EPL in the Dotcom World.

Dotcoms follow a very different business model from traditional employers. But several recent lawsuits suggest that they share some of the same workplace liabilities.

The Internet is the California gold rush of the new millennium. Entrepreneurs with great ideas are staking their claim on dotcom addresses rather than stores on Main Street.

And just like the Gold Rush days, Internet businesses tend to be free-wheeling ventures run by young entrepreneurs. What the hard-driven executives lack in management skills and experience they more than make up for in their disdain for traditional workplace values. Many dotcom business owners know as much about labor laws and employee rights as a prospector on a Saturday night binge.

"Dotcom companies are counter culture, informal, casual," says Fram Virjee, a labor and employment lawyer with O'Melveny & Myers in Los Angeles. "They don't like rules, constraints, policies, procedures, and employee manuals--all the things that protect employers from litigation."

But Virjee and others believe that is about to change as the first wave of employment-related lawsuits against dotcom companies hits the courts. Considering the high cost of such litigation, some of these start-ups are now beginning to pay closer attention to their employment-related policies and practices.

Lack of Sophistication 

"I don't think there is going to be an exceptional amount of lawsuits against the dotcoms, but I do think they will be disproportionate," Virjee says. "I think there are some fairly significant reasons for that. There is a relative lack of sophistication with respect to labor law issues among dotcom owners."

For instance, many dotcom companies don't even have an elementary employee handbook outlining basic rules. Without written personnel policies, procedures or an employee handbook, dotcom businesses leave themselves uncomfortably exposed to financially crippling lawsuits.

"They don't have the personnel policies and procedures in place, and they haven't trained their managers" about how to handle employee issues, reports Bill Milani, a labor and employment lawyer and partner at Epstein Becker & Green in New York. "As a result, many are facing litigation and are not in the best position to defend those claims. There is inattention to employment-related liability, and in some cases it can be devastating."

The single best shield against employee lawsuits, experts say, is hiring a strong risk management or human resource professional. These professionals not only understand labor and employment laws but can develop the in-house policies, procedures and manuals necessary to avoid lawsuits in the first place. But the fact is, most dotcom companies are more interested in rapid growth and finding the venture capital to fuel that growth.

Frankly, employment-related liability isn't at the top of the to do list for most dotcoms. Employment-related liability is an afterthought, says Peter Petesch, a labor attorney at Ford and Harrison in Washington. "That's what can get them into trouble. You name the labor law, and dotcom companies are not necessarily prepared to comply with it. The business grows from five to 50 or more, and they don't know anything about the Family and Medical Leave Act. That's just one illustration of how these businesses may not be ready."

Petesch sees dotcoms as ticking time bombs of employment-related lawsuits. Indeed, the lawsuits reaching the courts (many are settled out of court so they don't have to be reported to prospective investors) span labor and workplace law. While sexual harassment remains the most common, cases of age discrimination, compensation claims and even nepotism are growing.

Of three employment-related lawsuits recently reported by HRWire, two were sexual harassment cases. The third was filed by a group of employees against a dotcom for failing to give employees promised stock options.

Another related lawsuit that dotcom companies are now being slapped with is based on extraordinary promises or assurances given by the employer. These cases usually involve luring a person from a secure, high-paying job to join a dotcom at a lower pay rate with the guarantee that their salary will double in a year. Some dotcoms go so far as to put the promise in writing. When it doesn't happen, the disappointed employee sues.

"I think there is great risk there," Milani says. "We are seeing many claims that the employee was later dissatisfied because the promise made was not kept."

It's just another example of a lawsuit that most likely would not happen if the dotcom business had risk management procedures in place. "I see all the cases that I don't see at the more seasoned employer who has been around the block a few times and has a risk management or human resource professional who knows these things inside out," Virjee says.

Frontier Spirit

Until lawsuits started appearing it wasn't easy getting the attention of many dotcom executives.

The Internet Rush began in earnest during the waning years of the 20th century. The pioneers were generally young, well-educated entrepreneurs raised in technology or MBA graduates hungry to make their mark. Many never worked in a corporate setting. Those that did didn't like the culture.

The Internet offered them the freedom to run a business their way and have fun. "It's a little bit of American entrepreneurial frontier spirit and an attitude of you don't tell me the rules," says Virjee, who specializes in working with Internet and emerging market companies.

Not surprisingly, dotcom executives pay little homage to all things corporate. Virjec says it's not unusual for him to go into a dotcom setting and feel like he's on the set of MTV's "Real World." Nor is it unusual for him to admonish clients about draping their arm around employees or complimenting their looks or clothing. Clients also have to be told that racist and sexist jokes, or even the one about the pope and the rabbi, aren't appropriate in the office.

