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Employment relationships and small and medium-sized enterprises

Oliver Mallett* & Robert Wapshott

Small and medium-sized enterprises (SMEs) can be deceptively complex organisations

to manage. This complexity can raise a broad range of challenges (Huang and Brown,

1999), central to which are issues relating to owner-managers, employees and the

employment relationship. The International Small Business Journal (ISBJ) has played an

important role in publishing research and debate in this area and this Virtual Special

Issue of ISBJ highlights five key papers that demonstrate the breadth and insight of this

work. This introduction will outline these five papers in context, why they are

important and why they should be (re)read by academics, students and practitioners.

When we discuss ‘employment relationships’ in SMEs, we are talking broadly about the

ways that firms hire, manage, train, reward, handle disputes with and separate from

employees as well as the broader relationship between employers and employees

(Marlow and Patton, 1993; Ram, 1999). Some authors featured in this Virtual Special

Issue write about ‘human resource management’ (HRM) to indicate a formal approach

to managing these issues (e.g. Sheehan, 2013) while others report on contexts where

more informal arrangements are in use (e.g. Nadin and Cassell, 2007; Ram, 1999). The

distinction in terminology can have important implications for how we understand the

practices in SMEs but it is more important to focus on how employment relationships

operate in SMEs rather than the labels used to characterise types of relationship.

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SMEs’ employment relationships are not only dependent upon the specific nature of

the firm but are also influenced by external factors and the turbulent environments in

which they often find themselves (Gill, 1985; Rainnie, 1989; Kinnie et al, 1999; see also

Edwards et al, 2010). For example, SMEs may be dependent upon larger customers that

may make demands on how the SME is managed, indicating particular policies or

practices be put in place. However, these external influences must still be interpreted

and responded to by those inside the organisation and neither owner-managers nor

their employees are passive in this interpretation (Ram, 1994). So, while acknowledging

the potential opportunities and constraints presented by the external environment, it is

the ongoing, everyday negotiation of employment relationships within the firm that is

the focus of this Virtual Special Issue.

In attempting to understand the dynamics of employment relationships it is important

to acknowledge that SMEs are not only different from one another but also differ from

larger firms in several important ways (Torrès and Julien, 2005; Curran, 2006). SMEs are

less likely to have collective bargaining or trade unions (Dundon et al., 1999), they lack

internal labour markets (Westhead and Storey, 1996) and tend to have more

centralised decision-making (Rodwell and Shadur, 1997). Their cultures are shaped, at

least initially, by owners whose goals and desires are communicated directly to

employees in a context of close spatial and social proximity (Marlow and Patton, 1993;

Jennings and Beaver, 1997), which also fosters informal relationships and working

practices that are generally flexible and quick to change and adapt (Nadin and Cassell,

2007; Gilman and Edwards, 2008). Consequently, concepts developed to understand

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employment relationships in large firms may not be applicable in SMEs (Verreynne et

al, 2011), creating a need for research to understand and evaluate SMEs on their own

terms rather than against implicitly large firm norms.

An important early paper on this topic, published in ISBJ and included in this Virtual

Special Issue, is a research note by Marlow and Patton (1993). This paper gives a

valuable overview of the history of research in this area, beginning with the recognition

of SMEs as an important source of economic growth and job creation in the 1970s.

SMEs were, at this time, characterised in policy discussions as harmonious and

paternalistic, suggesting a 'small is beautiful' conception of such businesses

(Schumacher, 1973). However, an alternative ‘bleak house’ perspective began to

highlight power asymmetries in SMEs’ employer-employee relationships (Curran and

Stanworth, 1981) where union representation and other forms of collective bargaining

are minimal and employees are therefore vulnerable to exploitation (Dundon et al.,

1999).

These competing, polar interpretations can be criticised for paying insufficient

attention to the ways in which employment relationships might feature combinations

of competing interests, reflecting a need for more balanced, context-sensitive

understandings of the nuances of employment relationships in SMEs (Ram and

Edwards, 2003). Marlow and Patton's paper emphasises the importance of the often

under-valued contribution of employees in SME success and thus the need for effective

management and employment relationships. In response to these challenges, they

discuss the potential value of HRM within SMEs.

