Darden Restaurants
by Philip Mattera
Darden dominates the full-service restaurant sector with more than 2,000 locations that serve more than 400 million meals per year. Its Olive Garden and Red Lobster restaurants can be found throughout the United States, though the company has announced plans to sell the latter chain. The company also operates smaller chains such as LongHorn Steakhouse and Capital Grille. Outside the U.S., Darden's presence has been limited to a few dozen company-owned locations in Canada and similar numbers of franchise outlets in Asia and the Middle East. It is also beginning to expand into various parts of Latin America.
Darden, which has some 195,000 hourly employees, has been embroiled in numerous controversies over its labor practices and is a leading foe of workplace reforms such as paid sick days.
In October 2013 hedge fund Barington Capital Group launched an effort to force the company to split in two. Two months later, facing poor financial results, Darden gave in to the pressure and announced that it would spin off or sell its Red Lobster chain while also halting expansion of the Olive Garden chain and refraining from new acquisitions. Barington and another hedge fund, Starboard Value, are pressing for more aggressive restructuring. Darden, nonetheless, announced plans in May 2014 to sell only Red Lobster. More changes are expected in the wake of a successful October 2014 move by Starboard to replace Darden's entire board of directors.
The Green Frog
The company traces its roots back to 1938, when William Darden opened a lunch counter in Waycross, Georgia called The Green Frog. Bill Darden went on to open other eateries, but it was not until the late 1960s, when he started to build a string of moderately priced seafood restaurants in Florida, that those efforts began to have a significant impact. His Red Lobster chain was a roaring success and attracted the attention of food giant General Mills, which bought the company in 1970.
Bill Darden remained in charge after the acquisition, but it was his successor Joe Lee who spearheaded the growth of the chain using assembly-line methods like those employed at the company's fast food counterpart, McDonald's. Looking to expand its restaurant segment, General Mills launched an Italian-style chain called Olive Garden in 1982. Despite negative reviews of its menu, Olive Garden was a hit. Within a decade it had some 340 outlets and more than $800 million in annual revenues.
In 1995 General Mills decided to spin off its restaurant operations so it could focus on consumer food products. Joe Lee named the new company Darden Restaurants in honor of the Red Lobster founder. Darden subsequently introduced new chains such as Bahama Breeze Caribbean Grille, and in 2007 it acquired RARE Hospitality Inc., operator of the LongHorn Steakhouse chain and the upscale Capital Grilles.
Darden brags that in the 1930s its founder took the bold step of welcoming diners of any race in his restaurants, located in the South, but the company has adopted somewhat less enlightened practices in more recent years, especially with regard to its employees. These practices have prompted protests at the company’s annual meetings in recent years.
Wage and Hour Disputes
For more than a decade, Darden has been accused of using various means to shortchange its workers on their paychecks, a practice known as wage theft. In 2005 the company agreed to pay $9.5 million to more than 20,000 current and former servers at Red Lobster and Olive Garden outlets in California to settle a lawsuit claiming that the restaurants violated state labor regulations by preventing workers from taking required breaks and by requiring them to purchase and maintain their uniforms.
Three years later, Darden disclosed that it had paid $4 million to settle two class-action lawsuits alleging that it had violated California law in requiring servers and bartenders to make up for cash shortages at the end of their shifts. Also in 2008, Darden reported that it had paid $700,000 to settle another California suit claiming several types of wage and hour violations, including a failure to provide itemized wage statements and timely pay when an employee was terminated.
In 2011, following a U.S. Labor Department investigation that found workers were not being paid for all their hours, Darden agreed to pay $25,000 in back wages to 140 current and former servers at an Olive Garden in Mesquite, Texas. The company was also fined $30,800. That same year, the company consented to pay $27,000 in back pay and was fined $23,980 in connection with a similar federal investigation at a Red Lobster in Lubbock, Texas.
In the wake of the two Texas cases, suits were brought against Darden in several other states. For example, in early 2012 Restaurant Opportunities Centers United (ROC United) filed a class action case on behalf of Darden workers at the company's Capital Grille restaurants. For technical reasons, the action was later divided into separate actions in five jurisdictions (all are still pending).
An even larger legal challenge to the company came in September 2012, when a class action suit was filed in federal court in Miami on behalf of all current and former employees (back to 2009) at five of Darden's chains. The 54 named plaintiffs in the case stated that the company did not pay them for the period between the beginning of their shifts and the time customers began to arrive, thereby forcing them to do prep work off the clock. Darden was also accused of failing to pay time-and-a-half for those working more than 40 hours per week and for improperly applying the lower subminimum wage for tipped workers when they were engaged in non-serving tasks.
The complaint in the case -- which described the company as having "a steadfast, single minded focus on minimizing its labor costs" by arranging to have "as many tasks as possible performed by as few employees as possible" -- also alleged that two of the named plaintiffs had suffered retaliation from management because of their participation in the case. As of October 8, 2013, approximately 13,000 current and former Darden servers had joined the suit, which is pending.
Darden is one of the large companies that pay workers with debit cards, a practice that has generated controversy because of the onerous fees often imposed by the card issuers. Darden is among the employers that have been contacted by the New York State Attorney General's office, which is conducting an investigation of the practice.
Employee Benefits
In anticipation of the Affordable Care Act's penalties on large employers that do not provide health coverage for full-time workers, Darden switched more of its workers to part-time status in 2012, but it later abandoned that plan in the face of criticism.
Discriminatory Practices and Racial and Sexual Harassment
The ROC United wage theft actions against Capital Grille also allege that the chain has engaged in a pattern of racial discrimination, including the denial of better-paid server and bartender jobs to non-white workers.
