As family offices become more institutionalized, considerations around human capital—employees, independent contractors/consultants, and board members and advisory board members—become more relevant. Failing to address these and similar considerations could result in employee relations and retention issues, harm to corporate assets, and potential legal liability.
Below we lay out some of the employment, compensation, and human resources considerations that family offices should pay particular attention to.
RECRUITING
Bad hires can quickly turn into poor-performing employees and potential legal liabilities for employers. Family offices should take the time to carefully vet candidates, including through multiple interviews, background and reference checks, and drug screening.
Family offices should determine if the potential employee has any restrictions (for example, restrictive covenants) that would prevent or limit their ability to work for a new employer and that the employee will not use on the family office’s behalf any confidential or proprietary information of any former employee or other third party. These representations should be confirmed in writing in the candidate’s offer letter or employment agreement.
EMPLOYEE BENEFITS
Setting up employee benefits for senior management and family office employees requires planning, outside input, and vendor support. Standard benefits usually cover health (e.g., medical, dental, vision), retirement, and paid time off, while other forms of benefits may include allowances for an automobile or other transportation, life insurance, disability insurance, moving, and executive travel.
NONCOMPETES AND RESTRICTIVE COVENANTS
Family offices should consider implementing restrictive covenants to protect their assets. The noncompete ban proposed by the US Federal Trade Commission has been enjoined. Accordingly, family offices should look to state law to govern the enforceability of post-termination restrictive covenants, including noncompetes and nonsolicitation agreements.
Careful drafting is critical. Generally, if a restrictive covenant goes beyond protecting the legitimate business interests of the family office employer (such as customer goodwill and trade secrets) or if the choice of law or venue included in the restrictive covenant agreement implicates a state that has no connection to the employer or employee, it may not be enforceable.
ALTERNATIVES TO TRADITIONAL NONCOMPETES
In the event that traditional noncompetes are legally impermissible or not practicable under the circumstances, family offices may wish to consider alternative arrangements such as incentives (e.g., bonus compensation) or disincentives (e.g., clawbacks) to prevent unfair competition. Given continually changing state laws and enforcement concerns, counsel should be consulted in establishing alternative arrangements.
In addition, family offices should focus on those covenants that are reasonable and enforceable under the applicable state laws, including the following:
- Trade secrets/confidentiality
- Intellectual property assignment
- Nonsolicits of customer/employee (where permissible)
- Nondisparagement
EQUITY AND EQUITY-BASED COMPENSATION
Whether it be co-investment or equity participation opportunities, upfront planning and careful consideration of long-term effects are particularly important for family offices. Equity and phantom equity programs have various attributes—and pitfalls—that are generally handled at the design phase, including the ability to vest, eligible investments and thresholds above which participants may share, and timing and type of distributions.
Furthermore, termination treatment should be considered. Family offices would be wise to consult internal and external tax professionals regarding equity and equity-based concerns, including under Sections 409A and 457A of the tax code.
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