Aug 19, 2015 ยท 4 minutes

Zirtual might have found a soft landing at Startups.co, but now come the legal repercussions of the company’s collapse.

Yesterday, former employee Felice Martin filed a class action complaint (embedded below) against Zirtual Inc, claiming the company failed to give adequate notice to the approximately 400 employees it suddenly laid off.

The complaint claims that under the Worker Adjustment and Retraining Notification (WARN) Act, the company was legally required to give 60 days notice ahead of mass layoffs. Martin is asking the court to certify the complaint as a class action suit.

The complaint is not entirely unexpected. Since the company announced its sudden closure on August 10th, several former employees have been hinting that they might persue legal action against Zirtual or founder Maren Kate Donovan. As we reported at the time…

“Zirtual employees [are] being offered to return only as contractors, not W2 employees. Former Zirtual employees had their healthcare benefits cancelled the moment the company announced its collapse. There’s no sign those benefits are ever coming back.”

According to the Dept of Labor’s own WARN guidance

The WARN Act requires employers to provide written notice at least 60 calendar days in advance of covered plant closings and mass layoffs… A WARN notice is required when a business with more than 100 full-time workers (not counting workers who have less than 6 months on the job and workers who work fewer than 20 hours per week) is laying off at least 50 people at a single site of employment (see glossary and FAQs), or employs 100 or more workers who work at least a combined 4,000 hours per week, and is a private for-profit business, private non-profit organization, or quasi-public entity separately organized from regular government.

The act does provide exceptions to the 60 day period in some circumstances…

Faltering company: When, before a plant closing, a company is actively seeking capital or business and reasonably in good faith believes that advance notice would preclude its ability to obtain such capital or business, and this new capital or business would allow the employer to avoid or postpone a shutdown for a reasonable period;

Unforeseeable business circumstances: When the closing or mass layoff is caused by business circumstances that were not reasonably foreseeable at the time that 60-day notice would have been required (i.e., a business circumstance that is caused by some sudden, dramatic, and unexpected action or conditions outside the employer's control, like the unexpected cancellation of a major order);

But while exceptions can reduce the notice period, they still require formal notice be given as soon as possible, and in a way that is guaranteed to be received by employees: “first class mail, personal delivery with optional signed receipt, etc.” According to former employees, no such formal notice was given.

If successful, the suit could result in all of the laid off employees being eligible for back pay and benefits equal to 60 days employment.

Where that money might come from, however, is unclear. According to the act, when a company is subsequently acquired, it is the seller that is liable for pay-outs under WARN, not the buyer. Given the layoffs were apparently caused by Zirtual Inc running out of money, there many not be anything left to pay former employees.

The legal documents are embedded below.

Meanwhile, the question of who knew what and when about Zirtual’s cash position remains unanswered. Last week, investor Jason Calacanis insisted he was unaware of the company’s difficulties when he publicly promoted it as a great investment prospect just days before it collapsed.

Yesterday, however, Calacanis appeared on CNBC where he told viewers that he demands monthly financial updates from all the companies in which he is an angel investor:

“I require my portfolio companies to send me a monthly update on how much cash they have in the bank, how many months of runway and when they’re going to be 'cash out'.”

According to sources with knowledge of the company’s finances, Zirtual was forced to raise money in July in order to make payroll. The company's serious financial troubles were understood by company execs and some investors at least six weeks before it collapsed.

If Calacanis did indeed receive monthly updates from Zirtual, he would have known about the company’s precarious cash position when he said on his podcast, taped August 5th, that Zirtual had “money in the bank, like, whatever, but I think that we're set up for... like... what are we calling this? Is this a B? An A?  We have to get somebody who has a little bit of vision…"

I reached out to Maren Kate Donovan yesterday, asking her to clarify what numbers she had shared with Calacanis, but she hasn’t responded.

Regardless of the eventual outcome of the WARN lawsuit, employees will be hoping the suit at least gets to the truth of the events leading up to the mass layoffs.

 WARN suit