FOR VICTOR ZAVALA, THE AMERICAN dream ended at 7am on a chilly Thursday
last month. As he walked across the car park of the Wal-Mart superstore in
Piscataway, New Jersey, where he had spent an overnight shift scrubbing
floors, two police cars and two unmarked cars sped towards him. Within
seconds, he was in handcuffs.

Mr Zavala, an illegal immigrant from Mexico, says he had worked for three
years cleaning Wal-Mart stores seven nights, or 60 hours, a week, earning
about $6 an hour. He got no overtime pay, health insurance or sick leave;
he also paid no taxes or social security. He never got a day off; his
request for a week's honeymoon leave in February was denied.

Now facing deportation, Mr Zavala, 28, was employed by a cleaning
contractor, not by Wal-Mart. But he is one of nine cleaners suing the
world's largest retailer in what they aim to make a class action suit. It
alleges Wal-Mart knew the workers were illegal and violated federal
racketeering laws by conspiring with cleaning contractors to pay them low
wages.

The nine are among 250 illegal workers arrested in raids on October 23
outside 61 Wal-Mart stores in 21 states, in one of the biggest operations
of its kind. Immigration officers also searched a mid-level manager's
office at Wal-Mart's Bentonville, Arkansas, headquarters, taking boxes of
documents. Wal-Mart has since confirmed that a federal grand jury is
determining whether it should be charged with knowingly employing
contractors who were using illegal workers.

"This is a case of the strongest company in the world preying on the most
vulnerable poor people," says James Linsey, a lawyer representing the nine
illegal workers. "What is heartening is that the federal authorities are
not just picking on the littlest of the little, but have sent Wal-Mart a
letter saying they are the target of a criminal investigation. This is very
serious stuff."

Wal-Mart says it has no evidence that employees at any level knew illegal
workers were being employed, and is co-operating fully with investigators.

"We are as eager as anyone to see what evidence federal officials might
have," says Mona Williams, vice- president of communications. "If anyone at
Wal-Mart has broken a law, we want to know who it is, and we will make sure
that the person will no longer work for our company."

But the immigrant worker case is throwing an uncomfortable spotlight on to
the employment practices of what is the world's largest company by revenues
- with 1.4m employees, $245bn sales and $8bn net profits last year - and is
arguably the most powerful.

Coupled with three dozen lawsuits alleging that Wal-Mart forced employees
to work unpaid overtime, it raises questions over whether the retailer's
relentless drive to cut costs is causing it to stray too close to the
boundary of legality.

On top of that, a strike by 70,000 supermarket workers in southern
California over their employers' plans to slash healthcare benefits - to
compete with cut-price Wal-Mart - has provoked a debate over the so-called
"race to the bottom". The US is already jumpy about domestic industry being
undercut by cheap labour overseas. Now many fear that Wal-Mart's low pay
and benefits are undermining efforts by competitors and suppliers to pay
their workers a decent wage.

Wal-Mart's size and power make it a magnet for criticism. It has long been
accused of destroying Main Street USA by shutting down "mom-and-pop"
stores, and driving manufacturing jobs abroad by aggressively screwing down
suppliers' prices and costs. That has not deterred the estimated 138m
shoppers who visit its giant stores each week. But for a company whose
business model relies, in part, on a plentiful supply of willing, non-union
labour, controversy over its employment standards touches a nerve.

Gary Balter, retail analyst at UBS Warburg in New York, says Wal-Mart is a
"very honourable company". But he warns that many powerful businesses
eventually run into an issue that threatens to hold back their progress.
With Microsoft, it was regulation. Could labour issues become the kind of
thorn in the side for Wal-Mart that antitrust probes became for Microsoft?

"It is very hard to regulate a company because they are giving you low
prices," he says. "But there may be someone looking for the one thing they
did wrong, so that they can use that, for example, to force them to let
more unions in.

"In the public relations battle, you have Wal-Mart on one side saying we
want to cut prices for consumers. And on the other side you have more and
more people saying Wal-Mart is hurting the fabric of America."

Wal-Mart's spartan "home office", in a converted warehouse in rural
Arkansas, presents an image of thrift and propriety. Employees are
reluctant even to let visitors buy them a coffee, so strong is the policy
against accepting gifts. And vendors trying to persuade Wal-Mart to carry
their products meet buyers in bare rooms with signs proclaiming that
Wal-Mart will not accept bribes.

The company admits its workers' basic pay is less than that of rivals, but
it insists respect for its workers - studiously referred to as "associates"
- is central to its philosophy. Employees carry cards bearing the three
core values of Sam Walton, the company's founder. Number one is "respect
for the individual".

Lee Scott, chief executive, says he is committed to preserving the folksy
culture of "Mr Sam", who died in 1992. Mr Walton, he recalls, said there
were only two people to whom he would never give a second chance: "anyone
who stole, or managers who abused their people".

The challenge Wal-Mart faces is to preserve Mr Sam's culture as it grows to
2m or even 3m employees, and - with 4,700 stores worldwide already,
two-thirds of them in the US - to ensure that managers always meet the
standards head office demands.

A rash of lawsuits against the company allege there have been abuses. The
latest is from the immigrant workers but Wal-Mart says 240 of the 250
workers detained last month were employed by third-party contractors for
which it cannot be held responsible.

However, federal officials confirm that they have recorded conversations
indicating that Wal-Mart employees knew illegal workers were being used. Mr
Zavala, the Mexican immigrant, and his lawyers say it would have been hard
for Wal-Mart staff, at least at store level, not to know. Cleaners, they
say, were supervised by Wal-Mart assistant store managers.

