The WBO middleweight champ shared a photo of Meadowhall shop worker Jonny Marsh with his 92,000 followers on Twitter with the caption: "Walking through Meadowhall Sheffield and see this - confused" along with a puzzled face emoji.
In the picture, believed to have been taken without Mr Marsh's consent, the Urban Decay shop assistant, 25, can be seen serving customers from behind his till - while sporting large, gold hoop ear-rings, flowing dark hair and stubble.
But the assistant has hit back at the boxer and friends have flocked to his defence on Twitter, accusing Saunders, 27, who represented Great Britain at the 2008 Olympics, of being homophobic.
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Jonny said: "So today someone came to my workplace and took a photo of me, unbeknown to me to then post a hateful tweet about me!
"They are supposedly someone who is representing Great Britain?
"How can someone is representing MY COUNTRY publicly shame someone for how they look and their gender?
"The comments on this post about me are vile, but do I care about the small words? No.
"If anything these small annoying things make me feel stronger in myself and more proud to be me!"
Referring to famed American drag queen RuPaul, Mr Marsh, added: "Like momma RuPaul said 'if those bitches ain't paying your bills, pay them bitches no mind!' #SPREADLOVENOTHATE."
Mr Marsh added: "I really don't think my gender needs putting in a box. I am me, Jon."
People tore into the boxer on Twitter after he attempted to defend his comments with a series of further tweets.
Replying to one message he wrote of Mr Marsh's appearance: "Its up to him I don't dislike him but don't think it's right for kids to see that's all.
In another he wrote: "I don't Nw (sic) him he might be a nice kid like but not my cup tea" but as the angry comments continued to pour in, he wrote: "Right not gonna sit on Twitter and ague with small minded people today you only want more followers."
Friend Elsa Roberts said: "The comments he made are disgusting. Just looking at Twitter you can see the uproar and support Mr Marsh has.
"The boxer has no remorse whatsoever. It's awful to see. It is 2017, How can bullying still be a thing?"
"What an influence these sorts of things make on the youth of today and young up and coming athletes. We all want an inclusive and accepting world to live in don’t we?
"This 'man' has photographed Mr Marsh without his consent, at his workplace, without the workplace consent and published this online, using bullying and homophobic undertones to belittle him.
"His further comments are nothing short of an uneducated, bigoted spoilt brat. He has shown no remorse for his comments nor his following behaviour.
"I really hope that no other children/young adults and aspiring athletes see this and follow in his footsteps.
"He will use the excuse of being a boxer and that it is all a joke, like he is already doing on Twitter, We cannot let this go unpunished in this day and age."
And to add to the fury, the fighter also got into a scrap with an adult glamour model by the name of Amber Jayne who defended Mr Marsh.
The top shelf magazine model wrote: "Takes a pic of someone who's gender he's confused by in order to cause embarrassment and then calls others small minded?"
Saunders wrote back: "Ha rich that from you" with the model replying: "In what way? Please do elaborate... are we going down the whole... "you're a porn whore route" carry on running with the cave man baton."
He hit back, writing: "no I think that's rather cute your a porn Hor (sic)."
The boxer, who is now training at the Ingle gym in Wincobank, hails from Hertfordshire and is living near the gym for the training camp, ahead of a scheduled defence of his title in London in September.
But the latest row comes just days after an explicit video chat with fellow Sheffield boxer Tyan Booth surfaced, showing the pair talking about losing their driving licences for motoring offences and Saunders describing women as "brasses" (prostitutes).
In the clip, which has been viewed thousands of times, Booth says: "If you got money, you can be a fat, ugly c*** and still sleep with nice women you know. Money talks don't it? As long as you've got money, you'll do alright sexually."
Joking about Booth's time working in a charity shop as part of his community service for drink driving, Saunders says: "They could have put you in a porn shop. Get the women coming in."
Booth replies: "There's a few of them here in Sheffield, are you gonna make the most of them?"
Saunders retorts: "I'll probably give them a visit. See if there's any brasses (prostitutes) about, take 'em down there."
And Booth responds, adding: "They are all on the same road so it's ideal," with Saunders replying: "You'll have to show me where that is."