He discovered, however, that his clients ignored his advice. So now rather than coming in with a lawyer's list of workplace dos and don'ts, Virjee asks dotcom owners what they want him to do. Invariably what they want is to avoid lawsuits, keep the employees happy, make the company a good place to work and protect the stock.

Putting together employment-related policies and procedures is the first place to start. That's precisely what Deborah Fell did at Commerx, a Chicago-based provider of collaborative e-marketplace supply chain solutions. While putting some basic procedures and policies together, Fell, the company's vice president of people services, also created the Cultural Commandos. The group of 17 employees were trained in Appreciative Inquiry, a positive interviewing technique. Each of them was sent out to ask fellow employees what they found most inspiring at Commerx and what they wanted to see more of.

"There has to be a sense of identifying culture as a priority among priorities," says Fell, who worked for Lawson Mardon and Frito Lay before joining Commerx last November. "You have to have strategic people leaders and a very well defined plan to build the culture you want. That results in fewer disgruntled employees."

Risk management can help ensure that the company has policies and procedures that make clear what is expected from employees on a daily basis. Risk managers can also make clear that the company is an equal opportunity employer and that it will not tolerate discrimination or harassment in any form, including comments, jokes, photos or cartoons.

"That sort of policy is absolutely vital," Milani says.

They can also train supervisors and managers on how they are expected to act in different circumstances, including what recruiters can and cannot promise to job prospects.

"Managers and supervisors are viewed by the courts as the eyes and ears of the company," Milani says. "It is vital they be trained in terms of what is expected of them."

Spell It Out 

As for the employee handbook, a dotcom company handbook will probably differ in style and tone from the one distributed at most Fortune 500 companies. But it should say the same things and be clear.

Virjee says a dotcom employee handbook should include a clause that says all employer/employee disputes will be settled out of court by an arbitrator.

The employee handbook should also include a nondisclosure agreement that prohibits a former employee from divulging trade secrets or privileged company information.

Petesch says dotcoms should be wary of buying a one-size-fits-all approach being offered by some consultants. He recommends that his clients bring in someone with a solid risk management or human resource background. But make sure, he cautions, that consultants are willing to learn and understand the business.

"Every company is unique with unique problems and issues," Petesch says.

In the end, most dotcoms will probably have a full-time risk management or human resource position on staff. It will come down to simple survival. Lawsuits not only drain profits, they drive away investors.

"A savvy investor will do due diligence, and when they see a ticking time bomb they will get skittish," Petesch says. "That's an incentive for dotcoms to get their house in order, because if it is not in order they are going to miss out on some of the capitol infusion they need to survive."

The Internet Gold Rush days are already giving way to a more stable e-commerce community. "As things settle down and instead of 15 dotcoms going for a niche you have two or three, the companies will become more competitive and careful and more willing to listen," Virjee says.

Smart companies, Petesch says, will pay attention and make the necessary adjustments. But then there will be those that don't pay attention, he adds. "They will be the frequent defendant. They'll learn, but it might be at a great cost."

Sooner Or Later

When Paul McCourt became the first human resource manager at Register.com last July, the Internet company had all of 50 employees. Yet the Web site's executives recognized the importance of ironing out employee policies and procedures sooner rather than later.

Talk about vision--a year later the company has 200 employees and is still growing.

"They started to get into issues as they started to grow, and it became obvious to them that they needed someone with long experience who could put meat on the bones before we ran into any serious issues," says McCourt, who came to Register.com after 13 years at the New York Mercantile Exchange.

In his first year, McCourt, with the help of labor and employment law attorney Bill Milani, has put together an extensive employee handbook defining company policies. To his surprise, the employees--all in their 20s and early 30s--were happy to have the structure, especially during salary reviews.

"People are happy to know where they stand," McCourt says. "A lot of Internet companies don't lay out rules clearly and they change day to day. I don't know if that is the way to build a long-term business."

Having policies and following procedures also helps employees know what to expect. When something does go wrong, they see that the company's response is to fallow policy.

"We don't interfere with the vibrancy of the organization," he says. "You spend a lot of time in a start-up environment like this and it can be stressful. We felt it was extremely important that there were rules, and that was a great relief off people's minds. There is not ambiguity, and people know I'm here for them and if they come to me it is strictly confidential."

McCourt says a large part of his job is keeping employees happy. That's why he championed the idea of giving eight weeks maternity leave with full pay. To date, two women have used the time while a third, a valuable member of the management team, is about to. "She'll be back and she will be loyal to the company and that is how I feel you should treat employees," he says. "That's the type of thing that when I came here we didn't have in place."

McCourt can't understand why so many other dotcom companies choose to ignore employment-related liability issues.

"Human resources can be one of the things that is hard to quantify. But what does a week in court cost a firm with a decent lawyer? And what does that case do to your morale and how the company is looked at from the outside? If you're smart about it, you would want to do it to protect yourself."