Reversing course, NLRB reinstitutes a more expansive “joint employer” standard

UPDATE: On November 16, 2023, the Board extended the effective date of its rule on determining the standard for joint-employer status to February 26, 2024 to facilitate resolution of legal challenges with respect to the rule. The new standard will only be applied to cases filed after the rule becomes effective.

On October 26, 2023, the National Labor Relations Board (NLRB) announced a new final rule (the Rule), significantly broadening the circumstances under which companies can be considered “joint employers” of another company’s workers under the National Labor Relations Act (NLRA), and are thus jointly liable for labor law violations – and, potentially, collective bargaining – over those employees’ terms and conditions of employment. 

The Rule, which rescinds and replaces the rule promulgated in 2020 during the prior administration, revives (and goes well beyond) the expansive and much-criticized joint employer analyses set forth in the NLRB’s 2015 Browning-Ferris Industries[1] decision.

The test for joint employer status under the new Rule makes it possible for an entity to be deemed an employer if it even has indirect or “reserved” control over another company’s workers’ terms and conditions of employment, even if that control is never exercised – a change that many business advocates have found alarming. 

The Trump-era Board rule had reinstated the long-standing, pre-Browning-Ferris precedent that an entity only is a joint employer if it actually exercises “substantial direct and immediate control” over workers’ terms and conditions of employment.

By reaching circumstances of attenuated and non-exercised control, the new NLRB Rule clearly targets franchisors and vastly expands the universe of potential business relationships where a joint employer relationship may be found to exist under the NLRA.

As discussed below, the Rule has potential far-reaching implications and creates compliance challenges affecting large number of industries and common business practices, most notably franchised businesses, staffing companies (such as Professional Employer Organizations, or PEOs) and businesses that rely heavily on subcontractors.

Background

The NLRB’s 2015 decision in Browning-Ferris significantly altered the scope of traditional labor law obligations in the US, reversing course on decades of NLRB precedent and adopting an expansive standard for determining joint employer status.

Under Browning-Ferris, a putative joint employer no longer was required to exercise “direct and immediate” control over workers’ terms and conditions of employment. Indirect, or even reserved contractual, control became potentially sufficient to establish a joint employment relationship, even if that control was never exercised.

In 2017, the NLRB overturned Browning-Ferris in a case called Hy-Brand Industrial Contractors, Ltd.[2]  However, this decision later was revoked on procedural grounds, creating further uncertainty and confusion. In 2020, the NLRB decided to resolve the issue through rulemaking, promulgating a regulation re-establishing the “substantial direct and immediate control” joint employer standard.  That rule took effect on April 27, 2020.

After the change in presidential administrations, the Biden-era NLRB signaled it would attempt to reinstate the Browning-Ferris standard via regulation as part of its aggressive overhaul of labor relations law and pro-union agenda.

On September 6, 2022, the Federal Register published a Notice of Proposed Rulemaking revealing the proposed new joint employer standard which would replace the existing rule. After the comment period, in which over 13,000 public comments were lodged, the NLRB issued the final rule, along with a fact sheet, on October 26, 2023.

The NLRB’s new joint employer test

The NLRB’s final rule rescinds the Trump-era regulation and establishes a revised joint employer standard. Under the new rule, “two or more employers of the same particular employees” are considered joint employers “if the employers share or codetermine those matters governing employees’ essential terms and conditions of employment.”

To “share or codetermine those matters governing employees’ essential terms and conditions of employment” is further defined to mean for an employer to (i) “possess the authority to control (whether directly, indirectly, or both)”, or (ii) “to exercise the power to control … one or more of the employees’ essential terms and conditions of employment.”

Significantly, under the Rule, possession of the authority to control “is sufficient to establish status as joint employer regardless of whether control is exercised” and exercising the power to control indirectly (including through an intermediary) “is sufficient to establish status as a joint employer regardless of whether the power is exercised directly.” (emphasis added)

The Rule sets forth a broad swath of “essential terms and conditions of employment” to be considered in making any joint employer determination:

• Wages, benefits, and other compensation
• Hours of work and scheduling
• The assignment of duties to be performed
• The supervision of the performance of duties
• Work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline
• The tenure of employment, including hiring and discharge, and
• Working conditions related to the safety and health of employees.

If the NLRB determines that an entity is a “joint employer,” that entity then would be required to engage in collective bargaining with respect to any term and condition of employment that the employer possesses the authority to control or exercises the power to control, regardless of whether that term or condition is deemed an essential term and condition of employment under the Rule for the purposes of establishing joint-employer status.

The party asserting joint employer status bears the burden of proving, by a preponderance of the evidence, that the putative joint employer meets the joint employer standard.

The new Rule becomes effective on December 26, 2023 and only will be applied prospectively to cases filed after the effective date.

Implications for employers

It is difficult to overstate the reach and potential implications of the new joint employer Rule.   According to the NLRB, the Rule will impact over 100,000 franchised businesses and hundreds of thousands of small businesses.  The Rule has particularly serious ramifications for franchised businesses, potentially creating uncertainty in the relationships between franchisors and franchisees, and (barring successful legal challenges already in the offing) certainly will require franchisors to, at a minimum, review their franchise agreements and standard operating procedures and processes governing relationships with franchisees.

Indeed, the experience under the Browning-Ferris regime provides some perspective on the potential impact of the new Rule. The International Franchise Association noted that Browning-Ferris cost franchise businesses $33 billion per year in operational costs, led to 376,000 lost job opportunities, and resulted in an astounding 93-percent increase in lawsuits.[3]

Beyond franchises, under the new Rule, businesses that contract with staffing agencies for workers, an arrangement common in many industries (including healthcare), will face the prospect that even indirect or reserved control can be grounds for establishing a joint employment relationship with the staffing agency.

Similarly, companies that use subcontractors likely will face similar claims as would-be plaintiffs seek to hold the bigger pockets liable for the wage and hour (and other) violations allegedly committed by the prime employing entity.

The new Rule likely will be subject to challenge on multiple fronts. The International Franchise Association is already considering a legal challenge to the Rule, perhaps under the Administrative Procedure Act.  Other possible legal grounds exist, and franchisors are expected to call out the very real conflict between the new Rule and the requirements of the laws governing franchising that require, among other things, that franchisors take steps to enforce brand standards and protect their marks. 

Additionally, Senators Joe Manchin (D-W.Va.) and Bill Cassidy (R-La.) have indicated that they intend to introduce a resolution to rescind the regulation, which would likely face the hurdle of a presidential veto.

Pending the resolution of any challenges to the NLRB’s new Rule, businesses should prepare to take prophylactic measures now, before the Rule takes effect this December. Companies are encouraged to closely scrutinize existing and proposed contracts with others with which they have relationships (eg, franchisees, staffing companies, contractors, and joint venturers) for any clauses that potentially could be interpreted as (i) allowing direct or indirect control over the other party’s employees’ terms and conditions of employment or (ii) reserving the right to control (either directly or indirectly) the other party’s employees’ terms and conditions of employment.

Finally, companies are urged to educate and train personnel responsible for contracting with and managing relationships with potential joint employer entities to ensure that they comprehend the new Rule, and the appropriate boundaries that properly should be maintained in order, as best possible, to prevent a finding of joint employer status under the NLRA.

Our team of dedicated labor and employment professionals has extensive experience advising clients on joint employment issues, including significant experience in the franchise context. If you would like to discuss any of these matters, please reach out to the authors or your DLA Piper relationship partner.