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Tech Center
Dot-Coms May Need Crash Course
In Labor Law Amid Broad Layoffs
By STEPHANIE MILES
WSJ.COM

Dot-coms may face another labor headache.

Already, the struggling industry is facing stepped-up unionization efforts at companies such as retail giant Amazon.com Inc. and lesser known Collaborative Media Inc., which runs etown.com. Soon, however, dot-coms may run smack into a second problem: a ten-year-old plant-closing law that applies not only to steelworkers but java programmers as well.

Until recently, few New Economy workers had heard of the Worker Adjustment and Retraining Notification, or WARN, Act. Then, earlier this month, Connecticut's attorney general sued Walker Digital Inc. (www.walkerdigital.com) for allegedly failing to comply with WARN.

While few, if any, other suits have been filed against New Economy companies under WARN, there are signs of more conflicts ahead. Former employees of one failing Web publisher hired attorneys in mid-December to investigate if they were owed back wages under WARN, but haven't filed suit. An Internet software and services company cautioned investors last month of potential WARN claims. Several dot-com executives say they have sought advice from their lawyers on how to avoid exposure to the law when cutting jobs.

Concern about WARN is "becoming more common as more companies are going in the tank, that is for sure," says Donald Savelson, a labor attorney and partner with Proskauer & Rose LLP in New York City. He says he fields questions from his clients about the law "on a daily basis."

WARN doesn't limit the type of workers covered, and it contains no salary cap or explicit wording about who is or isn't covered. That means that high-tech is as entitled as textile factories to protection under the statute.

Specifically, WARN requires a company with 100 or more employees to give 60 days notice before it can implement mass layoffs or plant shutdowns. If a company doesn't give sufficient notice, employees are entitled to 60 days back pay and compensation for benefits. Companies may have to pay state fines.

The WARN Act includes exceptions for companies that can prove that their business was materially affected by unforeseen circumstances, such as a labor strike at a contractor. Other exceptions allow a company to provide shorter notice if it was actively seeking new funding or in cases of natural disaster.

These exceptions provide some wiggle room for employers. Robert Covington, a professor at Vanderbilt University Law School in Nashville, Tenn., says that WARN was a "compromise" law, and its many exceptions and loopholes make it difficult to enforce. Moreover, he says, the law hasn't been frequently litigated in any industry. Potential awards are relatively small, and in cases where the employer had filed for bankruptcy protection, there may be little money left to collect.

For many established companies, the 60-day notice required by WARN is part of standard operating procedure. Within the past few months, for instance, WARN notices were filed by American Electric Power Co. when it shut two coal mines, and Montgomery Ward filed when it set plans to close its stores. Fairpoint Communications Inc. wasn't able to provide 60-days' notice when it shut down facilities in two cities. The company was able to comply with WARN by giving affected employees 60 days' back pay and contacting local agencies to ensure that job-placement services were available.

"We were in the fortunate situation to have in-house counsel that recognized that it was a potential issue," says Tim Henry, vice president of finance for Fairpoint. "If done properly, WARN protects both the employee and the company."

But until recently, few high-tech employers or employees were even aware of the law, or that it applies to all employees -- not just blue-collar workers. The fog may be lifting, though. Spurred on by the persistent turmoil in the beleaguered Internet sector, workers who were experts on stock options and real-estate appreciation are now getting up to speed on the finer points of layoffs and labor laws.

In its suit against Walker Digital, filed on behalf of the state department of labor, the Connecticut attorney general's office alleged that the company violated the WARN Act in November when it laid off 80% of its staff, or about 100 employees. Walker Digital, which developed the name-your-own-price model at the heart of Priceline.com Inc.'s offerings, says that it has complied with all applicable laws.

Web-site publisher Urban Box Office Networks may also face a suit alleging WARN violations. The Maurice & Jane Sugar Law Center for Economic and Social Justice, known as the Guild Law Center, has been retained by about 30 former UBO employees to investigate whether UBO violated the law.

UBO, which operates a network of hip-hop and urban-culture sites, laid off the majority of its 320 employees in November after it failed to secure additional financing. It later filed for Chapter 11 protection from creditors in U.S. Bankruptcy Court for the Southern District of New York.

"Looking at what happened with [UBO] when they shut their doors, it's our belief that they did violate" the WARN law, says Mark Fancher, a senior attorney with the Guild Law Center.

UBO's attorneys didn't return repeated calls for comment. Rumors of UBO employees' actions first surfaced on DotComScoop.com.

New Economy companies are also boning up on the law. A spokeswoman for Kozmo.com Inc. (www.kozmo.com), which has made several rounds of layoffs and closed two locations over the past six months, says the company was made aware of the WARN law by its attorneys before it let any workers go. She adds that Kozmo believes its actions were exempt from the WARN act. She declined to say whether the company provided any early notice or severance pay to laid-off employees.

Other companies have taken WARN into account when planning layoffs. One California digital-media firm that recently laid off one-third of its employees made sure it wasn't exposed under the act before cutting jobs, an executive says.

Potential WARN costs are creeping into financial statements issued by companies. For instance, Internet software and services company Intraware Corp. said in December that it was cutting 180 job cuts in an effort to reach profitability sooner. In the "forward looking statements" portion of the release, it listed several possible events that could derail its projections, including "an unanticipated increase in costs resulting from claims filed by terminated employees." The company removed the WARN item in subsequent releases. "With the passage of five weeks' time, it was no longer a risk," says investor relations manager Pierre Hirsch.

Those that aren't familiar with the statute, plan to be. "I've never been told by my lawyers about it, I've never heard about it, and none of my other friends have ever heard about it," says Bill Cockayne, who co-founded Scout Electromedia, a wireless device firm in New York City that abruptly ceased operations in October, laying off 80 employees.

"It's the first thing on my 'ask my lawyer' list," says Mr. Cockayne, who is now a director at Eastman Kodak Co.'s venture group.

There is some precedent for high-technology suits. The Guild center, for instance, is representing 5,100 former employees of computer supplier Inacom Corp., which is currently in bankruptcy proceedings. The Guild center has filed a class-action lawsuit in New York on behalf of the employees, asking for 60 days' pay and benefits.

Labor experts say that while the law was designed to protect blue-collar workers, there's no indication that lawmakers intended to exclude other types of employees.

"Congress has long since demonstrated that it knows how to exempt white-collar employees if it wants to," says Prof. Covington. "If they wanted to do that, they would have done so."

Write to Stephanie Miles at stephanie.miles@wsj.com


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