In 2009 the U.S. Equal Employment Opportunity Commission announced that Darden's Bahama Breeze chain would pay $1.26 million to settle allegations that managers at its restaurant in Beachwood, Ohio had subjected 37 black workers to repeated overt racial harassment. In addition to the monetary relief, the chain signed a three-year consent decree requiring it to improve its anti-discrimination practices throughout the country.
In September 2013 the EEOC filed suit against Red Lobster, alleging that female workers at its restaurant in Salisbury, Maryland have been subjected to "pervasive sexual harassment." According to the agency, the harassment was committed by a manager, whose superior was said to have failed to take prompt action on the matter despite complaints from at least one of the affected workers.
Tipping Issues
In February 2011 Darden announced that it would require servers to share their tips with bartenders and busboys. The move was seen as a way for the company to reduce its labor costs by subjecting more workers to the sub-minimum wage for tipped workers.
In the wake of an Internal Revenue Service ruling that automatic tips such as those that some of Darden's restaurants apply to larger groups would be treated as wages and thus subject to payroll taxes, the company is reportedly considering ending the practice.
In December 2013 Darden announced that it would do away with the 18-percent automatic gratuities it was adding to parties of eight or more.
Lobbying Activities
Darden has also sought to lower its labor costs by becoming more active in the public policy arena. Until 2007 Darden spent less than $250,000 a year on federal lobbying. Beginning in 2008 that amount jumped to well over $1 million annually.
In 2006 the company hired veteran corporate operative Robert McAdam to be its Senior Vice President of Government and Community Affairs. He previously worked for Wal-Mart and the Tobacco Institute. McAdam joined the board of the American Legislative Exchange Council (ALEC), the organization that writes corporate-friendly legislation frequently adopted by conservative state legislators. (Darden was later one of dozens of companies to leave the group.) The company remains a prominent participant in the National Restaurant Association (NRA), where McAdam is a member of the board of directors.
The NRA has promoted policies that enhance Darden's bottom line. It has opposed living wage initiatives, worked to keep the minimum wage for tipped workers at $2.13 an hour (where it has remained since 1991) and resisted efforts by labor groups to enact mandatory paid sick days, often by promoting state laws that pre-empt local ordinances on the issue. Darden is reported to have helped write the pre-emption bill in Florida.
Darden CEO Clarence Otis personally lobbied against a California bill designed to penalize large companies whose workers have to depend on Medicaid for their healthcare coverage.
The company, nonetheless, highlights the fact that it has been included in Fortune's list of the Best Companies to Work For. The legitimacy of that list--which is produced by an organization, the Great Place to Work Institute, which sells consulting services to the companies it ranks--has come under question.
Hygiene Issues
Although Darden emphasizes its commitment to food safety, the company has faced a series of incidents involving food poisoning . For example, in 2002 an outbreak of salmonella that affected about 180 persons (including one who died) was tied to a Red Lobster in Chattanooga, Tennessee.
In 2006 more than 300 people who had eaten at an Olive Garden an Indianapolis suburb were reported to have experienced gastrointestinal illness. Several employees tested positive for norovirus. The company later settled a class action lawsuit linked to the incident for $387,000.
In 2011 officials in Cumberland County, North Carolina advised persons who had eaten at an Olive Garden in Fayetteville during an eight-day period to get a Hepatitis A shot because a worker at the restaurant had tested positive for the disease. Darden settled a lawsuit linked to the incident by establishing a $375,000 fund out of which those who had been immunized would each receive $250.
In the summer of 2013 the U.S. Food and Drug Administration linked prepackaged salads from Mexico served at Olive Garden and Red Lobster restaurants in Iowa and Nebraska to an outbreak of the stomach virus cyclospora that affected several hundred people.
Consumer Protection
In 2007 Darden settled Federal Trade Commission allegations that it deceived consumers in the sale of gift cards by failing to disclose adequately the "dormancy fees" that would be subtracted from the value of the cards after a period of non-use. In addition to improving its disclosure practices, Darden agreed to refund fees that had been charged. The FTC did not announce the total cost of the refunds, but Darden had reported that the agency was proposing a figure of $31 million.
In 2009, Darden's Olive Garden chain settled a class action alleging that it had violated federal law by printing the last six digits of customer credit card numbers on receipts (rather than the legal limit of five digits). The settlement consisted of $9 appetizer vouchers sent to about 12,000 affected customers.
Tax Avoidance and Subsidies
In 2006, following what it claimed was a nationwide search for a new headquarters location, Darden decided to stay in Orange County, Florida after negotiating at least $12.3 million in state and local economic development subsidies for new offices. The total included a $2.5 million Qualified Target Industry Tax Refund and a $2 million Economic Development Transportation fund award.
Because Darden’s corporate income tax liability was not large enough to take full advantage of the state credits it had been offered, in 2011 the company began lobbying the Florida legislature for the right to apply the credit to its sales tax liabilities instead. The change was said to be worth about $5 million a year. The legislature adopted the change but specified that it would begin only after 20 years.
Darden has sought to further reduce its property tax payments by challenging the appraised value of the furniture and equipment in its headquarters. Its appeals were rejected in 2011 and 2012.
Campaigns and Watchdog Groups
Restaurant Opportunities Centers (ROC) United
Key Books and Reports
Behind the Kitchen Door by Saru Jayaraman (ILR Press, 2013).
Blacks in the Restaurant Industry Brief (Restaurant Opportunities Centers United, December 2011).
Darden’s Decision: Which Future for Olive Garden, Red Lobster & the Capital Grille? (Restaurant Opportunities Centers United, October 2012).
updated October 13, 2014
research assistance from Thomas Mattera