Family Business & Divorce: Understanding the employment considerations

When a marriage at the heart of a family-owned business breaks down, the consequences can be far reaching, especially when one or both spouses have been working for the firm. Simon Gorham, Boodle Hatfield partner in the employment team discusses how the long term impact on individuals and business can be minimised.

Recent figures indicate that, sadly, we can expect some 100,000 marriages to end in divorce every year in the UK.

The breakdown of a marriage is among the most painful and stressful events most of us are ever likely to deal with – a considerable strain on the couple involved and on children and extended family or friends who all feel the impact.

For a family who owns a business, the emotional fallout is compounded by a whole host of other complications linked to how the relationship breakdown will affect the future of the business, and by association other family members who are involved or who hold shares.

A Legacy Intact: safeguarding your family business in the event of divorce, a new publication from Boodle Hatfield examines the risks for family businesses when relationships break down and looks at the sensible protections they can consider when doing their long-term planning.

One aspect of planning that family businesses often overlook is how they will handle the repercussions of divorce when a spouse has been working for the business.

It is, of course, a common scenario. It is natural that in many family businesses, shareholders’ spouses play some role, and this means that there are questions that must be addressed if the relationship breaks down. For example, has the spouse been fairly remunerated for the time and energy they have invested in the business over the years? What should happen to their role going forward? Can they replace their level of earnings in alternative employment based on their skillset and qualifications?

What rights to do employee spouses of shareholders have?

If a spouse has been employed for at least two years, should their employment then end when their marriage does, they will have the right to bring a claim for unfair dismissal.

Additionally, an employee spouse will have other ‘day one’ rights (i.e. rights that are not subject to a two years’ service requirement), which include, for example, the right to protection from discrimination and the right not be to treated detrimentally or to be dismissed for blowing the whistle.

These risks can be mitigated only if there is a fair reason for dismissal and a fair process has been followed.

What’s the best approach when a spouse joins the family firm?

While the most straightforward solution might be that a spouse should never become involved in a family business, at all, the reality is that in many families this is just not practical or realistic! Accepting then, that in many family businesses, the involvement of a shareholder’s spouse is a natural progression, how should this be handled to best protect the interests of all those involved?

First, spouses should generally not become shareholders of the company and should not, therefore,be remunerated by way of dividends.

A better approach, and one which provides some protection to the family business, is to make sure that the individual is formally employed, with a paid salary directly commensurate with their work.

The business might also want to think carefully about paying bonuses for any particularly successful contributions made, so that the spouse can be sure they have been fairly recompensed at the time.

Bringing employment to an end

Bringing an employment relationship to an end is not straightforward, especially in this context where there are wider family law issues at play. It requires careful planning and preparation, and very sensitive handling.

If the decision is taken to end employment, then ideally this would be packaged alongside an overall financial settlement rather than looked at on a standalone basis. The inter-play between the Family Court’s approach to finances on divorce and employment law rights is not straightforward. The aim of the Family Court is to sever as many financial ties as possible on divorce. In an ideal world, this includes ending a spouse’s continuing involvement as an employee in a family run company, if at all possible. However, this throws up all sorts of issues from an employment law perspective. The departing spouse may also be able to assert that their earning potential in alternative employment would not match what might be a generous pay structure through the family business which could lead to heightened claims for maintenance. Equally, the departing spouse may not be willing simply to walk away from their job. The last thing that a family business wants is litigation on both fronts – both in the Family Courts and in front of the Employment Tribunal.

The business may need to consider using an external HR professional to conduct any employment process. This allows all those involved to feel it has been managed fairly and impartially, and reduces the risks of conflict of interest. It can also help if the couple consider dispute resolution, including mediation, as part of their preparation and planning.

Though the process will never be easy, with a sensitive approach, it is possible to try to minimise the personal impact, contain costs, and limit disruption to the business.