Wal-Mart's in Trouble With the Feds

Wal-Mart's expenses are outpacing sales growth by 2.8% (10-Q). One reason may be losses caused by "intermittent" protests created through social media campaigns. The NRLB is fighting for employees and Wal-Mart has every reason to be scared.

Feb 10, 2014 at 4:00PM

Doug McMillon, the new president and CEO of Wal-Mart Stores (NYSE:WMT), is originally from Jonesboro, Arkansas, which is just four hours and 49 minutes outside of Bentonville, the company's global headquarters. McMillon makes it more difficult for labor unions to come after Wal-Mart, as after all McMillon started off as an hourly summer associate in a Wal-Mart distribution center. Even still, Wal-Mart is under increased scrutiny for unlawful labor practices. Organizations like the National Labor Relations Board, or the NLRB, are using the nation's largest discount retailer to make a point.

The NLRB is an independent federal agency with a mandate to protect private sector employees and "improve their wages and working conditions." In November, the NLRB's general counsel issued a press release threatening to file complaints against Wal-Mart unless it settled certain charges filed against the company by employees. Ultimately, the NLRB accused Wal-Mart of unlawful retaliation for firing employees during a protest.

Over the last two years Wal-Mart workers have started walking off their jobs at the busiest times of the year, such as Thanksgiving weekend. Walking off the job isn't new, but now employees return back to their jobs after the protests are over. These short strikes are organized by several advocacy and union groups via social media forums.

I feel the need to play devil's advocate. Government prosecutors are supposed to help the settlement process along. Making a public statement in the middle of negotiations virtually guarantees a stall in the settlement process as employees use that backing to call bluffs that may or may not have merit. If Wal-Mart loses this case the implications for company earnings could be devastating, as a new era of non-union protesters use shorter strikes to exact numerous demands, from longer rest periods to increased pay.

A challenging retail environment
The retail industry is under a great deal of competition from online and specialty competitors. Comp-store sales are on the decline for many retail outlets and cuts in government spending are creating yet another challenge, especially for discount retailers that accept food stamps. These companies are looking for ways to cut expenses and labor tends to be the easiest way out.

Family Dollar Stores' (NYSE:FDO) same-store sales dropped 3% in the first quarter. The company also posted an $11.5 million litigation charge as part of a settlement to store managers regarding overtime pay. This is a common theme at dollar store chains that assign the designation of "manager" to certain employees, excluding them from basic protections in federal labor law. These "managers" work for the same amounts of time as other workers, but they don't get paid much more than the workers they manage.

Dollar Tree Stores (NASDAQ:DLTR) has numerous complaints against it -- some are single-party suits, some are class action suits. Several allege that store managers were "misclassified by the Company as exempt employees." Other suits commonly allege that Dollar Tree "failed to maintain accurate time records and wage statements; and failed to pay wages due upon termination of employment." Many of these cases, including a class action suit that included over 2000 store managers, were settled for "immaterial amounts."

The most recent earnings report from Dollar General (NYSE:DG) lists many of the same basic types of lawsuits. Several store managers have alleged that they were "improperly classified as exempt executive employees under the Fair Labor Standards Act." Last August a preliminary settlement was reached for $8.5 million -- hardly an immaterial sum. Another lawsuit was filed in May that alleges that, ""key carriers" were not provided with meal and rest periods in violation of California law".

Clearly, labor is an issue for discount retailers, which is why this case is precedent-setting.

Wal-Mart takes on the NLRB
Not surprisingly, Wal-Mart refused to settle with the NLRB. The NLRB followed suit by filing a complaint against the company on Jan. 15, alleging that Wal-Mart threatened employees engaging in a "legally protected strike." However, as a recent Forbes article points out, Wal-Mart walk-outs are not exactly legally protected.

Evidently, short and repeated work-related strikes are not covered under the National Labor Relations Act. A traditional strike usually takes place over an extended period of time; the strike has a specific objective or demand, like higher wages. As a result, employers are better able to manage through traditional strikes.

Clearly, Wal-Mart employees have stumbled upon an effective loophole, but should that loophole be honored by the law or treated as absenteeism by the employer? The NLRB believes the law should be honored and updated to include "intermittent" work stoppages. According to Forbes, Wal-Mart, leaving little room for interpretation, told its employees the following:

Should you participate in further union-orchestrated intermittent work stoppages that are part of a common plan or design to disrupt and confuse the Company's business operations, you should expect that the Company will treat any such absence as it would any other unexcused absence.

Foolish bottom line: it doesn't look good for Wal-Mart
According to Peter Schaumber, former chairman of the National Labor Relations Board under George W. Bush, the NLRB is controlled by three former union labor lawyers. If that's true, I'll be shocked if the strikes aren't approved. No doubt, this decision will have a lasting affect on both labor relations and the retail bottom line.

Whether or not the NLRB uses Wal-Mart as an example, things are looking pretty bad for the retail behemoth. If you're looking for stock ideas to put your upcoming tax refunds to work, you may want to hold off on Wal-Mart for now. Instead, the Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

C Bryant has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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