Venture capital firm pays the price for 'free' labor

The US Labor Department concludes that Fenox Venture Capital illegally labeled 56 employees as interns. Now, the firm must pay them for three years of unpaid work.

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Fenox Venture Capital must pay back wages and damages of more than $331,000, according to the US Labor Department.

David Hitch/Illustration Works/Corbis

At the end of 2014, a founding partner of a Silicon Valley venture capital firm seemed to make a generous donation, giving the proceeds of his book, "Startup Bible," to help rebuild Japan in the wake of the deadly 2011 earthquake, tsunami and nuclear plant meltdown.

Anis Uzzaman's donation now looks more like a desperate plea for forgiveness.

On Monday, it became clear why. Uzzaman's firm, Fenox Venture Capital, stiffed dozens of its employees for years, according to the US Department of Labor, which revealed this week that it ordered Fenox to pay $331,269 in back wages and damages.

A Labor Department investigation, which began in late 2014, found that San Jose, California-based Fenox labeled 56 workers as unpaid interns between September 2011 and September 2014. The company used their free labor to perform a wide variety of tasks that its US- and Japan-born workers should have been paid for, the government said.

Interns even recruited for the firm and screened startups for possible investment -- that is, a venture capital firm's key job.

Other work the interns performed including the translation of Uzzaman's book into Japanese. The book's premise? Teaching Japan how to follow Silicon Valley's success.

"It's somewhat ironic," Michael Eastwood, an assistant district director at the Labor Department, said about Uzzaman's use of free labor.

"A large number of employees worked for free providing hundreds of man hours for this company to make a profit," Eastwood said. "For them to not even pay minimum wage in [San Francisco] Bay is really appalling."

To be sure, working for free in a San Jose office is not comparable to toiling for free in a diamond mine. But living in the Bay Area without a salary couldn't be easy.

US law, specifically the Fair Labor Standards Act, requires that companies pay interns if they're performing work that the company would hire someone to do, among other criteria.

A venture capital firm getting busted for labor violations pretty unusual, Eastwood noted.

Fenox's problem with the feds is only the latest in a series of Silicon Valley's self-inflicted wounds. Tech firms have already cultivated the image of culture hostile to women and venture capitalists have a knack for adding fuel to that fire.

Breaking American labor law in pursuit of another nickel isn't a new thing in the Valley either. Last year, a federal judge approved a $415 million settlement in a class action suit against Apple, Google, Intel and Adobe Systems. The judge found that the companies had conspired between 2005 and 2009 to avoid competing for one another's workers, a tactic the lawsuit alleged was designed to keep salaries lower.

Tech firms have also captured federal regulators' attention over their use -- and misuse -- of immigrant labor. A 2014 Labor Department investigation found that Valley-based Electronics For Imaging, or EFI, compensated a group of Indian workers in Indian rupees, paying them as little as $1.21 per hour for work they did in Silicon Valley. That company would not respond to a request for comment.

By Valley standards, Fenox is a lesser-known player in the venture capital business. Founded by Uzzaman and Vitaliy Arbuzov, the firm says it targets a wide range of startups, including ones in virtual and augmented reality, health care and robotics.

Fenox did not return requests for comment.

For Anand Sanwal, CEO of venture capital research firm CB Insights, the lure of breaking into Silicon Valley probably allowed Fenox to get away with using unpaid interns in the first place.

"It's a sexy industry," he said. "If you're a young, aspiring college student who wants to get in, it's something that people would probably do for free."

Still, Sanwal said, this isn't the type of publicity Fenox wants.

"VCs don't want their names associated with this."

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