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Unethical Business Practices in the Foodservice Industry

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Unethical Business Practices in the

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a b c
Mike Woods , Natasa Christodoulidou , Burhan Yavas & Demos
d
Vardiabasis
a
Executive Programs, Pepperdine University , Malibu , CA , USA
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Department of Management and Marketing, California State
University Dominguez Hills , Carson , CA , USA
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Department of Accounting, Finance, and Economics, California
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School of Business and Management, Pepperdine University ,
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To cite this article: Mike Woods , Natasa Christodoulidou , Burhan Yavas & Demos Vardiabasis (2013)
Unethical Business Practices in the Foodservice Industry, Journal of Foodservice Business Research,
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 Journal of Foodservice Business Research, 16:407–419, 2013
Copyright © Taylor & Francis Group, LLC
ISSN: 1537-8020 print/1537-8039 online
DOI: 10.1080/15378020.2013.824284

Unethical Business Practices

in the Foodservice Industry

MIKE WOODS
Executive Programs, Pepperdine University, Malibu, CA, USA

NATASA CHRISTODOULIDOU
Department of Management and Marketing, California State University Dominguez
Hills, Carson, CA, USA
Downloaded by [Burhan Yavas] at 21:05 26 September 2013

BURHAN YAVAS
Department of Accounting, Finance, and Economics, California State University
Dominguez Hills, Carson, CA, USA

DEMOS VARDIABASIS
School of Business and Management, Pepperdine University, Malibu, CA, USA

This article examines how unethical management styles manifest

themselves within the restaurant industry in the United States.
We look at (a) individual case histories of violations committed
against particular foodservice workers and (b) more general pat-
terns of abuse that have arisen throughout the restaurant industry.
The effect of slackening regulations and enforcement of labor laws
by the Department of Labor, as well as other methods selected by
disgruntled employees in an effort to redress abuse on the part of
managers when it comes to wages and working conditions, are also
examined. The problems of labor abuse in the foodservice industry
are a reflection of negative leadership behavior in U.S. business as a
whole. Some recommendations are made as possible considerations
for solutions to these problems.

KEYWORDS dark leadership, unethical practices, hospitality

industry, restaurant industry

Address correspondence to Natasa Christodoulidou, 401 Via Sonador, Henderson, NV

89012, USA. E-mail: nchristodoulidou@csudh.edu

407
 408 M. Woods et al.

INTRODUCTION

In recent decades, we have witnessed a spate of high-profile business and

economic scandals involving what have come to be known as dark side
or toxic leaders and managers (Luthans, Peterson, & Ibrayeva, 1998). The
headlines have been filled with miscreant businessmen, ranging from Charles
Keating (savings and loan) and Michael Milken (junk bonds) in the 1980s to
Kenneth Lay (Enron), Bernard Ebbers (WorldCom) and Dennis Kozlowski
(Tyco International) in the 21st century. While the particulars of their wrong-
doings may differ, they all have one thing in common: they used their power
and influence to create situations and conditions within their respective busi-
nesses that eventually destroyed those businesses, as well as the livelihoods
and even the lives of thousands of employees and associates.
However, it is a mistake to assume that these types of leaders exist
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only in giant corporations and multinationals or within certain industries.

One of the definitions of dark side leadership has such events taking place
whenever “a leader’s behaviors become exaggerated, lose touch with reality,
or become vehicles for purely personal gain,” thus raising the possibility
that the behavior “may harm the leader and the organization” (Conger, 1990,
p. 44). This distorted model of leadership can be transmitted down to the
middle and lower levels of management; it can affect medium-sized and
small firms just as badly as large ones; and it is particularly prevalent in those
areas where worker rights and workplace protections are weakest—such as
the restaurant, fast-food franchise, and hospitality sectors of the economy.
According to Ruckelshaus (2008),

Almost every growing sector in the bottom half of our economy . . .

