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What Goes Around . . .

Making promises to employees and then giving them the boot? They'll be back--carrying lawsuits that could damage your company.

What's piling up almost as fast as the number of newly defunct dotcoms? Lawsuits filed by former employees of those companies, people who were relying on inflated promises of big money. In Minneapolis, former employees of Wwwrrr Inc. sued the Web-based learning company after it shut down without warning-and without paying two weeks of wages or reimbursing employees for expenses. In the Silicon Valley, a top executive sued the company where she'd worked for conspiracy, claiming that she was purposely fired right before her stock options would have vested. Wherever the New Economy is slowing down, employees who got burned are filing suit over fraudulent inducement, breach of contract or violation of labor law.

"But You Said . . ."

Jeff Tanenbaum, an attorney with Littler Mendelson in San Francisco, calls the trend "disappointment lawsuits." With the labor market tight, owners of fast-growth small firms lured people away from stable jobs with promises of wealth. Within months, some of those companies went under, leaving the employees with a goose egg.

Regulators and courts have started to crack down. Some states are applying the federal Worker Adjustment and Retraining Notification Act (WARN), designed to protect factory workers from sudden layoffs, to tech firms. The law requires companies with more than 100 employees to give 60 days' notice of mass layoffs or hand over 60 days worth of back pay and benefits. And courts in some jurisdictions are recognizing employees' right to sue if they relied on oral recruitment promises that were later broken. But there may be no way employees can recover their losses-even with a judicial order-if the company has no money.

"When you choose to work for a start-up, you take certain risks," says Tanenbaum, who has little patience for people who gambled with their careers and lost. He argues that standards for evaluating start-up management should be different from those used to judge established companies.

Perhaps, but management errors that can lead to disappointment lawsuits aren't limited to dotcom start-ups. All manner of small-business owners, even those with many years' experience, can find a lesson in this turn of events.

Pile on the Paperwork

The dotcom culture attracted bright, energetic young entrepreneurs because of the seemingly limitless opportunity for profit-and the wide-open, free-flowing culture. With a hot new idea and a fistful of venture capital, it was exciting to build on the concept, recruit employees, design working space and launch a marketing campaign. It may have seemed pedestrian to check for compliance with labor laws, prepare job descriptions, draft employee handbooks, and make sure promises to recruits were actually written down in offer letters and delivered on. But that's what it takes to stay out of legal trouble.

The same rule applies to more seasoned business owners: While you're pouring most of your energy into improving and marketing your product or service, don't overlook basic employment documents. Tanenbaum recommends you draft job application forms and employment contracts or offer letters spelling out duties, salary, benefits and any stock options for all employees. A basic employee handbook should include a mediation and arbitration clause. Over time, the company can develop additional policies and procedures as needed.

Don't neglect the human resources function, says Fred Ruffin, vice president of human resources at Autoweb.com, a consumer automotive Internet service company in Santa Clara, California. He advises entrepreneurs to hire someone with expertise in human resources to make sure everything is done right. Ruffin has taken his own HR experience to three start-up companies so far. "You need a management team that's a mix of the energetic minds and more experienced managers," he says. "We have to be coaches to the senior people without damaging their egos."

A good HR staff can not only handle benefits, labor law compliance and routine paperwork, but also help recruit good people and keep them.

Follow your dreams, but make sure you're also following the law and treating your employees right.


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

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This article was originally published in the October 2001 print edition of Entrepreneur with the headline: What Goes Around . . ..

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