Gr8 fails to invest 401(k) deductions

Design company hints it may seek protection in court

Workers haven't been paid

28 have lost jobs in 2 rounds of layoffs in past month

April 28, 2001|By June Arney | June Arney,SUN STAFF

In what might be a violation of federal law, Gr8 LLC, a Baltimore design, marketing and technology company, has held onto funds that were supposed to be invested into an employee 401(k) plan.

Company officials have acknowledged to The Sun that there was a "shortfall" in the 401(k) and also that current and laid-off employees have not received paychecks recently.

The officials also hinted that seeking bankruptcy protection is an option for the company.

Gr8 founder Craig Ziegler declined repeated requests for interviews. But in a prepared statement, he said: "In reference to the question about bankruptcy, Gr8 is currently building an operational plan. ... One option for Gr8 is to do this with the court's assistance."

Twenty-eight employees have been dismissed in the last month in two rounds of layoffs, leaving the firm with 31 workers - a move that company officials blamed on the economic slowdown.

Several former employees said their biweekly contributions, which were deducted by the company from their paychecks, were not invested in their 401(k) plan with Principal Financial Group.

"There was a minor shortfall in some of the funding of the 401(k)," Amanda V. Manos, a spokeswoman for Gr8, said yesterday. "We are currently assessing options. There are some exciting and positive developments in the works for Gr8, and we plan on implementing them over a period of time."

The Employee Retirement Income Security Act of 1974, known as ERISA, requires companies to transfer employees' contributions for 401(k) plans no later than 15 days after the end of the month in which the money was deducted.

"We would definitely look into it," said Mabel L. Capolongo, regional director of the U.S. Labor Department's Pension and Welfare Benefits division.

ERISA violations can lead to both civil and criminal penalties. The Labor Department seeks recovery of the funds, plus interest, and the recovery amount could be subject to a mandatory 20 percent civil penalty, Capolongo said. Should criminal intent be found, offenders could be sent to prison.

The agency has brought 5,585 civil cases since 1995. Of those closed, she said, more than $100 million has been recovered. In that same period, 96 people have been indicted in criminal cases involving 401(k) programs.

"A lot of these problems are the result of financial difficulties," Capolongo said, "but sometimes it's an administrative issue."

The company said last night that it is trying to resolve the matter. It estimated the amount owed at $15,000 to $20,000.

Gr8 also has had trouble meeting its payroll.

At least two dismissed employees said financial troubles at Gr8 were apparent even before the firings, because paychecks arrived late or bounced when employees tried to cash them. Then the checks stopped altogether.

For weeks, most employees continued to work at the office, in the American Can Co. building in Canton.

"I felt very betrayed," said one former employee who asked not to be named, fearing retribution. "We believed very much in Craig's vision and his word." Most of the staff continued to work even though they weren't paid, she said.

"The loyalty was amazing," the former employee added. "We never asked about our paycheck. We simply trusted and believed and waited."

Although the company declined to discuss specifics, it said, "While it is true that employees we've retained and those that were furloughed did not receive recent pay, we had anticipated that this would not be the case. And we're exploring several opportunities to remedy this situation over time."

Before the layoffs, according to two former employees, Gr8 returned supplies purchased on behalf of client Hewlett-Packard Co., including a printer and routers, for cash.

When the layoffs were announced last week, Ziegler, asked then about severance, told The Sun that the company "will take care of" the employees. The former employees said they have received nothing. In his prepared statement, Ziegler said, "In terms of severance, Gr8 doesn't have a formal policy. Under the current circumstances we are not in a position to extend severance packages to those employees being furloughed."

The 17-year-old company had its best year ever in 2000, logging just under $8 million in revenue. But the company has not been profitable since January, Ziegler said. In September, the company had 85 employees.

The problems at Gr8 are not unique to that sector, as the stock market has turned against technology firms.

"Many companies, while they've been putting a lot of money into their online presence, have not been effectively measuring the return on that," said Michele Pelino, an analyst and director of the Internet Market Strategies Group at the Yankee Group in Boston. "Now CEOs are asking about that. Some money for interactive design is being reallocated. A lot of companies are going through this - not just one or two."

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