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WorldCom's Ex-Employees Suffer Loss of Severance, Health Insurance

SHAWN YOUNG / Wall Street Journal 30sep02

RICHARDSON, Texas -- When Bruce Wehmeier lost his $89,500-a-year job with WorldCom Inc. in June, he figured he still had some financial breathing room.

After 9 years as a manager in technical training, the 44-year-old father of four had $22,354 in severance coming to him. And under company policy, he was slated to get health-insurance coverage for 13 weeks.

But then WorldCom filed for bankruptcy protection in the wake of a massive accounting scandal -- and with that, much of Mr. Wehmeier's financial safety net vanished. Instead of his expected severance, he received just $4,650. The bankruptcy filing also abrogated his health-insurance benefit, sticking Mr. Wehmeier with a $954 monthly bill to keep coverage for his family. And his 401(k), invested entirely in WorldCom stock, became essentially worthless.

Last month, his savings almost gone, he put his house in Celina, Texas, up for sale. "The day we had the real-estate lady here, we went inside and looked out the window at the front yard and my 11-year-old son was out there throwing rocks at the sign and crying," Mr. Wehmeier says.

"Losing your job is bad enough," he adds. "But with no severance you don't have any time to pick up the pieces."

Laid-Off Workers

As corporate bankruptcies mount to record sizes, tens of thousands of laid-off workers are finding themselves in similar straits. Since the beginning of 2001, more than 60,000 companies have sought bankruptcy protection, and the number of affected employees is rising fast. In 2001, the 10 largest companies filing for bankruptcy reported employing about 140,500 people in the most recent annual report before the filing, according to research firm BankruptcyData.Com. The top 10 this year had 444,600.

Normally, employers offer benefits that soften the blow for many employees who lose their jobs. But bankruptcy changes all the rules. In many cases, workers have to get in line with other unsecured creditors for severance benefits, unused vacation pay, expenses and commissions -- a process that can leave them with mere pennies on the dollars that they're owed.

WorldCom's case is a stark example of the dramas playing out across the battered telecommunications sector, which so far this year has accounted for six of the nation's 10 largest bankruptcies. The nation's No. 2 long-distance company, WorldCom began to hit big trouble in April, when it disclosed a huge revenue shortfall. In June, the company first disclosed the accounting improprieties that have since mounted to at least $7 billion and resulted in fraud charges against the former chief financial officer. As it tried to halt its skid into bankruptcy by conserving cash, the Clinton, Miss.-based company informed 12,800 of its roughly 75,000 workers that they'd be losing their jobs. The job losses were particularly acute here in the area north of Dallas, where WorldCom's big MCI Communications unit has a major hub.

Policy Change

In past layoffs, WorldCom's policy was to make severance payments in a lump sum, equal to one week of pay for every year of service with a minimum of six weeks' pay. But shortly before a mass layoff on June 28, the company changed its policy so severance would be paid in increments every other week, like paychecks. That meant that payments were suspended on July 21, when WorldCom filed for Chapter 11 bankruptcy-court protection with $41 billion in debt. The company's bankruptcy filing was the largest in U.S. history by the size of its assets.

WorldCom, which will continue to operate under Chapter 11 while it works out a plan to restructure its debt, wasn't trying to deprive workers of severance when it made the change, says spokesman Bradford Burns. The company was only trying to conserve cash in hopes of staving off a bankruptcy filing and still thought it would succeed, he says.

But thousands of employees were abruptly left unable to collect their full severance. That's because the bankruptcy code caps severance payouts at $4,650 for employees who lose their jobs in the 90 days before a filing and haven't already collected all the severance due them.

Drop in the Bucket

The upshot was that WorldCom saved about $36 million in payments, a drop in the bucket for the company and its big creditors but a huge sum for ex-employees. WorldCom has since asked the bankruptcy court for permission to pay the full severance and other benefits such as health-insurance premiums. In filings with the court, the company argues that the move would be good for the company and its creditors alike because it would preserve the goodwill of existing employees. The official committee of the company's unsecured creditors supports the motion. The court is set to hear arguments on the motion Monday.

Meanwhile, the plight of former employees at such prominent bankruptcies as WorldCom, Enron Corp. and Global Crossing Ltd. has sparked calls for reform and led some former WorldCom workers to start a grass-roots group called the ExWorldCom5100 that is fighting what it says is unfair treatment. The AFL-CIO is funding a legal battle against the severance caps, and last month, a New York bankruptcy court approved severance payments of up to $13,500 for more than 4,200 rank-and-file workers laid off following Enron's bankruptcy filing. The court also gave the former workers the right to go after more than $80 million in bonuses the company paid to its top executives days before filing for bankruptcy-court protection. The union is also backing legislative proposals that would raise the $4,650 cap to the $13,500 granted in the Enron case.

For Laura Tucker, any additional help wouldn't necessarily undo the damage that's already been done. A manager in maintenance supervision at WorldCom who was owed more than $14,000 in severance, she has seen her life upended since her layoff. Payments on her house in Rowlett, Texas, became too onerous, so she made plans to move into the garage and put the rest of the place up for rent. But that meant she had to send her 14-year-old daughter to live with her ex-husband in Maryland. "With no health insurance and no cash and no idea how I was going to hold onto this house, I didn't know what else to do," says Ms. Tucker, who hasn't had any luck finding another job.

