NLRB’s final joint-employer rule brings clarity for employers

Employers received welcome news from the National Labor Relations Board last month. On Feb. 26, the board published its long-awaited final rule regarding joint-employer status under the National Labor Relations Act, which becomes effective April 27, 2020.

The final rule marks the latest development in years of adjudication and litigation over what standard the board will apply when addressing the question of when one employer is the "joint employer" of another company's employees (at least until an inevitable legal challenge). Make no mistake: Joint employment is a high-stakes proposition for any company -- a joint employer may be required to bargain with a union representing jointly employed workers; can be subject to joint and several liability for unfair labor practices committed by the other employer; and may be subject to labor picketing that would otherwise be unlawful. Moreover, the plaintiffs' bar has been increasingly aggressive in seeking to hold employers liable as joint employers -- particularly where one company represents a potential "deep pocket." The board's action should serve to give those employers facing these claims a firmer legal framework in which to defend themselves.

Substantial Direct and Immediate Control

Under the final rule, an employer will be considered a joint employer under the NLRA only where it exercises "substantial direct and immediate control" over the essential terms and conditions of another company's employee. The final rule makes clear that an employer will be considered a joint employer of a separate company's employees only if a business possesses and exercises substantial direct and immediate control over one or more essential terms and conditions of employment of another employer's employees. The rule further defines the essential terms and conditions of employment as wages, benefits, hours of work, hiring, discharge, discipline, supervision and direction. It further provides that even where an employer exercises direct control over another employer's workers, it will not be held to be a joint employer if such control is "limited and routine."

Equally important, with respect to indirect control, or control that is contractually reserved over terms and conditions of employment but never actually exercised, the final rule states that while such control may be probative of joint-employer status, it is only so to the extent that it reinforces evidence of direct and immediate control. The rule makes clear that joint-employer status cannot be based solely on indirect influence or the reservation of a right to control that is never exercised. This approach is generally consistent with the joint-employer rule issued earlier this year by the U.S. Department of Labor, addressing the standard for joint employment under the Fair Labor Standards Act.

Finally, the rule states that routine elements of an arm's length contract will not result in a contractor becoming a joint employer, and provides definitions of key terms, including what does and does not constitute "substantial and direct immediate control" over each essential employment term. The clarification that routine business-to-business contractual provisions will not render one company the joint employer of another's employees will be of significant interest to businesses using the franchise model.

In September 2018, the board issued a proposed joint-employer standard for public comment, which generated almost 29,000 responses. The final rule largely tracks this proposed rule, while addressing a number of issues raised by commenters.

Franchisers, Third-Party Staffing Companies Given Clarity

As noted earlier, in recent years, the plaintiffs' bar has attempted to hold national franchisors as "joint employers" of their franchisee's employees under the NLRA. The final rule reduces the risk that a franchisor will be found to be a "joint employer" thereby reducing potential liability for unfair labor practices, and making clear that these companies do not need to bargain with their franchisees' workers. For example, the rule specifically provides that "a franchisor's maintenance of brand-recognition standards (e.g., a requirement that the employees of its franchisees wear a particular uniform) will not evidence direct control over employees' 'essential' working conditions." Nor will the board consider a franchisor's protection of its trade or service mark to be evidence of joint employment.

The rule will also provide much needed certainty to employers that utilize third parties, such as staffing agencies, to provide workers on a full-time or as-needed basis. With the board establishing clearer rules of the road as to how joint-employer status will be determined, both employers and third parties should be better able to arrange and conduct their contractual affairs without fear of liability years down the road.

The End of Browning-Ferris?

By way of background, the final rule reverses the NLRB's 2015 Browning-Ferris Industries of California, Inc. decision, which dramatically expanded the definition of joint employer and categorized many more independent companies as joint employers, upending years of precedent. Under Browning-Ferris, two entities were deemed joint employers based on the mere existence of reserved joint control, indirect control, or control that was limited and routine.

Browning-Ferris was a stark departure from the board's long-standing prior standard. Prior to 2015, the NLRB's case law held that employers would be deemed joint employers only if the alleged joint employer exercised substantial, direct and immediate control over a group of workers' terms and conditions of employment. Under this test, the alleged joint employer had to both possess and exercise the authority to control the workers' employment terms. Limited and routine supervision was insufficient to create a joint-employer relationship. Browning-Ferris drastically increased the universe of potential joint employers and was the subject of intense negative scrutiny, including congressional hearings geared toward overturning the decision.

What Will the Future Hold?

Opponents of the rule have criticized the NLRB's process in promulgating the rule, and it remains to be seen whether any legal challenges to it will be filed. As noted above, the Department of Labor earlier this year issued its own final rule on joint employment (which has already been challenged in court by a coalition of states attorneys general). The U.S. Equal Employment Opportunity Commission, the federal agency that enforces national civil rights and EEO law, has likewise indicated its plan to release a proposed joint-employer rule in the months to come. And of course, with changes in presidential administrations will come potential changes in policy and regulations. Given the fast-changing legal landscape, interested employers are advised to consult with counsel to best determine their options for their businesses' models and organization. 