United States: NLRB Adopts, Then Extends Deadline For New Joint Employer Rule

Highlights

• The National Labor Relations Board (NLRB) issued a new rule on Oct. 26, 2023, that significantly expands who qualifies as a joint employer under the National Labor Relations Act.
• The effective date of the new joint employer rule, which originally was Dec. 26, 2023, has been extended to Feb. 26, 2024, to facilitate resolution of legal challenges with respect to the rule.
• The new rule will be applied only to cases filed after it becomes effective.

The National Labor Relations Board (NLRB) on Oct. 26, 2023, issued a new rule that significantly expands who qualifies as a joint employer under the National Labor Relations Act. Under the new rule, which rescinds the prior 2020 rule implemented by the NLRB under the Trump Administration, an entity may be considered a joint employer of another entity's employees if the employers "share or codetermine" the employees' essential terms and conditions of employment. The new rule defines "share or codetermine" to mean for an employer "to possess the authority to control (whether directly, indirectly or both) or to exercise the power to control (whether directly, indirectly or both) one or more of the employees' essential terms and conditions of employment." The party asserting joint employer status has the burden of establishing it by a preponderance of the evidence.

The new rule provides an exhaustive list of what qualifies as essential terms and conditions of employment for purposes of a joint employer determination: "(1) Wages, benefits, and other compensation; (2) hours of work and scheduling; (3) the assignment of duties to be performed; (4) the supervision of the performance of duties; (5) work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline; (6) the tenure of employment, including hiring and discharge; and (7) working conditions related to the safety and health of employees." Authority to control other matters does not trigger the joint employer standard.

The new rule sets a lower threshold for finding joint-employer status than the 2020 rule, which required a showing of "substantial direct and immediate control" over essential terms and conditions of employment. Under the new rule, indirect control is sufficient, and it does not matter if the control is actually exercised. This means that an entity may qualify as a joint employer if it has the authority to control an employee's essential terms and conditions of employment, even if that authority is indirect and it never in fact exercises that control. According to the NLRB, the new rule "more explicitly ground[s] the joint-employer standard in established common-law agency principles."

Impact of the New Rule

The new rule has significant consequences for entities involved in potential joint employer relationships, such as staffing companies and their customers, contractors and their subcontractors, parent companies and their subsidiaries, and franchisors and their franchisees. First, if an entity is a joint employer of particular employees due to its control over one or more of the seven essential terms and conditions of employment listed in the rule, it must collectively bargain with the employees' representative with respect to not only those terms and conditions, but also all other mandatory subjects of bargaining that it possesses or exercises the power to control. As a result, the new rule stands to bring two or more employers to the bargaining table with widely divergent interests. Second, joint employers may be liable for their co-employer's unfair labor practices. Third, a joint employer may lose its status as a "neutral employer" and become embroiled in strikes, boycotts and pickets stemming from its co-employer's labor disputes.

The new rule expands joint employer status beyond the already low NLRB threshold in effect prior to the rescinded 2020 rule. In particular, it makes even indirect and unexercised control over essential terms and conditions of employment dispositive of joint employer status, as opposed to just probative of such status. It also jettisons a step in the pre-2020 law requiring proof that the putative joint employer possesses sufficient control over employees' essential terms and conditions of employment such that its presence at the bargaining table is necessary "to permit meaningful bargaining." Under the new rule, even in a scenario in which only one of the joint employers indisputably has exercised sole and complete control over every aspect of its employees' essential terms and conditions, the other joint employer, with only reserved and unexercised authority, will be required to participate in the collective bargaining process.

Legal Challenges

Because of the significant legal and practical consequences of the new rule on employers, it quickly generated multiple legal challenges. Several U.S. senators and representatives introduced a Congressional Review Act resolution of disapproval to overturn the NLRB's joint employer rule. Subsequently, on Nov. 9, 2023, a collection of business groups, including the International Franchise Association, National Retail Federation and U.S. Chamber of Commerce, sued the NLRB in federal district court, alleging the joint employer rule is unlawful. They contend that the new rule 1) is overbroad and improperly upends years of precedent that limit joint employment to relationships of actual and substantial control, 2) abandons important principles of meaningful collective bargaining and 3) replaces a clear standard on which companies have relied to structure their business relationships with one that is arbitrary, capricious and chaotic.

On Nov. 16, 2023, the NLRB extended the effective date of the new joint employer rule to Feb. 26, 2024, to facilitate resolution of the pending legal challenges. The new rule will be applied only to cases filed after it becomes effective.

What Should Employers Do?

Given the potentially significant changes in business practices that may be required if the new rule takes effect, most employers likely will adopt a "wait and see" approach before actually implementing any changes. But employers would be well served to start reviewing their agreements with subcontractors, staffing agencies and other entities to determine whether those agreements could be interpreted as reserving the right to potentially control any essential term or condition of another entity's employees or otherwise creating exposure to a joint employer determination. Employers also should start assessing how much control they need to benefit from the business relationship, whether it makes sense to reserve control that it likely will never exercise and whether it is worth taking the risks associated with retaining too much control (including indirect and unexercised control) over essential terms and conditions of employment. Employers who cannot eliminate the risks should consider possible revisions to their contracts to allocate or shift responsibility for their potential joint employer liabilities.

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