My Co-Owner Keeps Hiring Family Members: Conflict-of-Interest Rules in Florida Companies

If your co-owner keeps hiring family members, you are probably asking two questions: is it allowed, and can you stop it? In Florida, the hire is not automatically illegal. What matters is whether the owner disclosed it, whether the company gets a fair deal, and who had the authority to approve it.

Is It Illegal for My Co-Owner to Hire Family Members?

Not by itself. Florida’s LLC and corporate statutes do not prohibit an owner from hiring relatives outright. But owners who manage a company owe it a duty of loyalty, and when a relative’s paycheck is material, it can count as the owner’s own financial interest. Then the hire has to pass a fairness test.

In a Florida LLC, each manager of a manager-managed company and each member of a member-managed company owes duties of loyalty and care to the company and its members. A member who does not manage a manager-managed LLC owes no duty under that section.

Acting in your own interest is not a violation by itself. Dealing with the company on behalf of someone whose interest is adverse to the company is, unless the deal meets the conflict-of-interest requirements below.

Has a co-owner added a relative to the payroll without telling you? Talk with a Jimerson Birr business litigation attorney before another hire goes through.

How Do Florida’s Conflict-of-Interest Rules Treat a Relative’s Paycheck?

Florida’s statutes say a family member includes a spouse, child, stepchild, parent, stepparent, grandparent, sibling, step sibling, or half sibling of the member, manager, or director, or of that person’s spouse. A family member’s material financial interest in a deal counts as the owner’s own indirect interest. “Material” means the interest would reasonably be expected to impair the owner’s objectivity.

The LLC statute, section 605.04092, sets three paths:

• The deal is fair. Fair means the transaction as a whole benefits the company and its members and is comparable to what an arm’s-length deal would have been. A deal that is fair when approved is not grounds for damages or equitable relief.
• The deal was disclosed and approved by disinterested owners. If the material facts and the owner’s interest were disclosed or known, and a majority of the disinterested managers (or a majority-in-interest of the disinterested members, in a member-managed LLC) approved it, the person challenging the deal must prove it was unfair. A single manager or member cannot approve it alone.
• Neither happened. The owner defending the deal must prove it was fair.

A vote by disinterested owners shifts the burden of proof. It does not make an unfair deal fair.

Corporations work much the same way for directors under section 607.0832. One difference: shares owned or controlled by the interested director do not count as disinterested shares. That section speaks to directors, so an owner who is only an officer or shareholder is analyzed under other rules. Pinning down the owner’s exact role is one of the first tasks.

In a two-owner company, you may be the only disinterested vote. If nobody disclosed the hire or asked for your approval, the hiring owner may carry the burden of proving fairness, assuming the hire counts as a conflict-of-interest transaction at all. Whether it does depends on the facts, including the size of the pay and the job. Jimerson Birr’s conflict of interest transactions and self-dealing pages explain how these disputes arise.

What Makes a Family Hire Unfair to the Company?

A family hire is unfair when the company does not get what it pays for. The test asks whether the arrangement benefits the company and compares to what the company could have obtained from an outsider.

Warning signs include:

• Pay well above what the company would offer someone else in the role.
• A job with little visible work, or a title created for the relative.
• Raises, bonuses, or titles that skip the approval process in the operating agreement or bylaws.
• Vehicles, phones, insurance, or other perks charged to the company.
• A pattern of several relatives added over time while you were kept out of the books.

One hire at market pay for real work is a different situation from a pattern of above-market pay. Patterns like this often overlap with signs a co-owner is mismanaging the company and with executive compensation issues. Family-run companies raise their own questions, covered on the firm’s closely held and family-owned business disputes page.

What Can I Do When My Co-Owner Keeps Hiring Family Members?

Start with documents, not confrontation. Four steps come first:

1. Read your operating agreement or bylaws. Many set who can hire, who sets pay, and whether related-party deals need approval. An agreement can change some of these default rules within limits, so read it before relying on the statute. See how Florida courts interpret an ambiguous LLC operating agreement.
2. Request the records. Under section 605.0410, a member can inspect the records every LLC must keep, including tax returns and financial statements for the three most recent years. Broader information, such as pay records for a specific person, is available on a demand that, in a manager-managed LLC, must be in writing and state a purpose reasonably related to your interest as a member. The company must respond in writing within 10 days. Learn more about access to books and records.
3. Object in writing. A clear email creates a record. Avoid self-help, such as cutting off a relative’s access, because it can create problems of its own.
4. Know your claim. Harm to the company is usually pursued as a derivative claim. In an LLC, that generally starts with a demand on the company, with an excuse when a demand would be futile. Read who gets the money if you win a derivative claim in Florida, and see Charles Jimerson’s profile, which includes a shareholder derivative action alleging breach of fiduciary duty.

Watch the clock. Florida generally gives four years for an action that no other limitations provision covers, which is where many fiduciary duty claims land. Which period applies depends on how the claim is labeled.

If trust is gone, the larger question may be an exit. See business divorce vs. dissolution, how to remove a business partner or member, and the firm’s business divorce page. The firm’s LLC member rights and business litigation pages cover related disputes.

What Facts Decide Whether the Hire Is a Problem?

Five facts change the answer more than anything else:

• Your entity and the hiring owner’s role. Member-managed or manager-managed LLC, or a corporation, and whether the owner is a manager, director, officer, or only an owner.
• What your documents say. The operating agreement or bylaws on hiring, pay, and related-party deals.
• What you knew and did. Whether you were told, whether anyone voted, and whether you signed, approved, or stayed silent after learning.
• Ownership and control. Ownership percentages and who controls the books, payroll, and bank accounts.
• The numbers. What each relative is paid and what the company would pay an outsider for the same job.

These facts decide the outcome, and an attorney needs to review them before you act.

Not sure whether the hire is fair to the company? Request a free consultation with Jimerson Birr so an attorney can review your documents.

How Can Jimerson Birr Help With a Co-Owner Who Keeps Hiring Family Members?

If your co-owner keeps hiring family members, Jimerson Birr’s business litigation attorneys can review the operating agreement, payroll records, and approval history, and advise you on conflict of interest transactions under Florida law. Call (904) 389-0050 or request a free consultation. The general four-year limit discussed above can start before you learn of a hire, so an early review of your documents matters.