"Susceptible Startups - Employment Law: Cases against dot-com companies demonstrate their vulnerability to labor issues"
by Richard S. Rosenberg and Douglas N. Silverstein

For most of the past decade, start-up and emerging growth companies rode an unprecedented wave of expansion. Amidst almost daily reports of newly minted "dot.com" millionaires, traditional brick and mortar enterprises watched helplessly as thousands of their employees traded in career paths and business suits for khakis and a bucket full of stock options. Enthused by the prospect of overnight riches and a casual work environment, a new 24/7 work culture took hold. Not surprisingly, many of these companies didn't see the need to be concerned with mundane matters like labor law compliance. And, why should they? The thought of becoming the next dot.comer to retire made new economy workers and managers alike giddy with anticipation. Labor woes were the last thing on their minds. Indeed, all was good in dot.com land, or so everyone thought.

With a recession now looming and tech stocks no longer the darlings of Wall Street, there are thousands of harried and overworked dot.comers with boatloads of worthless stock options and busted dreams of instant riches. With daily reports of the next dot.bomb, there is a disturbing undercurrent of labor unrest amongst a workforce most people considered immune from such concerns. Just last month, seven former and current Microsoft employees filed a $5 Billion race discrimination class action. A few weeks earlier, a Silicon Valley jury awarded a former Oracle employee $2.6 Million on her wrongful termination and whistleblower claims against the company. Reports of the recent unionization efforts of a group of employees at etown.com and Amazon.com were the talk of Silicon Valley and the rest of dot.com land.

Start-ups often have a very informal culture with a younger workforce who have not been schooled in the many legal requirements of workplace etiquette. At the helm of these companies, one is apt to find an entrepreneur who has little or no experience as an employer. The new CEOs often don't appreciate the value of an HR department. The age of the workforce also tends to contribute to labor law compliance problems. Whether you chalk it up to youthful exuberance or just a lack of awareness, sex harassment, age and other discrimination claims at dot.com companies are on the rise. For example, few CEOs would intuit that the law requires them to train managers and their subordinates about how to sue the company for sexual harassment. Nor would they likely know that many of the most common interview questions are illegal, or that disabled workers have to be offered workplace accommodation.

Wage/hour law compliance is another fertile litigation area. Cases can be brought on an individual or class wide basis. Wage/hour laws require every worker be paid overtime premium pay unless the employee meets the test for an exemption. The regulations are written so that most employees are not exempt. The determining factor is what the person actually does all day long. Simply working with a computer or having the title containing the word engineer or analyst is not nearly enough. Attorneys representing employees are very motivated to file these claims because if they win, the company is required to pay their attorneys' fees.

Companies must also become familiar with the array of regulations which govern many routine personnel matters such as hiring practices (which questions are legal and which are not), pre-employment screening and testing, background checks, handling time off requests (e.g., vacation, pregnancy leave, family leave, sick leave, jury duty, military leave, substance abuse leave, workers compensation and medical leave), job safety (every employer must have a written illness and accident prevention plan), reimbursement of employee travel and other expenses, affirmative action, and the many requirements for managing physically and mentally challenged job applicants and employees under the Americans with Disabilities Act.

The youth factor at the helm of so many new economy companies makes age discrimination a common problem. Many of those in management at the dot.com companies believe that older workers are slower, tech phobic, inflexible and resistant to change. Employment decisions affecting older (over 40) job applicants or employees are illegal if they are made with these thoughts in mind.

Another common mistake is treating employees as independent contractors. Most of these workers could never pass muster if their independent contractor status was challenged. A written agreement specifying independent contractor status is not determinative, or even binding. Also, employees treated as contractors often assert later on that they are employees when doing so is advantageous, such as when they file to collect state unemployment or disability insurance, or when they seek workers' compensation benefits following a workplace injury. A recent Los Angeles Times article cites to the sharp upswing in workers' compensation claims among dot.comers who are suffering from carpal tunnel and other repetitive motion injuries from heavy computer use. Workers under the age of 40 who suffer from debilitating conditions are seeking to have the company foot the bill for their medical care and rehabilitation. Also, non-compliance with new federal and state ergonomics regulations will provide additional claims and settlement costs to these already expensive cases.

Many new economy companies are reliant on third party labor providers to supplement the workforce. There is a growing body of law holding them jointly liable for the labor law violations of the labor provider. Also, if the company hires temporary employees who work alongside the company's regular workforce, there is a danger that later on they may be treated as employees of the company for tax and benefit purposes. Microsoft found this out the hard way when they lost a major class action suit by a group of temporary workers who the company had excluded from its benefit plans. Microsoft just settled this suit for $97 Million.

Sexual harassment claims are another problem. With so many young unattached people working long hours, consensual dating is likely to occur. However, the line between acceptable behavior and illegal unwanted advances is blurry, especially where a relationship ends on a sour note. Companies and managers alike must understand that they are personally liable, and the company strictly liable, for a manager's sexual harassment. This is so even if the behavior occurs off hours and away from work. Like wage/hour lawsuits, employees who win a sexual harassment or other job bias case are entitled to have the company pay their attorneys' fees.

The cooling economy gave labor organizers a leg up at etown.com. Most observers thought new economy employees were immune from unionization. etown.com has the distinction of being the first internet company to face a real unionization effort. If the union succeeds, it will pave the way for similar efforts among the legions of disaffected dot.com workers. Two different unions are reportedly attempting to organize Amazon.com's 5,000 customer service representatives and distribution employees. There are complex rules which companies have to know when dealing with union organizing efforts. Most of the common reactions are outlawed as Unfair Labor Practices under the federal labor law governing union management relations.

Emerging businesses and start-ups who haven't made the investment to set up a human resources infrastructure ought to consider these well-publicized cases a wake-up call. There are specific steps which companies can take now to position themselves for the future, both in terms of litigation risk management and improved labor relations. At a minimum, all major employment practices and policies should be reduced to writing and reviewed by an employment law specialist to assure legal compliance. Legally compliant policies and procedures are also a must for any company seeking to purchase employment practices liability insurance. An HR audit is also a very good investment. In addition, managers must be trained on precisely how they fit into the company's labor law compliance picture.

The recent spate of cases against dot.com companies demonstrate that these companies are not immune to the kinds of labor law claims which their brick and mortar counterparts routinely face. Following the recent sharp downturn in the economy, some dot.com and emerging business found out the hard way that there is a steep price to pay for ignoring labor law compliance. As companies speed down the information superhighway, the ones that are prepared to meet these challenges head on are most likely to survive.