is plagued by penurious employers who drag down working condi-
tions for everyone. Common schemes emerge in jobs with sweatshop
conditions: employers hide behind subcontractors, call their workers
“independent contractors” not covered by workplace laws, and hire
immigrant workers who are subjected to substandard conditions. . . . In
addition to providing paltry benefits, if any, employers in these sectors
routinely violate bedrock employment rights like the right to be paid
fully for work and the right to a safe workplace . . . As if that were
not enough, workers face barriers to enforcing their basic job rights,
including antiquated rules for bringing class actions in private litiga-
tion, and fear of reprisals that go unchecked when workers complain.
(pp. 373, 375)

Another way to look at unethical leadership management is to define it as

leadership that does not have the four necessary ethical components of moral
sensitivity, moral judgment, moral motivation and moral action (Hackman &
Johnson, 2000).
 Unethical Business Practices 409

Business Ethics, Quo Vadis?

The underlying problem, according to many business theorists, is that
the concept of business ethics and moral leadership is no longer taken
seriously:

Neither term carries credibility in popular culture and when conjoined

constitutes a “null set” rather than just a simple contradiction in terms . . .
More significant is that we have so few models of businesses and leaders
operating on ethical principles. (Gini, 1998, p. 27)

In studies dealing with the behavior of leaders and managers in the

business community, there have been two general approaches in attempts to
understand why some business leaders have turned toxic: that put forward
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by McIntosh and Rima (1998), holding that it is the personality of the person
that determines what kind of leader he or she can be; and that espoused by
Howell and Avolio (1992) is more sociological and value-neutral in nature,
stating that it is not possible to determine beforehand whether any partic-
ular leader will be moral or immoral. The first theory is psychological and
does not take social, economic, or political conditions into consideration;
the second is value-neutral and maintains that if environmental factors create
opportunities for misconduct and abuse those will inevitably occur.
In this article the basic assumption is that dark side leadership is a com-
bination of these factors, but that it is mainly environmental situations and
lax regulatory conditions that create the circumstances for unethical business
practices to grow and flourish. The main thrust of the article is the effect
that such negative leadership has on workers in the foodservice industry
(more specifically, the restaurant subset of the industry). If it is found that
the abuses within the industry are the result of individual managers, then the
removal of these managers who abuse power is advocated. If, on the other
hand, it is found that the abuse is more the result of structural components
within the business (i.e., the nature of the business in its attempts to secure
as profitable a bottom line as possible), then it appears that other remedies
are in order, including a change in the way the restaurant industry conducts
business.

Labor Trends
A troubling series of trends have been identified that are instrumental
in helping prop up the poor conditions experienced by numerous low-
wage earners in areas such as health care, retail services, and others in
the foodservice field. Among the problems that have been identified and
quantified with respect to what is the fastest growing sector of the U.S.
economy are:
 410 M. Woods et al.

● 26% of New York City’s domestic workers earn less than the poverty line
(Domestic Workers United and Datacenter, 2006);
● 50% of day laborers suffer wage theft of some kind (Valenzuela, 2006);
● 20% of home health-care aides live below the poverty line (Scanlon, 2001);
● (U.S. Department of Labor, 2000);
● a 100% non-compliance rate for poultry processing (national Employment
Law Project, 2003);
● a 50% non-compliance rate for garment manufacturing (“Close to half,”
2006);
● a majority of restaurants in New York City are out of compliance
(Restaurant Opportunities Center of New York & New York City Restaurant
Industry Coalition [ROC-NY & NYCRIC], 2005).