"Whoever was in charge of making these contracts with contractors knew what
they were doing," adds Gilberto Garcia, a lawyer representing the illegal
workers. "The people negotiating had to know that there was a reason why
one [bid] was cheaper than another."

Wal-Mart's Ms Williams says the company cannot be expected to check every
worker's papers at hundreds of outside providers of services and products.
She adds that the immigrant workers' lawsuit is baseless, and Wal-Mart will
move to dismiss it.

But, she says: "We are especially concerned about allegations that
undocumented workers were not treated properly, that contractors took
advantage of [them]. That is wrong. We would never condone such treatment
and we are sorry it happened in our stores."

The immigrant workers' case follows 37 suits pending against the company on
a different issue. These allege Wal-Mart tried to cut costs by making
employees work unpaid overtime.

One verdict has already gone against the company. A jury in Oregon last
December found a "pattern of practice" at Wal-Mart permitting 400 employees
to work overtime without pay between 1994 and 1999. Two similar cases have
been granted class action status this month, in Minnesota and California;
Wal-Mart is appealing against an earlier class certification in Indiana.

Ms Williams says Wal-Mart's policy - "to pay associates for every minute
they work" - is clear. "Any manager who requires or even tolerates
off-the-clock working would be violating company policy and is subject to
disciplinary action up to and including termination," she says. "We have
had a huge education effort to make sure that all of our managers and
hourly associates know that off-the-clock working isn't tolerated. . . We
have fired some managers who have been doing this."

A third area in which the company faces a lawsuit - potentially the biggest
civil rights class action in US history - is over alleged sex
discrimination. The suit, filed by six women in 2001, claims Wal-Mart
systematically denies promotion and equal pay to women. If certified by the
federal judge considering the case, it would cover almost 1.6m current and
former female employees. The plaintiffs say that while two-thirds of
Wal-Mart's hourly employees are female, women fill only a third of store
management team jobs and fewer than 15 per cent of top store manager
positions. They also say women at all levels earn less than men.

Ms Williams says the case has no merit. She says women are promoted in
direct proportion - or better - to the numbers applying for management
jobs. Women workers have sometimes been reluctant to apply for senior jobs
that would require them to move, or work antisocial hours, and Wal-Mart is
working on tackling that.

The retail group has also found itself cited as indirect cause of the
strike in southern California by 70,000 workers for the three biggest US
supermarket chains. The companies, Kroger, Albertson's and Safeway, say
they have to cut healthcare costs and restrain pay increases to compete
with Wal-Mart, which plans to open 40 "super-centres" in California. These,
unlike older Wal-Mart stores, sell groceries and as well as non-food goods.
The United Food and Commercial Workers Union, the supermarket union, has
seized on the issue of health insurance - for which most Americans rely on
their employers to pay much of the cost - as a battleground.

It says that while two-thirds of Wal-Mart employees qualify for company
health insurance, fewer than half participate, because they cannot afford
the high contributions Wal-Mart requires them to make. That leaves some
uninsured or forces either their spouses' employers, or federal government
programmes, to provide healthcare for them.

Wal-Mart disputes the figures, saying 78 per cent of its workers are
eligible for its healthcare plan and 50 per cent participate. About 40 per
cent of its workers, it says, get healthcare through other sources; but
this is partly because, for example, they are students or senior citizens.

About 40 per cent of those in its scheme had no health insurance before
joining Wal-Mart. "These are people who would have fallen through the
cracks or been on the public health rolls," says Ms Williams, noting that
the company provides cover to about 500,000 American families.

In the background of all of these issues is a so far unsuccessful four-year
campaign by the UFCW to get a toe-hold in Wal-Mart stores (see below).

Wal-Mart says it is not anti-union, but "pro-associate"; it does not
believe its workers need unions when it operates an "open-door" policy up
to chief executive level, allowing staff to voice complaints to managers.
"When it comes to our people, we think we are more effective if we're
dealing with you as an individual rather than having to go through some
intermediary," says Mr Scott.

Wal-Mart says stores are free to vote to unionise, but none has done so.
The UFCW says the reason is that at the first sign of union activity,
Wal-Mart dispatches labour relations teams from head office that employ
aggressive tactics to persuade workers not to join. The company admits that
these teams exist, but only to explain their rights to staff and use legal
means to get the company's views across.

Al Zack, assistant director of strategic programmes at the UFCW, says:
"This is all about the fact that the nation's number one employer is
setting a lowest common denominator standard - as opposed to the standard
set by General Motors in the past, when it was the number one employer, of
setting the bar higher," he says.

Yet however much unions and competitors may attack Wal-Mart, an army of
analysts and economists readily defends it. Gary Stibel, chairman of New
England Consulting Group, a marketing management consulting firm, says
Wal-Mart is right to be aggressive on costs, and should stand firm against
anything that would increase them.

"I've worked with Wal-Mart directly and indirectly for 30 years," he says.
"Are they coming close to the boundary [of acceptability]? Yes. Are they
stepping over the line? Absolutely not. They are one of the most ethical
companies we work with anywhere," he says. "But the job of the retail
industry is to stay close to the boundary, because if you don't somebody
else will go round you."

Mr Stibel says the productivity gains Wal-Mart has achieved - he estimates
it saved US consumers at least $20bn last year - have given a huge boost to
the economy, pushing down prices and creating wealth and jobs.

"In a world where new jobs are not being created every hour, Wal-Mart is
creating them every second. I have walked into retail environments where
staff are being paid better than those at Wal-Mart and been given much
worse service. At Wal-Mart, the service I get is pretty good. People seem
to enjoy working there."

© Copyright The Financial Times Limited 2003.