By Kara Maciel and Andrea Chavez

On October 26, 2023, the National Labor Relations Board (NLRB) issued its Final Rule (Final Rule) for determining joint-employer status under the National Labor Relations Act (NLRA). The Final Rule expands the scope of when an entity can be deemed a joint employer to when it “possesses 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 employee’s essential terms and conditions of employment.” Joint employers may have a duty to bargain with unions and may be exposed to what would otherwise be unlawful secondary union activity (e.g., picketing during labor disputes) as well as unfair labor practice liability, both jointly and individually. This change significantly increases potential liability for any entity that contracts with contractors, temporary workers, vendors, franchisees, and others. The rule goes into effect on December 26, 2023.

The new rule repeals and replaces the current rule, promulgated in 2020 by the Trump-era Board.  The 2020 rule requires an entity to “possess and exercise such substantial direct and immediate control over one or more essential terms or conditions of their employment” to be deemed a joint employer, and only considers evidence of indirect and reserved control to the extent that such control “supplements and reinforces” evidence of direct and immediate control.

The new rule largely marks a return to the 2015 common law employment relationship standard established by the NLRB’s decision in Browning-Ferris Industries of California, Inc., 362 NLRB 1599 (2015).

 Definition of Joint Employer Under the Final Rule

The new rule defines joint employers as two or more common-law employers of the same employees who “share or codetermine” matters governing those employees’ essential terms and conditions of employment.

A common-law employer “share[s] or codetermine[s]” such matters if the “employer []possess[es] 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 Board clarifies the definition of “essential terms and conditions of employment” by providing the following exhaustive list of categories: (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.

Therefore, under the Final Rule, an entity may be considered a joint employer even if it indirectly, through an intermediary, reserves the right to control only one essential term and condition of employment without ever exercising that right.

Company-to-Company Contracting

Several entities submitted comments to the proposed rule and sought to modify the rule to recognize certain business practices as aspects of routine company-to-company dealings that are not material to the existence of a common-law employment relationship based on its belief that case-by-case adjudication is the best approach.  Specifically, the commenters requested that the Board 1) “specify that monitoring a third party’s performance for the purposes of quality assurance or auditing for compliance with contractual obligations will not be viewed as probative of joint-employer status;” and 2) “clarify that the mere communication of work assignments, delivery times, or other details necessary to perform work under a contract is not material to the joint-employer inquiry if it is not accompanied by other evidence showing a common-law employment relationship.”

However, the Board refused to recognize such business practices as aspects of routine company-to-company dealings which necessarily should raise concerns for companies. Under the Final Rule, routine components of many company-to-company contracts may indirectly impact essential terms of employment, resulting in a joint employer relationship.  In his dissent, Member Kaplan raised the example of a widely used standard contract in the construction industry that includes a provision that makes the general contractor “responsible for initiating, maintaining, and supervising all safety precautions and programs in connection with the performance of the [c]ontract.” As the dissent notes, that clause would, at minimum, evidence the general contractor’s indirect control of “working conditions related to the safety and health of employees” of each of its subcontractors. Contracting entities, such as general contractors, are often legally required to follow safety regulations pursuant to OSHA or OSHA-approved state plans that result in some level of control over the working conditions related to the safety and health of another company’s workers. Under the Board’s Final Rule, it is unclear how such a contracting entity will comply with OSHA regulations and not be deemed a joint employer under the NLRB.

 Joint Employers Duty to Bargain

Once it is determined that an entity is a joint employer, then it may have a duty to collectively bargain with a labor union. The Board provides some clarity, stating that a joint employer is only required to bargain over the terms or conditions which it has the authority to control or exercises the power to control. However, this not only includes bargaining over essential terms or conditions but also any non-essential mandatory subject of bargaining that it has the authority to control or exercises the power to control.

Unfair Labor Practice Joint Liability

The Board stated that it would continue to follow the longstanding Board precedent of imposing unfair labor practice liability for the actions of one joint employer on another entity only if that other entity knew of the action and did nothing to protest it. The Board further noted that joint employers still have the authority to structure their contracts to include indemnification clauses, which will be an important tool for companies to utilize to recover certain costs and expenses, typically stemming from a joint employer relationship.

 Lawful Picketing

By broadening the definition of joint employers, previously neutral employers are now susceptible to legal picketing as primary employers.

Challenges to the Final Rule

The Final Rule is already being challenged in Congress and in the courts.

On November 9, 2023, a group of bipartisan House and Senate lawmakers introduced a Congressional Review Act resolution to overturn the Final Rule, specifically noting its threat to the viability of the franchise business model.

The same day, the U.S. Chamber of Commerce and a coalition of business groups filed a complaint against the NLRB in the U.S. District Court for the Eastern District of Texas, challenging the Final Rule. The coalition alleges that the Final Rule is contrary to common-law joint employer principles incorporated into the National Labor Relations Act and is arbitrary and capricious. The coalition requests the court to enjoin the Board from enforcing its Final Rule and to set aside the Board’s rescission of the 2020 rule.

Next Steps

Employers should monitor the challenges to the Final Rule closely.

There is currently no injunction prohibiting the Board from enforcing the Final Rule and so, as of now, the Final Rule will go into effect on December 26, 2023. Companies should carefully review their written contracts and actual practices with third parties to evaluate any reservation of the right to control (both indirect and direct) another entity’s worker’s essential terms and conditions of employment. The risk of being deemed a joint employer should be weighed against the need to retain the right to control over the workers.

Although in many contracts, it will be difficult or impractical to relinquish that right, the relationships where there is no need to control or reserve the right to control essential terms and conditions of employment, should have their contracts revised to relinquish such control.

In all contracts, but especially in contracts where a company explicitly reserves the right to control essential terms and conditions of employment, the company contracting for services should think about utilizing an indemnification clause to require indemnification for certain costs and expenses resulting from a finding of a joint employer relationship.

To the extent the reservation of the right to control essential terms and conditions of employment remains in the contract, companies should carefully review the wording of the provision and, to the extent possible, minimize its scope.

Managers and supervisors should be trained in this new rule and the changes to any contractual relationships with their company as a result. Companies should create policies regarding the interactions with and oversight of other companies’ workers so that managers and supervisors have a clear understanding of what is and is not required from them.