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.
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"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.