Labor Laws Apply to Dot-Coms? Really?

Many Web startups skipped the boring stuff required of employers. Now the lawsuits are flying

On the morning of Jan. 10, the 120 employees of Minneapolis-based wwwrrr inc. gathered for a meeting in the company's swank, maple-floored lobby. Just months before, these same workers had voted the online-learning outfit--with its brick-walled, loft-style offices, lavish benefits, and arm-around-the-shoulder culture--one of CityBusiness newspaper's "Greatest Places to Work." On that January morning, though, things were far from great. Wwwrrr was shutting down.

That was only the beginning of what was soon to become a particularly ugly episode of dot-com dystopia. The employees found out they wouldn't be seeing another nickel from wwwrrr--not even for the two weeks they had already worked. Their expense reimbursements? Not happening. Health insurance? Canceled. Stock options? Scratch paper.

SPREADING. Today, wwwrrr faces a heap of legal trouble, including a suit being brought by employees and a Labor Dept. investigation. It's yet another example of a company that seemed like a New Economy utopia on the way up turning into a jumble of misunderstandings and legal liabilities on the way down. Indeed, as the economy slows and the promise of the next big bankable thing evaporates, New Economy workers who feel they have been burned are filing suits over everything from outright labor-law violations to claims of fraudulent inducement and breach of contract when stock options are rendered worthless. One high-level Silicon Valley executive is even charging conspiracy, claiming she was strategically fired so her stock options couldn't vest.

This wave of disappointment litigation is roiling companies everywhere and has pushed employment law-firm caseloads up by as much as 100% since the economy cooled. "It is absolutely nuts," says Garry Mathiason, the partner in charge of high-tech companies at San Francisco-based Littler Mendelson, the country's biggest employment-law specialist. "We have every resource in our firm double-committed and triple-committed to this issue."

Already, such high-tech heavies as Oracle, Broadcom, InfoSpace, and Qualcomm (which is countersuing some employees) are facing stock-option related claims. In an unusual move, Connecticut's Attorney General is suing Stamford-based Walker Digital Corp., claiming it failed to comply with a sleeper statute that until recently most tech-heads had never heard of: the Worker Adjustment & Retraining Notification Act (WARN), which was originally designed to protect blue-collar workers. WARN stipulates that companies like Walker Digital that have more than 100 employees are required to give 60 days' notice of mass layoffs--or hand over 60 days' worth of back pay and compensation for benefits. Walker Digital says the suit is "totally without merit." Nevertheless, "more dot-com employees are going to be taking advantage of [WARN] in the future," says Jay Waks, a partner at New York-based law firm Kaye Scholer.

Ironically, the celebrated virtues of New Economy companies--the thrilling pace, the lack of red tape--have in many cases become legal tripwires. After all, when you were trying to be the next, who had time to write human-resources policies, make sure the contract language on options was airtight, and ensure that they were ladled out in a nondiscriminatory fashion?

What's also making it tricky for companies is that the legal climate is more tolerant toward disgruntled employees than it was even as recently as the last recession. It used to be that courts were unwavering about companies' rights to fire at will, which allowed them to terminate anyone they wanted to for pretty much any reason. But during the '90s, new anti-discrimination protections for many types of workers were put on the books. "Courts are increasingly sympathetic to these kinds of claims," says David Larson of Hamline University in St. Paul. "There's a recognition that employment-at-will is a harsh rule." What's more, the stock market bonanza and proliferation of free agents also raised the stakes to new heights.

STIFFED. Some employees who were lured away from solid jobs are even seeking to hold execs personally liable for seducing them with promises of financial abundance and freedom. And the inducements didn't even need to be written down. In the case of Matrix Telecom founder Dennis L. Miga, the venture capitalist backing Matrix verbally promised Miga options in another company. When Miga didn't get them, he sued. An appeals court recently upheld his award of $18 million.

Often, though, the alleged victims aren't high-flyers like Miga. Many of wwwrrr's former employees, for example, were middle-rung staffers who say they got stiffed out of as much as $10,000 in business expenses. Even worse, they allege wwwrrr was hanging on to the 401(k) contributions deducted from their paychecks--sometimes for more than 50 days--possibly to help float the company. "It's really sad and stressful to be put in this position," says Jean Golden, the company's former director of communications who is now doing PR for the employees filing the suit. Nevin R. Harwood, lawyer for wwwrrr Chairman Dale LaFrenz, says his client was not involved in day-to-day decision-making but says that all 401(k) contributions were paid "within the time requirements of the law."

Eventually, New Economy companies will have to set up Old Economy procedures to protect themselves, experts say. In the short term, though, expect more litigation, since there are certain to be plenty of New Economy companies that poured more resources into being market leaders than into being good employers.

By Michelle Conlin in New York

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