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Whether Their Stock is Skyrocketing or Plummeting, High-Tech Companies Can Ill Afford to Ignore Employment Law Issues

December 31, 2000

The dot-com explosion has seen the birth of more than a few companies with untrained managers, inadequate human resources staff, and an "anything goes" workplace atmosphere. Indeed, many high-tech companies seemingly operate on the gratuitous assumption that they are exempt from the myriad federal, state and local employment laws and regulations that more traditional industries have been grappling with for years. Not unfairly, then, high-tech workplaces could be dubbed the litigation frontier of the 21st century.

Ultimately, the cost of failing to comply with workplace laws will prove more than many high-tech companies can bear: even a single employment lawsuit can put a fledgling high-tech company out of business. Lawsuits that stop short of financially devastating an employer may nonetheless prove distracting to senior management, employees, clients and investors -- a side effect many high-tech companies simply can not afford to tolerate.

"Irrational Exuberance" in Recruiting

At its inception, the typical dot-com company has one human resources objective: recruit! In their rush to hire as many talented technology professionals as they could get their hands on, such companies have routinely ignored their own policies and procedures, and even their legal obligations: background checks have been completed hastily (if at all), without the required Fair Credit Reporting Act disclosures; I-9 forms have not been filled out, or the required documentation has not been attached; etc. In addition, human resources professionals may have been so consumed by the effort to satisfy the organization's hunger for new employees that they have overlooked any number of other critical HR functions, including employee relations.

Hiring Practices May Increase Exposure to Discrimination Claims

In their rush to hire new workers, many high-tech companies have not taken the steps necessary to recruit a diverse pool of job applicants. As a consequence of the relative homogeneity of the typical dot-com workforce, the Equal Employment Opportunity Commission (the "EEOC") now describes discrimination in the high-tech sector as a "high priority." Noting the relatively low percentage of minorities (especially Blacks and Hispanics) and older individuals working in the high-tech industry, the EEOC has launched an ongoing review of hiring practices in Silicon Valley. High-tech employers who do not heed the warning and take prompt and effective measures to diversify their workforces may find themselves the target of a highly publicized lawsuit filed by the EEOC.

Feeling the Pinch of Golden Handcuffs

In their initial frenzy to recruit talented employees from the limited pool of qualified candidates, many high-tech companies were quick to agree to long-term employment contracts with expensive severance provisions. Then, as the economic climate grew chillier and these companies were compelled to pare down their employment rosters, they have found it difficult to do so without incurring enormous severance obligations. The moral of this story is clear: high-tech companies should deliberate carefully before entering into written agreements which hamper their ability to respond quickly and effectively to changing market conditions.

Casual Work Environments Foster Harassment Complaints

High-tech companies are primed for claims of harassment based on sex, sexual orientation, race, age and other legally-protected personal characteristics. An extremely casual working environment (including the absence of a meaningful dress code and employee code of conduct) may help these companies to attract and retain employees, but such an environment can degenerate without warning into an unprofessional, "anything goes" atmosphere reminiscent of some college fraternity houses -- and from there, to a hostile work environment for certain employees. As sexual harassment lawsuits recently initiated against Juno and the now-defunct Pseudo Programs have demonstrated, camaraderie and familiarity among co-workers, especially in combination with long working hours, can have undesirable and even devastating consequences.

High-tech companies need to be especially sensitive to the harassment risks posed by e-mail. It is not surprising that inappropriate and carelessly circulated e-mails have fueled employment claims in ever-increasing numbers, since high-tech employees are accustomed to relying heavily on this convenient and deceptively informal mode of communication with friends, colleagues and clients alike.

Personnel Policies: One Size Does Not Fit All

Many high-tech companies cultivate a loose, permissive culture which contrasts starkly with their written personnel policies. Whether these written policies were "borrowed" from another company, duplicated from an HR desk reference, or purchased "off the shelf," they are virtually meaningless if not tailored to the company's unique identity and expectations of its employees. An employer that does not generally require adherence to its written policies and procedures is in no position to complain when an employee violates one of those policies or procedures.

Similarly misguided is the singular reliance by some high-tech companies on HR software as a substitute for a human resources policies, and even for HR staff. Certainly, such software can be a useful tool for developing appropriate personnel policies and procedures: it is nonetheless a poor substitute for a living, breathing HR professional. Software, no matter how advanced, is not yet independently capable of resolving the unique employee relations and other HR issues that arise in that employer's particular workplace.

Covenants Not to Compete
(Yet Another Area Where One Size Does Not Fit All)

In an industry where success often depends on being "first to market" with new concepts and new technologies, dot-coms often have legitimate concerns that key employees will leave and either join or start a competing venture. To keep departing employees from hijacking their information assets, many high-tech companies now require employees to sign covenants not to compete. To be enforceable, such covenants must be reasonably limited in duration: at least one court has held that "Internet time" runs faster, meaning that enforceable covenants not to compete have shorter durations in the dot-com world than they do in traditional industries.

Stock Options: Mystique or Mistake?

Over the past few years, thousands of employees were lured to the dot-com industry with offers of stock options that would make them rich beyond their wildest imaginations. Unfortunately, many of these same individuals are now holding worthless options, because the value of their employers' stock is currently lower than it was when the options were granted (i.e., the options are now "under water"). Some of these employees are filing legal claims against their employers, alleging, for example, that they were fraudulently induced to accept employment based on apocryphal promises of great success and vast wealth. Beyond this, high-tech companies are susceptible to option-related claims even from discharged employees whose options are not under water: these individuals may, for example, file claims related to option vesting schedules, verbal assurances of additional options or promises of long-term employment.

The Myth of the 40-Hour Workweek

The culture of many high-tech companies is such that employees routinely work many hours beyond 40 in a workweek. At the same time, however, some of these employers neglect to pay overtime to employees who are legally entitled to it under the federal Fair Labor Standards Act ("FLSA"). Such violations can have devastating financial consequences for the unwitting employer, whether reported to the Department of Labor by disgruntled employees, or disclosed in lawsuits filed by these employees. Penalties for overtime violations can be staggering.

Staff Reductions: Look Before You Leap

In recent months, many high-tech companies have been pressured by investors to reduce expenses and turn a profit. As a result, hardly a day has passed without another handful of dot-coms announcing layoffs. All too frequently in connection with these announcements, senior managers instruct their subordinates to substantially reduce headcount within a day or two, without offering any guidance to these subordinates (many of whom have never previously supervised other employees or experienced a reduction in force) on the appropriate -- and lawful -- way to make and communicate these difficult decisions. Conducting a staff reduction without appropriate forethought and legal oversight can obliterate the very savings it was intended to create. Particularly since the pool of available high-tech jobs seems to be evaporating at the moment, today's displaced high-tech workers are more likely than their predecessors to file lawsuits, whether alleging discriminatory discharge, breach of contract, violations of the Worker Adjustment Retraining and Notification Act ("WARN"), or other illegal acts.


In the past, employment lawsuits in the dot com sector were relatively rare, largely because employees were well-paid and in high demand. While offensive behavior in the workplace, failure to pay overtime, and other workplace anomalies were once willingly overlooked by employees happy to be working in a "hot" industry, the current economic cool-down may presage a flood of high-tech lawsuits. Moreover, the long-term survival of even those high-tech companies strong enough to weather the current economic storms depends in part on their awareness of, and compliance with, laws governing the workplace.