Jottings By An Employer's Lawyer

Sunday, July 25, 2004

Venture Capital Funds - Meet the WARN Act

Nothing is more important to a plaintiff than having a solvent defendant, and in the aftermath of the dotcom meltdown, that certainly meant looking beyond the employer, who often was nothing more than a fond memory and a pile of expensive, not overly used office furniture. But behind many of those burst bubbles were venture capital funds, which while perhaps less solvent than before, were at least still around. And more importantly, as pointed out in an article [pdf] from the Venture and Technology group at Nixon, Peabody, a target defendant for former employees left holding the bag. Two district courts considering potential WARN Act liability both used the 5 factor test contained in the WARN act regulations to determine whether or not a venture capital fund could be liable.  As set out in 20 C.F.R. ยง 639.3(a)(2):
Some of the factors to be considered in making this determination are (i) common ownership, (ii) common directors and/or officers, (iii) de facto exercise of control, (iv) unity of personnel policies emanating from a common source, and (v) the dependency of operations.
And in the two cases which gave the green light to at least proceed, the most important factor seemed to be de facto exercise of control. Something which many entrepreneurs would be quick to agree is often vested with the VC's, particularly when it comes to pulling the plug.

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