Laid-off employees are especially bitter at the disparity between their situations and those of top executives who were leading the company as it went under. Bernard Ebbers, who resigned as WorldCom's chief executive in April, was awarded a pension of $1.5 million a year for the rest of his life and is paying about 2% interest on $408 million in loans he took from the company. However, after receiving withering criticism, the WorldCom board is now considering revoking his termination deal.

Scott Sullivan, who was fired in June from his $700,000-a-year job as chief financial officer, has since been indicted on securities-fraud charges related to an alleged scheme to falsify WorldCom's books. He didn't receive any severance. But in 2000 the board awarded him a $10 million bonus. He is building a mansion valued at more than $15 million in Boca Raton, Fla. The WorldCom spokesman says the company is seeking the return of the $10 million. Attorneys for Mr. Sullivan and Mr. Ebbers didn't return calls seeking comment.

"Scott Sullivan is not going to lose his house," says Debbie Dawson, a nine-year employee in customer service budgeting and training.

Ms. Dawson is worried she might lose hers, a $127,000 brick house in Garland, if she doesn't get another job soon. Among other things, Ms. Dawson hasn't been reimbursed for the $1,100 in work-related expenses on her company credit card. As is the practice in many companies, WorldCom's company cards were issued in employees' names and employees were reimbursed for the expenses and paid the bills themselves. But Ms. Dawson hasn't been reimbursed and can't afford to pay the bill. "I have American Express calling me for their money," she says. "That goes on my credit." She is worried that this will ultimately hinder her job search, since many employers now check potential workers' credit histories. An American Express spokesman said former employees have been getting reimbursed by WorldCom and paying their bills, though some may still be unaware of the procedure they need to follow.

Cashing Out

Ms. Dawson, who made $65,000 a year, says she was owed $13,800 in severance. She recently cashed out her 401(k). Heavily invested in WorldCom stock, it had once been valued at $98,000. After the tax penalty for withdrawing the money early, Ms. Dawson received about $1,100.

"I sold a Kate Spade purse to my sister for $50 so I could pay my phone bill," says Ms. Dawson.

SPREADING THE PAIN

Largest US bankruptcy filings since 2002, ranked by number of employees
source: BankruptcyData.com

Perhaps the biggest financial hit has come to employees' retirement funds. The company provided workers with a variety of investment options, and they were free to diversify their investments, but many felt that the message from management was that WorldCom would continue to be their best bet.

Through combinations of ignorance, faith and procrastination, many never spread the risk. Deborah Reed, who used to earn more than $40,000 a year scouting out underused phone connections, plowed most of her retirement money into WorldCom stock, at the urging of her colleagues. As the shares deteriorated, she realized she needed to overhaul her investment, but busy workdays and the preoccupations of single parenthood came first.

"I had a sticky note on my computer to do it and I never did it," says the 40-year-old Ms. Reed. "I said to myself, I can do that tomorrow." The day she was laid off, she wadded up the note in disgust.

At this point, Ms. Reed's 401(k) almost isn't worth cashing in. After tax penalties and a deduction to pay off the remaining $300 of a loan she'd taken against it, she'd be lucky to get a few hundred dollars. In July, before her unemployment checks started arriving, Ms. Reed was down to $42. Before school started, she had to ask her ex-husband to buy school supplies and clothes for her nine-year-old son, Tyler. "It just made me feel so insignificant," she says.

Jim Waldrop, a five-year employee in project management, did relatively well to salvage about $16,000 in 401(k) savings after he moved a big part of his money into safer investments and cash. He thought his job was safe because the big corporate and government contracts he worked on are so vital to WorldCom's survival, even in bankruptcy. But he and his wife, Kim, figured she might be in line for a layoff from the job in marketing at Telefon AB L.M. Ericsson she had held for 16 years. In preparation for the possibility of living on one income, they'd made a major push over the past year to pay off credit cards and save more. Then came the double whammy. They both lost their jobs within a few weeks of each other.

The manager who laid off Mr. Waldrop on June 28 knew it would come as a shock and may have suspected, as many did by then, that benefits would be decimated. "He kept saying, 'I'm so sorry, I'm so sorry,' " Mr. Waldrop recalls. "I ended up consoling him."

The contrast between his layoff and hers is their salvation. Ericsson, based in Sweden, gave Ms. Waldrop two months' notice and will be paying her almost six months' severance, plus vacation pay, while also continuing the couple's health insurance for a full year. It even let Mr. Waldrop piggyback on the outplacement service it is offering her. She hates losing her job, but Ericsson's handling of the situation has softened the blow

For Ms. Dawson, 50, financial peril is a lot closer.

"Every day I call the bank to see what checks that I've written have cleared," she says. She's dropped all the electronic payments and withdrawals from her bank account that used to automatically pay her bills. She grocery shops every other week, when her unemployment check arrives and stays out of stores the rest of the time. The stress of unemployment upsets her stomach. She has lost 17 pounds.

"I earned every penny," she fumes. "I have a box full of awards at home. I did not deserve this."

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