In the 1990s, the U.S. Department of Labor conducted employer surveys that revealed shockingly high rates of non-compliance with federal minimum wage and overtime laws in several low-wage industries. In 1999, for example, only 35 percent of apparel plants in New York City were in compliance with wage and hour laws; in Chicago, only 42 percent of restaurants were fully compliant. In Los Angeles, compliant grocery stores numbered 43 percent. The causes of labor standard violations are usually attributed directly to employers’ efforts to reduce labor costs. Highly competitive industries with strong cost pressures and a ready supply of workers are particularly vulnerable to labor standard violations. David Weil points out, however, that compliance within industries varies, too. Not surprisingly, large firms are more likely to comply than small ones, perhaps because large firms draw more scrutiny from regulators or because they have more market power and can afford to treat their workers better. Weil proposes that in addition to firm size other, less obvious factors influence firm behavior, and, with an award from the foundation, he will investigate three of these factors: branding, franchising, and outsourcing. Weil hypothesizes that a straightforward analysis will reveal whether these business practices increase the likelihood of wage and hour violations.
Businesses that invest significantly in establishing a brand name, for example, may be more sensitive to the effect of labor violations on their reputations, so they may also be more likely to comply with labor standards than businesses without identifiable brands. Similarly, large franchisers, whose revenues also depend in part on their reputation, may have a bigger stake in maintaining labor standards than their own franchisees, whose profits depend more directly on keeping labor costs down. Weil also notes that outsourcing has been shown to lead to labor-standard violations via shifting employment to smaller firms. This practice—subcontracting—is common in the construction industry, but Weil will look at other kinds of subcontracting where the so-called “firm-size” effect is less obvious, such as hotel chains that use third-party management companies. Weil suggests that those chain owners whose returns depend in part upon reputation will be more sensitive to the possible consequences of labor standard violations than low-profile management companies whose profits depend more directly on keeping labor costs down.
To test these hypotheses, Weil will determine the frequency of wage and hour violations by linking firm-specific data on branding, franchising, and outsourcing. The primary source will be a database maintained by the U.S. Department of Labor that provides detailed information on every investigation initiated by the Department’s Wage and Hour Division in workplaces covered by the Fair Labor Standards Act. This dataset includes detailed measures of employer compliance as well as employer size, location, and corporate affiliation. In order to examine the impact of branding and franchising, Weil will match the Department of Labor data with another public dataset, FRANdata, which provides information on the franchise status (and other characteristics) of the twenty largest brands in the eating and drinking sector. This matched data will be used to test the hypotheses regarding both brand and franchising effects on compliance. Finally, Weil will compare a second dataset to the Department of Labor information in order to test the hypothesis that third-party management companies in the hospitality industry are less compliant with U.S. labor standards than owner-operated establishments.