These trends, although clearly identified in various studies, including the

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National Employment Law Project’s Holding the Wage Floor: Enforcement of

Wage and Hour Standards for Low Wage Workers in an Era of Government
Inaction and Employer Unaccountability (2006) have been allowed to move
forward without being checked, starting with the U.S. Department of Labor’s
overly narrow interpretation of the rules (in favor of the employer in most
instances) and blatant lack of enforcement even when something is so
obviously wrong:

Public enforcement of the Fair Labor Standards Act (“FLSA”) and other
baseline workplace standards is down . . . federal and state agencies
charged with enforcing baseline wage and hour laws are not having an
impact. Employers know that there is little to fear from public enforce-
ment of workplace violations, and so do not change their practices.
In addition, the DOL has interpreted laws to exempt large classes of
low-wage workers from basic wage and hour protections . . . In general,
despite the persistence of sub-par jobs, the DOL has not made it a priority
to stem these abuses. (Ruckelshaus, 2008, p. 375)

A series of studies conducted to determine how effective the DOL has

been in controlling abusive employer practices have concluded that any
enforcement attempted has been shoddy and haphazard:

While public agencies are by their nature underfunded and understaffed,

the DOL has been particularly under subsidized in recent years. In addi-
tion, it has failed to use its resources strategically to have the broadest
impact, as it has in the past with, for instance, targeted audits and affir-
mative task forces aimed at priority industries. . . .Then the DOL does
enforce its workplace laws, it makes a difference in the wage levels of
workers in workplaces beyond those it chooses to bring enforcements
actions against. (Ruckelshaus, 2008, pp. 376–378)
 Unethical Business Practices 411

Private Enforcement
One argument is that Americans who do not receive government help in the
resolution of problems can always turn to private enforcement. However,
by the very nature of the sector in which most of these employees work,
there are significant problems and barriers when employees go looking for
a redress to employer violations of the labor contract:

Because employment in the United States is at-will, most workers

fear employer reprisals for complaining about wage and hour viola-
tions, including losing their jobs . . . In the face of government non-
involvement, private lawsuits have become more popular, but employees
bringing private lawsuits cannot bring class actions because of a unique
federal law limitation in the federal FLSA requiring each individual worker
to affirmatively opt-in to a lawsuit by filing a written consent to sue with
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the court . . . Immigrant workers face an additional barrier to enforcing

their rights if the employer threatens to or does in fact call in the Bureau
of Immigration and Customs Enforcement (“ICE”), which has the power
to detain and, in some cases, deport workers without work authorization.
(Ruckelshaus, 2008, p. 383)

Class-action Lawsuits
Class-action lawsuits have served as an increasingly effective way for
employees to gain fair pay and to fight against abuses, forcing employers to
change the way they do business in some instances (“Close to half,” 2004).
Class action lawsuits turned out to be a much more effective way of recoup-
ing unpaid wages, forcing substantial damage payments and in keeping
employers in line than the threat of DOL regulation and enforcement.
In the next section, we discuss some general ideas and theories as
well as trends in the restaurant industry, and identify patterns of abuse of
employees.

POSITIVE IDEAS AND THEORIES

According to Ball (1992), the restaurant industry in general and the fast-
food segment in particular is in a continuous, accelerating growth pattern:
Fast food is a worldwide phenomenon with more people than ever con-
suming fast-food products both in their own country and abroad. The
sector generates large revenues for its providers and is a valuable contrib-
utor to government revenues, economic growth, the balance of payments,
and employment in many countries. This means that many investors find
this industry attractive, and that small business entrepreneurs are drawn to
 412 M. Woods et al.

franchise and restaurant chain operation as an opportunity to generate large

profits under private ownership conditions.
At the same time, many of the characteristics of the restaurant and fast-
food industry seem to be set up for potential abuse without proper controls.
These traits include a strong reliance on part-time labor, casual and youth
labor, wages that in some cases are below the minimums set by law, and
a lack of formal education on the part of those involved in management.
There is also a lack of union organization among the workers in this industry.
Finally, there is the matter of standards, with some segments of the industry
being lackadaisical in their approach to methodology and standardization
(e.g., bars and taverns) and others being almost mechanical and assembly
line in theirs (e.g., fast-food chains).
Employees working on vehicle assembly lines in the automotive indus-
try are unionized labor, earning three to four times the hourly wage given to
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fast-food employees and far better protected in terms of employment rights

