February 27, 2020

National Labor Relations Board Tightens Standard for Joint Employer Status

A business is a joint employer of another employer’s employees only if the two employers share or codetermine the employees’ essential terms and conditions of employment, according to a recently unveiled and long-awaited final rule from the National Labor Relations Board (NLRB). This means that a business must exercise “substantial direct and immediate control” over such issues as wages, benefits, hours of work, hiring, discharge, discipline, supervision and work direction. The rule, which takes effect on April 27, 2020, tightens the legal test the NLRB uses to determine whether workers are jointly employed by affiliate businesses, including franchisors and franchisees.

Specifically, the new rule substantially tightens the standard for joint employer status articulated by the NLRB in its 2015 Browning-Ferris decision. In that decision, the NLRB departed from a half-century’s worth of precedent in determining that it could consider employers who exercised indirect control over the terms and conditions of another employer’s employees, or who reserved the right to exercise such control, as joint employers. The new rule expressly rejects this standard, making clear that neither “indirect” control nor a reservation of right to control terms and conditions of employment is sufficient, on its own, to establish joint employer status. The new rule returns the NLRB to its pre-Browning-Ferris jurisprudence, which required actual and direct control. The new rule also notes that “sporadic, isolated, or de minimus” direct control will not be enough to warrant a finding of joint employment.

The issue of joint employer status is significant for businesses because workers and the unions that represent them can collectively bargain with joint employers and hold them jointly liable for unfair labor practices, which are violations of federal labor law. The Browning-Ferris decision, with its broader test for joint employer status, engulfed more contractors and franchisors into costly and time-consuming labor disputes and contract negotiations. By rejecting the Browning-Ferris standard, the NLRB’s new narrower test brings certainty to this area of law by ensuring that labor disputes and contract bargaining only involve those contractors and/or franchisors that exercise direct control over the employees of another employer. NLRB Chairman Jon Ring made this very point when he explained that “employers will now have certainty in structuring their business relationships, [and] employees will have a better understanding of their employment circumstances.”

This new rule is particularly important to franchisors and comes on the heels of the Department of Labor’s (DOL) new joint-employer rule, which also affected franchisors. Since the Browning-Ferris decision, there has been uncertainty about how much “control” is too much. This new NLRB rule provides welcomed clarity for franchisors, and will allow franchisors to provide more operational support and guidance to franchisees, which should result in franchisees having the opportunity to run their small businesses in a manner that will make a difference in their communities. Franchisors can protect their brands through appropriate brand standards and require franchisees to meet those standards without the heightened risk of being deemed a joint employer of their franchisees’ employees.

However, franchisors must be mindful of various state joint employer regulations, which may be broader in scope than the new rule, as well as plaintiffs’ lawyers asserting claims based on control theories. Franchisors should continue to review their business models and business practices (training, technology and field support) to ensure they are not involved in the exercise of control over a franchisee’s employees. Franchisors also should appropriately address these issues in their franchise agreements and operations manuals.

In sum, the NLRB’s new joint employer test is a win for employers, returning the NLRB’s joint-employer status jurisprudence to the narrower direct and actual control standard. Under this new test, contractors and franchisors who do not want to become joint employers should be careful to avoid exercising direct control over another employer’s employees’ terms and conditions of employment, including wages and benefits. The new rule’s clarity allows businesses to know where they stand as a potential joint employer and to prepare accordingly. 

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