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Legal Clinic

The Implications of Hiring Family

There are legal implications to many human resources policies and decisions. This month we examine those implications in the context of policies favoring hiring of family members, and requirements with regard to the method of retaining personnel records.

Monday, April 23, 2007
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Question: Are there any laws or regulations relating to hiring family members of employees? Is this a process to be encouraged or discouraged? Also, can an HR person -- whose company allows family members to be hired -- discourage an employee from asking a family member to apply for a job?

Answer: Some state and federal laws prohibit public employees from promoting or hiring family members when the public official exercises control or jurisdiction over the individual. In the private sector, the hiring of family members generally is not legally proscribed. 

However, there are some anti-nepotism laws applicable to employers in regulated industries. For example, Section 397 of the New York Banking Law declares an individual to be ineligible to become a director of a savings and loan association if any of that association's directors or one of the five highest paid officers is a family member.

Notwithstanding the absence of express statutory restrictions, there may be legal and policy concerns arising from the practice of favoring hiring of family members. On the legal side, to the extent such practices have the effect of adversely impacting a protected group, they may amount to unlawful discrimination.

For example, the courts have held nepotistic hiring unlawful where the favored hires overwhelmingly belonged to the same demographic group (such that applicants outside that group were perpetually excluded from employment), or where nepotism served to further a historic racial segregation of employees into different job categories. 

Companies that do not publish job openings to the general public but rely solely on word-of-mouth or nepotistic channels to fill vacancies are also susceptible to charges of discriminatory hiring practices for the same reasons.

These same legal considerations also arise where an employer endorses the hiring of family members, but one or more employees are discouraged from referring a family member for a job. The employer should be prepared to show that the employee was discouraged from recommending family members for legitimate business reasons and not because the employee is a member of a protected class or engaged in protected activity.

As a practical matter, hiring of relatives may also be problematic to the extent family members are in a direct reporting relationship. Employers may want to take precautions to avoid actual or perceived favoritism toward certain employees based on their familial relationship.

Question: Our company is seeking to have as much human resources information and forms stored electronically as possible. Is there a law requiring any particular HR form or information be saved as a hard copy?

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Answer: Generally, a company is free to maintain its records in any manner it chooses as long as those records can be retrieved in a reasonable and legible manner when requested. 

For example, the U.S. Department of Labor's regulations only require that every employer who is subject to any of the provisions of the Fair Labor Standards Act maintain records in some form containing the prescribed items of information and data. For electronic records, this means that the company could simply download files to a mainframe. 

One noteworthy exception is pursuant to an IRS regulation. 

Under Revenue Procedure ยง98-25, which applies to all taxpayers with "assets of $10 million or more," taxpayers may retain records in a machine-sensible format but must do so in a manner capable of being printed in hard copy. 

Thus, employers may be required to supplement electronic records with hard copy records if the electronic records do not contain all of the necessary data to identify the transaction. 

Employers are also advised to confirm with local counsel whether any state or local laws require the retention of hard copies of particular employment-related records.

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