NLRB Issues New Joint-Employer Rule

The new standard requires “substantial, direct and immediate” control over terms of employment

The National Labor Relations Board announced a new rule last week to clarify what constitutes a joint-employer relationship under the National Labor Relations Act, narrowing a company’s liability for federal labor law violations committed by franchisees and subcontractors.  

Under the new rule, which goes into effect April 27, a company must exercise “substantial, direct and immediate” control over the terms of employment for another company’s workers to be considered a joint employer. These essential terms and conditions of employment include wages, hours, benefits, hiring, firing, discipline, direction and supervision.

The new final rule, issued Feb. 26, reverses an Obama-era joint-employer standard, established in the NLRB’s Browning-Ferris decision of 2015, that required only indirect control over the terms of employment. 

The broader Obama-era test left a lot more contract terms and conditions open to interpretation. Under the old standard, companies feared that even an agreement asking a subcontractor to comply with the Fair Labor Standards Act, state wage laws or anti-harassment policies could be viewed as evidence of indirect control over the subcontractor’s workers. 

“As attorneys representing employers around the country, we had to review master service contracts and really take out as much as we could with respect to things that would be portrayed as terms or conditions of employment,” said Sherman & Howard member Patrick Scully. 

Polsinelli shareholder Mark Nelson said that under the old rule, it was difficult to identify when a company would be liable for another entity’s actions. “What we have now is much more certainty of when there will be a joint-employer relationship and when there will not be,” Nelson said.

The NLRB’s rule change will greatly affect franchisors and franchisees. McDonald’s was embroiled in litigation for years with labor rights group Fight for $15, which claimed the company is liable for labor law violations by several franchisees. Labor-friendly rulings earlier in the McDonald’s case, along with the Browning-Ferris decision, helped establish the Obama-era joint-employer doctrine.

“All the franchisees in the McDonald’s cases were absolutely independent employers for the purposes of workers’ comp, taxation, unemployment and all those things,” Scully said. 

But under the old test, a typical franchise agreement specifying store hours, the number of people working at a counter and other terms that ensure product consistency could be seen as evidence of the company’s joint-employer relationship.

It’s not just fast food chains that will find relief in the clarified joint-employer rule. General contractors in construction, hospitals that outsource their food services or security functions, and hotels that contract with landscapers are all examples of companies that could have been deemed a joint employer under the old standard. 

The NLRB’s joint-employer rule determines employer responsibilities and liability under the NLRA, which guarantees employees’ right to unionize, engage in collective bargaining and go on strike. Under the previous standard, a franchisor could be held responsible for their franchisee’s improper negotiations during collective bargaining, Nelson said, “even though the franchisor had no involvement and perhaps no knowledge of what was going on at the table.” 

Similarly, he said, if a franchisee unlawfully terminated an employee involved in an organizing campaign, a franchisor deemed to have indirect control could have been held responsible for the worker’s reinstatement and back pay.

While the rule change was long-awaited by employers, it’s mostly just a return to the pre-2015 state of affairs, except with added clarity. The new rule defines the essential elements of employment like hiring, firing, wages, hours and benefits where the standard of “substantial, direct and immediate” control will apply. 

“That specificity is good for everyone to know what these key terms and conditions of employment are that will be examined to determine whether there is a joint-employer relationship,” Nelson said.

“This rule is restoring a modicum of rationality to the test and putting employers in a position where they can defend themselves,” Scully said.

But Scully and Nelson don’t expect labor to let the old rule die without a fight, whether through lawsuits, legislation or new NLRB appointments.

“Certainly, if there’s a change in administration, there will be an immediate — or if not immediate, a very swift — attempt to undo this rule,” Scully said. 

A challenge to a different joint-employer standard issued by the Department of Labor in January is already in the courts. Last Wednesday, attorneys general from 17 states, including Colorado, filed a lawsuit in a New York federal court to block that rule from taking effect. The DOL’s rule interprets joint-employer responsibilities under Fair Labor Standards Act.

— Jessica Folker

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