National Labor Relations Board Adopts Expansive Test for “Joint-Employer” Status

On October 26, 2023, the National Labor Relations Board (“NLRB”) issued its long-awaited final rule on “joint employer” status under the National Labor Relations Act (“NLRA”).  The new rule significantly expands the NLRB’s joint-employer doctrine, which will have adverse effects on many common business arrangements, including the use of temporary employees, subcontracting, and franchisee-franchisor relationships.  The new rule is effective on December 26, 2023, and applies only to cases filed after that date.  As explained herein, the new rule expands the definition of a joint employer in several key respects.

“Indirect Control” is Sufficient to Warrant a Joint-Employer Finding.  The new rule considers both direct and indirect control exercised by the putative joint employer over essential terms and conditions of employment.  Under the former rule, a putative joint employer must have exercised “substantial direct and immediate” control over employment terms to be a joint employer; the mere exercise of “indirect control” was not a factor for consideration.  As noted by the dissent to the rule, the concept of “indirect control” is inherently vague and will give the NLRB wide latitude to impose joint-employer status in a variety of circumstances.  In its explanation for the rule, the NLRB states “indirect control” includes circumstances where the putative joint employer merely communicates work assignments and directives to the hiring entity’s managers, or maintains oversight over the manner and means of the performance of work.   Adding even another layer of ambiguity to the mix, the new rule also states that “indirect control” exercised only through an “intermediatory” is sufficient to establish joint-employer status. 

Includes the “Right to Control” Irrespective of Whether Control is Actually Exercised.  Under the prior rule, a joint employer must have actually exercised control over essential terms and conditions of employment.  The mere contractual reservation of the right to control, without the exercise of actual control, was not sufficient.  Under the new rule, a business will be deemed a joint employer if it merely reserves the right to control essential terms of employment, but never actually exercises that right.  This is significant because many contracts reserve a company’s ultimate right to make employment decisions, although that right may never actually be exercised.  The new standard will result in a joint-employer finding based solely on the contracting documents, as opposed to how the putative joint employer actually conducts business with the hiring entity.

Expanded “Essential Terms of Employment.”  Under the prior rule, essential terms of employment were narrowly limited to wages, benefits, hours of work, discharge, discipline, supervision, and direction.  Among other changes, the new rule states that essential terms of employment includes “directions governing the manner, means, and methods of performance of duties.”  This expansion is critical because it may result in a joint-employer finding where the putative joint employer merely sets production or performance standards for the hiring entity, but does not actually supervise the employees performing the work.  In addition, “essential terms of employment” now includes “working conditions related to the health and safety of employees,” which is highly problematic because it is common for vendor agreements to include provisions requiring the vendor to comply with applicable health and safety standards.

Effects of Joint-Employer Status.  The new rule states that joint-employers will have a mandatory bargaining obligation over any terms and conditions of employment for which the business is deemed to be a joint-employer.  For example, if a company is found to be a joint employer with respect to determining wages, the company will have a mandatory bargaining obligation with the union with respect to wages.  The rule states that a company will not have a bargaining obligation over terms of employment for which it is not found to be a joint employer.  Apart from what is stated in the rule, a joint-employer finding may also result in shared liability for unfair labor practices.  A joint employer finding may also provide the basis for a union to strike the putative joint-employer, which ordinarily would be prohibited as an unlawful secondary boycott.

What to Do Now.  Companies should respond swiftly to avoid the impacts of the new rule.  Crucially, companies should review the business contracts to ensure that they do not unintentionally reserve control, either directly or indirectly, over a business partner’s employment conditions.  Companies should also review their management protocols with business partners, including subcontractors and franchisees, to ensure that they are not exercising the type of indirect control that might result in a joint-employer finding before the current NLRB.

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