and benefits. The question can then be asked: if employees do not receive
much in the way of wage incentives and even less in terms of rights and
benefits, what are the primary incentives for an employee to choose a par-
ticular employer in the restaurant business? In a survey conducted by the
Foodservice Research Forum (1997), it was found that employees who were
able to work for an employer of their choice tended to be more satisfied with
their jobs, were considered more able to do their jobs well, stayed longer
at the job, and provided better customer satisfaction. The survey tended to
support the theory of “service—profit chain,” whereby an employee’s atti-
tudes tend to lead to customer satisfaction and loyalty, which in turn leads
to higher company profits (Heskett, Sasser, & Schlesinger, 1997). On the
negative side, it has been shown quite clearly that unhappy employees are
quick to change jobs and that this kind of turnover has a deleterious effect
on business. Turnover costs occur in terms of separation, replacement, and
training expenses. Also, employees who are new to the job make more
mistakes. Several studies have found that employee turnover can have a
noticeable cost, with one study indicating that the turnover cost for one
front-desk employee at a hotel was 30% of salary (Hinkin & Tracey, 2000).
Another study put the cost at about $5,000 per employee (Simons & Hinkin,
2001).
Despite all the studies indicating the correlation between employee
satisfaction, customer satisfaction, and increased bottom lines for restau-
rants, there still remains a perception among some restaurant managers that
employees are dispensable and interchangeable, and for other restaurant
managers that this marketplace reality gives them the right to treat employees
in whatever manner they like.
In the next section, we look at some individual case histories of abuse
of restaurant workers as a means of developing a pattern that can be used
for further analysis of the problem.
 Unethical Business Practices 413

WORKER ABUSE CASE HISTORIES

Pizza Restaurant: Arizona
One of the most egregious examples of worker abuse is alleged to have
taken place at a pizza establishment in Arizona. In interviews with more
than 150 ex-employees, taken in the early 2000s, sworn notarized affidavits
noted a host of employee abuse incidents, including:

● being short-changed on their paychecks

● being forced to work off the clock
● rounding out the time-clocks so that it always favored the management
● questioning hours worked
● clocking everyone out at a certain time and then forcing them to work extra
● making delivery people pay out of their tips for errors made in the kitchen
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● changing the schedules in mid-week so that it was difficult for employees

to keep track of their own time
● employing minors and paying them off the books
● female employees being forced to have sex with the manager

The various affidavits and interviews with former employees resulted

in a class action lawsuit against the establishment and its related companies.
Aside from the complaints alleged, the lawsuit also stated that each defendant
either directly or indirectly encouraged or knowingly acquiesced in these
labor violations in order to minimize labor costs and meet performance levels
that were financially rewarded by defendants (“Lawsuit filed,” 2001).
The idea of toxic dark side leadership management seems to be a perfect
fit for this particular instance of worker abuse on a grand scale. This case is
not necessarily representative of all large fast food franchise operation, but it
is typical enough to pose an underlying problem of management ethics.

New York City

If the pizza establishment in Arizona was simply an anomaly when it came
to restaurant worker abuse, it might be easier to identify and quarantine the
management there as an aberration. Other abuses cited included employees
routinely having their tips stolen by management and some employees were
physically abused.
Unfortunately, U.S. labor laws presently do not serve as much of a
deterrent for those who underpay and abuse their employees. An employee
may sue to be paid back wages but unlike other types of civil action, he or
she cannot sue for punitive damages. Restaurants routinely pay small fines
for wage and hour violations—then turn around and continue to commit
the same infractions because it is simply more profitable for them pay up
and continue the same practices. In a report published by the Restaurant
 414 M. Woods et al.

