Question:

My wife and I would like to open a small business and employ our 15-year-old son and 20-year old daughter, as well as some nieces and nephews. Do we have to be concerned about the laws that apply to employees, or are their exemptions for family members?

Answer:

It is often assumed that laws, including wage and hour laws, which apply to employees do not apply to family members working for the business. In fact, some laws apply regardless of the family relationship, and the application of others depends on several factors including the relationship of the individuals to the family, and whether the business is a sole proprietorship, a partnership, a corporation, or a limited liability company.
The California wage orders set forth the rules on wages and other working conditions that apply to industries and professions. These rules include the requirements to pay the minimum wage, overtime, and to provide employees with the opportunity to take meal and rest periods, just to name a few. The wage orders specify that their provisions do not apply to any individual who is the parent, spouse, child, or legally adopted child of the employer. As such, an individual employing his son or mother is not required to, for example, pay them the minimum wage or overtime. However, if the employer has a niece, uncle, or foster child working for it, it is required to comply with all of the wage order provisions unless there is another basis for an exemption as to some or all of the wage order provisions.
Many businesses become corporations or limited liability companies to protect their personal assets and for other business reasons. Under the law, corporations and limited liability companies are not considered to have children, parents, spouses, or adopted children. Therefore, businesses in that form would have to comply with the wage and hour law requirements for all employees, including those family members. In order to maintain the exemption of those family members from the wage orders, the business must be a sole proprietor or partnership.
If a couple employs their minor children who are under the age of 18, regardless of the form of the family business or the relationship of the employees to the owners, the minors must have work permits. For example, if a store owner with a sole proprietorship would like her 15-year-old daughter to work at her business during the summer, a work permit is required for her daughter. These permits are usually issued by an authorized individual at the minor’s school.
Another area to be wary of when employing family members is the employer’s obligations concerning workers’ compensation insurance. The California Labor Code requires every California employer using employee labor, including family members, to purchase workers’ compensation insurance. There are exceptions for partnerships if the only persons performing labor are the partners. For example, if a father, mother, and son are partners in the partnership, and they are the only ones doing work, the partnership may be exempt from the workers’ compensation insurance provisions.
Businesses employing family members must ensure that they know which laws apply to them in order to minimize the risk of claims for unpaid wages and penalties.