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Employment Contracts For All

6th June 2013 Sarah-Jane Walsh, Farrer & Co

Prevent hassles arising down the line and ensure all family members have employment contracts in place

It is fairly common for family members who work in family businesses not to have contracts of employment, and understandably so.  However, whilst it may seem like an unnecessarily formal process to go through, particularly at the outset, when a family business is being established, it is hugely important for family members to have clear and concise employment contracts, for the reasons explored below. 
 
Compliance with the law
As a family business owner employer, you are required to provide employees whose employment is to continue for more than one month with a written statement containing certain particulars of their employment.  
 
These particulars include, but are not limited to: the identity of the employer and the employee, the start date of the employee’s employment and continuous service, their place of work, salary, hours of work, holiday entitlement, provisions relating to sickness absence, reference to disciplinary and grievance procedures, and pensions entitlement).  This must be given to the employee within two months of their employment starting. These particulars can be incorporated into an employment contract, so that a separate statement need not be given.
 
Equality of treatment with non-family member employees
It is likely that non-family members employed by the business will be given employment contracts.  In order to ensure equality of treatment between all employees, and to prevent resentment and presumptions of nepotism by non-family member employees, employment contracts should be issued to all family and non-family member employees alike.
 
Defining responsibilities and setting expectations
The employment contract is a useful means by which to set the parameters for the family member’s role within the business.  The employee’s job title and a brief job description are required to be provided in the written statement of particulars (or employment contract) but it is also helpful to define the family member’s duties, as well as stating who they will report to and/or who they will manage.  This ensures that the family member understands the business’ expectations of their role and helps to avoid disputes with other family members or employees.
 
Being prepared for the future
When employing a family member in the family business, terminating the contract is the last thing on your mind.  However, in the event that the family member decides to leave the family business to pursue other interests, or, in the unlikely event of a dispute with that family member, it is vital that you have the appropriate mechanisms in place to deal with such circumstances.  This will include having an appropriate notice period in the contract (which is one of the required particulars), based on the family member’s role and seniority within the business.  Consideration should also be given as to whether an option to pay in lieu of notice, and whether the ability to put the employee on garden leave for their notice period, is desirable.
 
Employment tied with ownership of the business
If the family member’s employment is to be tied to their ownership or part-ownership of the business, this needs to be worded appropriately in the contract of employment and the termination provisions will need to be linked with those in the Shareholder’s Agreement.
 
Protecting the business
Although unthinkable, disputes between family member employees are a real possibility, due to the closeness of the relationships and the added emotions involved.  If things do turn sour with a family member, they may well leave to join a competitor, or set up on their own or with others in competition with the family business.  
 
In such circumstances, you will want to prevent them from taking and misusing the business’ confidential information; from competing with the business; from soliciting the customers you have worked hard to obtain; from poaching your other employees; and, in certain businesses, protecting the intellectual property of the business.  This can be achieved through the insertion of confidentiality provisions, intellectual property clauses and restrictive covenants in the contract of employment.  It is vital that such provisions are drafted carefully and appropriately to ensure they are enforceable after termination of the contract.
 
Without clear and concise terms set out within a well drafted employment contract, there is plenty of scope for uncertainty and misunderstanding, which can easily lead to disputes amongst family member employees.  The old adage, 'prevention is better than cure' rings true here – issuing a clear and concise employment contract at the outset of a family member’s employment in the family business is likely to prevent such uncertainty and disputes arising, but in the event that they do, you will be in a far better position to deal with the situation.
 

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