if you and your brother are in a partnership, you can't "fire" him. Generally, the partnership needs to be dissolved, and then you may or may not be able to continue the business on your own. That depends on the partnership agreement.

A good rule to follow is to include in your business plan, corporate bylaws, partnership agreement, or some other document, a discussion of how and when a family member may be fired and whether the other family members may continue the business after his termination.


Q: Who typically owns and runs a family business?


  • A:It's not a silly question! True, most "family" businesses are owned by a single person or two or more members of the same family, and they're also run or managed by members of the family. However, it's possible for a family business to be owned by family members and non-family members together. Likewise, non-family members may manage the business with some help from family members.

Regardless of the actual make-up, your business plan, corporate bylaws, partnership agreement, or other documents connected to the creation of the company should explain the duties and responsibilities of the owner(s) and management team.

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