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I think there are a few states that may lump it into their general anti-discrimination statutes, but almost all federal and state laws covering nepotism are limited to banning the practice in government work. In virtually all of the country, it's perfectly legal to preferentially hire relatives in private companies...whether they have five employees or five thousand. Federal laws have been used to successfully combat nepotism in the past, but only in instances where it was so widespread that it was infringing on other federal laws, or where it was contributing to discrimination against women or minorities.
Nearly all large companies have policies that ban it, but those are in place within the companies themselves. The because the companies set their own rules, they are free to set them aside or ignore them at will.
It IS a terrible practice. A good friend of my wifes was the head accountant at a big industrial plumbing company (they do sewer pipes, plumb office towers, that sort of thing) that is family owned, and she kept their books for about 11 years. This company has about 40 employees, and nearly half of them...including EVERY management and supervisory position, belonged to a relative. They weren't even shy about admitting it...if you weren't family, you weren't ever getting promoted.
After 11 years, her boss walked in and announced that she had a new "assistant". She was the 20-something year old niece of one of the owners cousins, and had a newly minted associates degree in accounting from the local community college, and no experience whatsoever. They worked side by side for about two months as the new "assistant" learned the ropes, but after those two months the owner took her aside and told her that they were having "money problems" and couldn't afford to keep her anymore (a REALLY bullshit excuse to give to the person who keeps the books and writes the paychecks every month, and who KNEW they were fine money-wise).
She contacted a lawyer, who looked into it but told her that she'd really be wasting her time. While she could have theoretically filed suit on her own, the odds of her actually winning were too small to bother with.
Yep, nepotism sucks. But in our system, where private companies are allowed to set their own hiring rules, there is little you can do about it.
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