What does NLRB’s joint employer standard revision mean for businesses?

Under the National Labor Relations Act, employees can unionize and engage in collective bargaining. So, when must a business recognize a union as the exclusive agent of its employees? When must a business engage in collective bargaining with a union? Under the NLRA, a business must do so when it is the “employer” of those employees. In most situations, the identity of the employer is simple enough: it’s the business that receives services from the employee and to whom it issues a W-2. But what happens when there are multiple independent businesses involved with establishing – or doing things that impact – an employee’s terms and conditions of employment? Examples abound. 

A warehouse business contracts with a staffing business to supply seasonal or temporary labor. Both businesses have a say in the temp employee’s job. The agency sets the pay scale, and the warehouse management assigns the work. Which business is obligated to respond when those employees want to be union-represented?

A franchisor contractually requires all its franchisees to make sure their staff look presentable and perform work in a certain manner and not engage in the poaching of employees from other franchise holders. When the franchisor fails to abide by the NLRA is the franchisor liable for the franchisee’s violation? 

A business outsources services, such as cleaning or delivery. Like any rational actor, the business wants to ensure that the services are properly performed and includes in its service agreement service standards and the right to remove the vendor’s employees in its discretion. When the business directs the contractor to reassign an individual, is that discipline over which the business and the contractor must bargain with the individual’s union?

To answer these questions, the federal agency that enforces the NLRA, the National Labor Relations Board, conducts an analysis to determine whether both businesses should be considered “employers.” The NLRB’s analysis – referred to as the “joint employer standard” – had been until recently developed for decades via case-by-case adjudication. That approach did not provide certainty for the business community. Each case was factually slightly different than the one before it, and each change in the political affiliation of the U.S. president raised the prospect of a change in the approach by a newly appointed NLRB. 

In 2020, the NLRB changed course and established an administrative regulation that codified the joint employment standard, and thereby brought greater predictability to this area of law. Two years later, and now with a Democratic majority of appointees, the NLRB has announced that it will once again change its approach. On Sept. 7, 2022, it published a formal notice of its intent to replace the current joint employer standard — just 27 months after the regulation had gone into effect. 

This article describes the differences between the two approaches and suggests steps a prudent business might take during this period of uncertainty. 

Current rule

The NLRB’s 2020 regulation (found at 29 C.F.R. §103.40) provides that a business may be considered a joint employer with another independent business if they “share or codetermine the employees’ essential terms and conditions of employment.” A business shares or codetermines the essential terms and conditions of employment under the regulation when it “possess[es] and exercise[s] such substantial direct and immediate control over one or more essential terms or conditions.” Evidence of indirect or reserved control over the essential terms or conditions of employment – for example, the warehouse business putting into its contract with the temp agency business that it might direct the agency to fire or cease assigning a particular individual – is germane to the analysis only if evidence of direct and immediate control exists. Under the regulation, what matters is whether the business actually exercises control over the essential terms and conditions of employment. 

The regulation also provides that the analysis is to focus only on the “essential terms and conditions of employment,” which under the regulation consists of wages, benefits, hours of work, hiring, discharge, discipline, supervision and direction. 

The relatively easy application of this regulation can be found, for example, in a recently issued NLRB administrative law judge decision: Bannum Place of Saginaw LLC, Case Nos. 7-CA-207685, et al. (Oct. 14, 2022). There, the judge found that a business simply setting minimum standards for contractor performance and occasionally inspecting the contractor’s operations hardly amounted to the type of “substantial direct and immediate control” required under the regulation to find joint employer status. 

Proposed revision

On Sept. 7, the NLRB published a formal notice of intent to revise the joint employer standard. The notice explained that the NLRB – or more specifically, its Democratic-appointed members – believes that the current regulation “wrongly departs” from how it assessed the issue previously on a case-by-case adjudicative basis and “unnecessarily narrow[s]” the circumstances where two businesses would be considered joint employers. The two Republican-appointed members of the NLRB not surprisingly disagreed with this perspective, but surprisingly published a formal, lengthy “dissent” to the NLRB’s notice.