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Subsequently, ISBJ has published a range of interesting research into HRM in SMEs, for

example in entrepreneurially-oriented young firms seeking growth (Messersmith and

Wales, 2013), in e-commerce businesses (Dietz et al., 2006), in transition economies

such as Vietnam (Nguyen and Bryant, 2004) and in terms of the external provision of

human resources and employment support (Jarvis and Rigby, 2012). Among other

insights, these studies have traced the adoption of HRM as firms grow and encounter

new people-management challenges, although this picture is far from straight-forward

(Rodwell and Shadur, 1997).

Verreynne, Parker and Wilson (2011: 2) argue that the ‘scarcity of resources drives

diversified and divergent employment systems’ in smaller firms, especially in their early

stages of development. Their research on Australian SMEs uses a mixed-methods

design and engages both with firms’ CEOs and their employees, focusing on the

practices and employment systems of high- and low-performing small firms. The

practices reported in the better-performing firms resembled the bundles of practices

associated with formal High-Performance Work Systems found elsewhere in the HRM

literature, but with a greater emphasis on employee participation.

Employees in the high-performing firms, citing examples such as flexible working

practices, ‘viable career paths’, high involvement and good communication, were much

more positive in their views of HRM-related practices than those in low-performance

firms, who reported inflexible working conditions, limited career paths, poor

communication and a lack of involvement (see Verreynne et al., 2011: 18). More

generally, employees were said to understand how employment practices could be

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used to improve organisational outcomes. This contrasted with their CEOs who,

removed from the ongoing, everyday practices of their organisations, showed little

sensitivity to the relative effectiveness of the HRM practices in their businesses.

Verreynne et al., therefore emphasise that, while moves towards more formal HRM

practices appear to benefit small firms, this formalisation should be balanced with

retaining scope for employee voice and participation on a day-to-day basis. Even in

SMEs, owner-managers cannot see and understand everything in their businesses and

should be open to the involvement and support of their employees.

In a new paper, Sheehan (2013) demonstrates HRM’s positive enhancement of

sustained competitive advantage over time. The paper builds on the resource-based

view of the firm (Barney, 1991) and associated work to argue that employees represent

an important source of sustainable competitive advantage for SMEs. From this position

it follows that the HRM policies implemented in SMEs should have a positive impact on

a firm’s performance. Taking a novel, longitudinal approach, Sheehan provides

evidence that the adoption of HRM practices increases an SME's performance,

demonstrating a causal link in terms of profitability, innovation and a lower turnover of

labour. The suggestion from Sheehan’s study is clear: investment in particular ‘bundles’

of formal HRM practices will generate returns for the firm.

However, as Sheehan acknowledges, there is scope for informal practices to interfere

with or undermine formal HRM policies and intentions. While many medium-sized

firms may have implemented HRM practices, differentiated work functions and job

roles, many small firms may be too small for formal HRM practices. Replacing informal

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and flexible practices that meet the current needs of a small firm with more rigid HRM

structures can give rise to tensions (Gilman and Edwards, 2008) and disrupt the

employment relationship more generally (Marlow et al., 2010; Mallett and Wapshott,

2012).

Ram’s (1999) paper looks at small professional service firms (sPSFs), in an attempt to

provide a different perspective from the traditionally predominant focus on industrial

sectors, again emphasising the heterogeneity of SMEs. A greater freedom and

autonomy in a flat, open structure was seen in these firms as compensating for

relatively low wages, although the employees did not always view the arrangement in

this way. This approach allowed for a greater degree of flexibility and accommodated

the demands on owner-managers’ time that often took them away from employee

issues to more immediately-pressing business concerns. However, this also caused

problems as the firms sought to grow and introduce more layered structures with staff

no longer reporting directly to the owner-manager but to a line supervisor with a

greater focus on employees’ daily activities.

The degree of autonomy varied for different employees, requiring them to be managed

accordingly. In this context, issues such as training, job roles and performance

assessment were negotiated informally and on an individual basis. For sPSFs to

function effectively, there is a need for co-operation and, as order is negotiated in an

informal, close-proximity environment, this is unlikely to derive from formalised

management strategies. Ram (1994: 186) suggested that ‘despite the informality of the

negotiating process [...] exchanges can, over time, develop logics of their own and may

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lead to a situation where they threaten they (sic) basis of the social order itself.’ These

adhocratic improvisations develop into informal mechanisms, routines and tacit

understandings (see also Brown, et al., 2010) that come to shape the nature of the

company rather than a coherent strategy. It is in this way that owner-managers and

employees come to mutually adjust and accommodate one another in a context of

employer/employee antagonism and cooperation (Ram, 1999; Wapshott and Mallett,

2012).