Opportunities Center of New York (ROC-NY), the following conditions were

noted:

● restaurant workers’ wages have remained at $20,000 per year for 20 years
● 80% of workers earn low wages
● 60% of workers earn poverty wages
● non-payment of overtime wages and stealing tips is pervasive
● high levels of accidents and injuries with few benefits (ROC-NY & NYCRIC,
2005).

According to this report, there are two ways for restaurant employers
to make a profit in New York City (and in all other locations)—they can
take the “high road” or the “low road.” Considering that New York is home
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to some 15,000 foodservice and drinking locations, as well as 24 of the top

100 highest grossing restaurants in the United States, the effects of restaurants
taking the “low road” can be dramatic and widespread. This is especially true
in terms of the sheer number of employment opportunities offered within the
industry. Close to 170,000 persons are currently employed in the New York
City restaurant industry. That number is greater than the number of persons
employed in all the hospitals, manufacturing, real estate, or construction jobs
in the seven boroughs (U.S. Bureau of the Census, 2003).
Putting together 530 surveys and 45 personal interviews with restaurant
workers between June and November 2003, the same ROC-NY report found
that most workers,

● reported low wages

● do not get benefits such as health coverage, vacation, or paid sick days
● do not receive regular raises or promotions or on the job training
● many are paid less than minimum wage
● many are not paid overtime
● some are not paid at all for time worked after 40 hours a week
● there were many health and safety hazards with a lack of training and
many on the job injuries
● workplaces are chronically understaffed
● asserting one’s rights most often led to verbal and even physical abuse
(ROC-NY & NYCRIC, 2005).

While foodservice employers by themselves have not seemed all that

interested in advancing worker rights and ensuring that illegal practices are
halted, restaurant workers have banded together for more clout, and there
are lawsuit settlements taking place (Franklin, 2008). In all, ROC-NY has
won back more than half a million in unpaid wages and discrimination
payments, and won several campaigns against foodservice employers who
 Unethical Business Practices 415

were found to be systematically abusive towards their employees. However,

as the report points out, that sum is merely the tip of the iceberg when it
comes to calculating the effects of worker abuse in the foodservices industry.
Such back-pay compensation does not address the collective psychological
and emotional damage done to restaurant employees through the use of
tactics that include threats, bullying, retaliation for filing complaints, and
deportation.
According to Keashly and Neuman (2005), “the harm to workers runs the
gamut of human misery including anxiety, depression, burnout, frustration,
helplessness, difficulty concentrating, lowered self-esteem and self-efficacy”
(p. 335). As well, there are studies of increased alcohol abuse and post-
traumatic stress disorder, emotional exhaustion, and environments riddled
with apprehension, distrust, anger and suspicion (Richman, Flaherty, &
Rospenda, 1996). Further studies indicate that this phenomenon of abuse
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at work is fairly common among U.S. workers, with 28–36% of workers

reporting some type of persistent abuse (Keashly & Neuman, 2005).

CONCLUSIONS

In an examination of unregulated work in New York City, it was found that

there are many forces at work that put pressure on industries to act in this
way. Among them:

● Three decades of economic restructuring: Factors include globalization,

deindustrialization and deunionization, helping to push down wages and
create almost 19th century conditions
● Poor enforcement: While data show that strong enforcement of laws for
minimum wage, overtime, and health and safety, serve to lower violations,
that is not the case at the present time.
● Poor legal standards: A change in the definition of employer–employee has
helped create an entire sub-class of independent contractors, temporary
workers, day laborers, and subcontracted workers.
● Dysfunctional immigration policies: While workers are allowed into the
country, they are denied any legal status. This leads to an underclass that
lacks documentation, is afraid of being discovered, and makes for easy
pickings for employers who wish to exploit that class for their own profits
(Bernhardt, McGrath, & DeFilippis, 2007).