The proposed standard adopts the same principle that the basic inquiry is whether two independent businesses “share or codetermine those matters governing employees’ essential terms and conditions of employment.” However, it departs from the current regulation where it proposes that “share or codetermine” means “for an employer to possess the authority to control (whether directly, indirectly, or both), one or more of the employees’ essential terms and conditions of employment.” As explained in the proposal, “indirect control, including control exercised through an intermediary, is relevant to the existence of an employment relationship.” Indirect control under the proposal could encompass not just reservation of right provisions in commercial contracts, but also “evidence that a putative joint employer communicates work assignments and directives to another entity’s managers or exercises ongoing oversight to ensure that job tasks are performed properly.” The expansiveness of the proposed rule is obvious.

The proposed standard also broadens the list of “essential terms and conditions of employment” both by adding items and by noting that the list is non-exhaustive. Items specifically added are workplace health and safety and work rules and directions governing the manner, means or methods of work performance. 

The proposed rule can become a final regulation only after the NLRB has had the opportunity to review all comments. Submissions are due to the NLRB by Nov. 7, 2022, and anyone may comment, including trade associations and chambers of commerce. In response to comments, the NLRB may modify the proposal or may decide to keep the current regulation in place. 

Implications

The existence of the proposal should cause businesses to carefully review their service provider agreements and their workplace practices for three reasons. First, because the standard may or may not change (though it is highly likely to change) and because the NLRB may seek to apply the new rule retroactively, commercial contracts and business practices that effectively insulate a business from being considered a joint employer under the current regulation may not in actuality be so effective. 

Second, the proposal does not establish a bright line and instead incorporates by reference common law principles without making clear which principles would be relied upon and the weight the NLRB would afford evidence relating to these principles. It represents in practice a return to the case-by-case adjudication model that previously frustrated the business community. 

Third, the expansiveness of the proposed rule creates ambiguity about what would be the extent of a joint employer’s obligations. It is one thing for a business to take an action knowing that doing so might create labor law obligations as a joint employer. It is a far different thing for a business to do something indirectly or reserve its rights to act and then be held accountable as a joint employer for an action not taken. The proposal does not clearly state how the NLRB would identify which employment terms and conditions for which a joint employer would be responsible.

The greater unpredictability under the proposal is not a minor matter. Just ask McDonald’s.

Back in 2014, claims were brought against various McDonald’s franchisees alleging that the franchisees threatened employees, promised benefits to them, interrogated them, and surveilled them in response to a nationwide organizing campaign for higher wages by fast food workers called “Fight for $15.” 

In addition to the franchisees, the complainants sought to hold McDonald’s, the franchisor, responsible by claiming its oversight over franchisees amounted to enough control over the labor relations policies of the franchisees as to be a joint employer. Among other provisions in its franchise agreements, McDonald’s required its franchisees to enter employment-related data into a database accessible and reviewable by the franchisor. The joint employer claim was also based on McDonald’s providing training materials for use by franchisee employees and purportedly setting the job duties and crew positions for franchise employees and establishing times available for the completion of tasks. 

Ultimately, McDonald’s reached a settlement with the NLRB around the same time that the NLRB was considering adopting the joint employer standard regulation. Now, under the rule proposed by the NLRB, the outcome for McDonald’s, and the NLRB’s receptivity to settling, will be quite different. The NLRB would likely more closely scrutinize the terms of the franchise agreements and draw certain conclusions about indirect control. 

Jay Sabin is a labor and employment and transportation attorney at Brach Eichler in Roseland with extensive corporate experience as in-house counsel to a regional third-party logistics provider and The New York Times. He has provided counsel to employers in such industries as trucking, media, warehouse, health care, cannabis, manufacturing, trade exporters, stevedoring, and SaaS HR providers. The author greatly appreciates the assistance provided by Arnold Sooklall, an associate in Brach Eicher’s Employment Practices group, in preparing this article.