Family businesses need long-term employment strategies

Family businesses often start out informally, in an environment of trust and cooperation, where planning for future conflict might go against the grain. Founders and successors may be reluctant to see their siblings, children or extended family as employees, and to formalize and supervise their roles within the business.

However, failure to manage expectations from the outset of the working relationship can lead to costly disputes. Disagreements about job performance or operation of the business are no longer simple family matters. Those conflicts have lasting impacts, not only on the relationships of those involved, but also on personal finances, careers and professional reputations. Given what is at stake, family business owners should plan and operate with employment law issues in mind, just like any other business venture.

The Scamurra decision

A recent wrongful dismissal decision in Ontario, Scamurra v Scamurra Contracting, 2022 ONSC 4222, shows how the gaps in employment planning can emerge when a dispute erupts in a family business. 

The plaintiff was one of several siblings who inherited interests in various family businesses from their father. He worked for those businesses for 26 years without a written agreement formalizing his role. The siblings had a falling out after the plaintiff accused two brothers of diverting assets and funds to themselves at the expense of the wider family. Through their control of business operations, those same two brothers terminated the plaintiff’s employment and he sued the family businesses for wrongful dismissal damages.

How the family businesses were operated undermined the family business’ defences and increased their liabilities. The court rejected their arguments that: 

• The plaintiff was a contractor. He worked exclusively for the family businesses under the direction of his brothers. He was an employee.
• There was just cause to terminate. The termination arose from a family dispute, not a workplace matter. Even if the plaintiff had performance issues, they were not addressed with progressive discipline as required before a just cause termination.
• The plaintiff was employed by a bankrupt arm of the company that could not pay damages. The family businesses were operated together in a mutually supportive way as a “common employer” and all were liable for damages.

Further, since the plaintiff did not have an employment agreement, there was no contractual limitation on his termination entitlements as an employee. The court concluded he was terminated without cause and entitled to 22 months’ notice of termination (less 6.5 months previously provided), for a total of $119,860 in damages. The family businesses were jointly and severally liable for those damages.

Takeaways

Regardless of the kinship of those involved, family business owners should take the time to plan their operations through an employment law lens. 

Among other things, this means:

• Establishing worker status. Before work starts, determine whether family members will work as employees or independent contractors. Incorrectly classifying a worker as an independent contractor can lead to liabilities associated with employment, such as unpaid source deductions; claims for overtime, vacation pay, holiday pay and other statutory wage amounts; and significant termination entitlements.
• Identifying the employer. Allowing family members to work for several businesses interchangeably raises the prospect that they are treated as a single “common employer.” If there is to be only one employer, operate as such.
• Adopting written agreements. Negotiate and set down the rights and responsibilities of family members as workers, whether they are employees or contractors. Ensure everyone agrees on compensation and what will happen when the working relationship ends.
• Managing performance. Do not allow disputes to fester or play out as family arguments. Performance issues should be properly managed with workplace discipline, expectations for improvement, and follow-up on those expectations.
• Complying with workplace laws. A family business must comply with workplace laws related to employment standards, occupational health and safety, human rights and workers’ compensation. Certain rules and exceptions may apply to the business or a particular employee of the company, depending on the type of work or nature of the role in issue, but the applicability of any such exceptions should be carefully evaluated at the outset, ideally with the assistance of legal counsel.

These are just a few of the many employment law issues that business owners should consider as they involve their families in their business ventures. Although it may be tempting to adopt an informal working arrangement, it is important to remember that family businesses are ultimately subject to the same employment law considerations as any other business. Planning ahead and taking proactive steps to formalize working relationships can minimize the risk of costly disputes down the road.