All the indications are that the foodservice industry is rife with toxic lead-
ers and that violations of workers’ rights seem to be the norm rather than
the exception. The nature of the business and the fact that it can be
volatile and seasonal leads to restaurants competing through cost-cutting
 416 M. Woods et al.

rather than actual profit margin increases. It appears that both patterns of
abuse—personal and systemic—coexist when it comes to leadership and
management styles in the foodservice industry. Examples of malicious and
abusive behavior toward staff have made headlines and led to serious class
action lawsuits that almost invariably are won by the plaintiffs, even if they
are only organized by their attorneys and lack union representation. The
sindividual managers in these cases came across as vicious, selfish, greedy,
and power-hungry. They were many true examples of the toxic, dark side
leader, as exemplified by the pizza establishment in Arizona. However,
it should be noted that the various lawsuits were not simply aimed at
this establishment and that several larger corporations were also named as
defendants.
If the matter of restaurant toxic-leadership behavior were simply that
of greedy and unethical individuals, then there would be no need for the
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kind of political/social/labor action being setup by groups such as ROC-NY.

The fact that the problems and violations seem to be endemic throughout
the industry (and throughout the low-wage sector of the economy in gen-
eral) has been widely shown in the various reports presented earlier in this
article.
Thus, while there is a natural human tendency to lean toward a psy-
chological explanation for what has taken place and what is still taken place
in the restaurant industry when it comes to the mistreatment and abuse of
employees, this explanation fails to cover the seemingly endemic nature of
such abuses in our society. In fact, judging from the studies cited earlier, the
more logical explanation would cite lax laws, lax enforcement of existing
laws, and lax punishment for the abuses committed as greater incentives to
continue with the abuses for as long as possible. The fact someone is a toxic
or dark side leader comes into play only after the other factors have been
examined. Those other factors include what could very well be the inherent
nature of unbridled free market capitalism as practiced today in the United
States:

Normative models may tentatively note the importance of “what works,”

but they refuse to pursue the question to its logical extreme. That logical
extreme, for capitalist firms, is to make a profit, indeed, to maximize
profits. Capitalism, by its structural logic, undermines a commitment to
values on the part of capitalists and their organizations. When values-
based leadership and culture offer competitive advantage, they may be
embraced; but if they detract from competitive advantage they must be
rejected or they will drag a firm to ruin. (Harvey, 2001)

The malignant behavior of some leaders toward foodservice employ-

ees is, therefore, the result of a combination of personal psychology and
sociological circumstances: the events, conditions, situations, and economic
 Unethical Business Practices 417

instances and interests that create opportunities for the moral lapse.
However, it is weighted heavily toward those sociological circumstances.
Changing those events, conditions, situations, and economic instances and
interests would go a long way toward alleviating the problems and violations
suffered by such workers. Changing those circumstances would involve a
series of events including: (a) the tightening of DOL rules and regulations
with respect to employee abuse, the reporting of that abuse, and the acting
upon that abuse; (b) an increase in actual field inspectors and investigators;
(c) making it easier to organize employees so that they cannot be so easily
intimidated; and (d) the changing of the provisions of the FLSA regulation
having to do with lawsuits under section 16(b), thus allowing collective
action lawsuits to become class action lawsuits (Fair Labor Standards Act,
29 U.S.C. § 216, 1938). According to Becker and Strauss (2008):
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If Congress wishes to truly adopt a Class Action Fairness Act, it will amend
section 16(b) to remove the opt-in requirement and thereby harmonize
the law of collective actions under the FLSA with the rules applied to
virtually all other causes of action brought on behalf of a class in the
federal and state courts. (p. 1347)

To summarize, it appears that it is vigilance and vigilance alone that will

help reduce the amount of employee abuse found within the restaurant and
fast-food industry. While such a reduction (and hopefully the elimination of
abuse at some point) will naturally help the individual employees, it will also
help the economy as a whole. In creating a just and fair society for workers,
these workplace reforms will improve the ethical climate of U.S. business at
the ground level, with ripple effects that may be felt up to the highest levels
of corporate management.

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