Mutual adjustment provides a useful approach to understanding the dynamics of how

SMEs’ employment practices are structured, imbued with a sense of power, conformity

and resistance (Dietz et al., 2006; Nadin and Cassell, 2007), revealing far greater

complexity and ambiguity in employment relationships and working practices than

permitted by traditionally polarised accounts of working life in SMEs. This helps to

counteract the emphasis on the influence of either external factors or powerful owner-

managers, to create a more nuanced understanding of the informally negotiated

working relationship of everyday organisational life (Ram, 1999).

Providing important insight into this perspective, Nadin and Cassell (2007) conducted

in-depth interviews with owner-managers of small firms to explore the nature and

influence of the psychological contract in their firms. The psychological contracts, the

unspoken obligations and expectations between employers and employees, found in

SMEs may differ significantly from larger firms owing to the close working

environment, resource constraints and the prevalence of informal management

practices. Nadin and Cassell highlight the important overlaps between potentially

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intensified employment and personal relationships in smaller firms and the influence of

short-term ‘pick n mix’ approaches to HRM practices.

The owner-managers interviewed by Nadin and Cassell felt that the psychological

contract helped to overcome some of the limitations of the formal, written contract,

related to areas such as employee flexibility, loyalty and a willingness to take

responsibility. The small size of the firms and resultant close social and spatial

proximity also led to increased accountability, for example in terms of personal

contribution, and the owner-managers were generally happy to stay small, seeing this

as more efficient. Many owner-managers felt that employing more staff meant more

potential problems. These perceived problems could be related to a lack of effective

management practices in these firms and, importantly, to a lack of engagement with or

management of the psychological contract or employees’ needs and obligations.

Nadin and Cassell also draw out the mutuality of obligations and respect that inform

the processes of formal and informal negotiation and mutual adjustment between

managers and employees. While structural conditions influence and potentially

constrain the employment relationship they are not deterministic and there is scope

for movement within the structural frame, both for owner-managers to seek forms of

control and consent but also for employees to resist these attempts. Workers are not

helpless, ‘passive recipients of management control’ (Ram and Edwards, 2003: 721) but

may draw on various resources to actively ‘bargain’ with their employers. In contrast to

accounts of owner-manager dominance in small firms, some managers in Nadin and

Cassell’s study reported a reluctance to be overly-prescriptive with employees, not

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wanting to limit their autonomy, ultimately, for fear staff would simply leave. This again

helps to highlight the importance of studying employees and employment relationships

in SMEs.

In collating this Virtual Special Issue, and through our introduction, we have sought to

represent the body of work concerning employment relationship in SMEs featured in

ISBJ. Important contributions have been made in terms of recognising the ways in

which SMEs may differ from visions of management derived from larger organisations

and what this means for understanding employment relationships in these smaller

firms. This is not to draw a crude distinction between ‘small’ and ‘large’ firms but

rather simply to recognise that, by degrees, SMEs may be more informal and

adhocratic than larger organisations and to acknowledge that such characteristics have

implications for employment relationships that need to be understood. Despite the

progress made to-date, there remains a need for further research and debate, not least

in relation to the ways in which SMEs cope with formalising aspects of their

employment relationships during business growth and how SMEs can foster

organisational resilience through effective employment relationships.

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The authors:

Dr Oliver Mallett (*corresponding author): Durham University Business School, Ushaw College, Durham, DH7 9RH. oliver.mallett@durham.ac.uk https://www.dur.ac.uk/business/faculty/staff/profile/?id=8643

Oliver is a Lecturer in Management at Durham University Business School. His research focuses on follower-centric approaches to leadership, considered as a socially constructed process, and how these relate to personal and social identity within organisations. He is also involved in ongoing research exploring informality and employment relationships in small firms.

Dr Robert Wapshott: University of Sheffield, Management School; Centre for Regional Economic and Enterprise Development. r.wapshott@sheffield.ac.uk http://www.shef.ac.uk/management/staff/wapshott

Robert is a Lecturer in Entrepreneurship at the University of Sheffield and he is also a board member of the Institute for Small Business and Entrepreneurship. Robert’s two main areas of research relate to employment relationships in small firms and exploring entrepreneurship and social exclusion.