On November 9, 2023, a coalition of business advocacy groups led by the US Chamber of Commerce filed a lawsuit in the US District Court for the Eastern District of Texas challenging the National Labor Relations Board (“NLRB”) new final rule for determining joint employer status under the National Labor Relations Act (“NLRA”). Almost immediately, on November 13, 2023, the Chamber filed for summary judgment.
In response, the NLRB has pushed back the effective date for the new rule to February 26, 2024. The rule was previously set to take effect on December 29, 2023.
As we previously reported, the new rule creates a more liberal legal test for joint employment and allows for a joint employer finding based on indirect or unexercised control alone. Although joint employment is rarely litigated at the NLRB, it has been one of the most bitterly contested issues in labor law over the past decade. The NLRB applies the joint employer test when workers directly employed through employers such as franchisors and staffing firms seek union elections or file NLRB charges claiming their labor rights were violated. If workers for a staffing firm claim the company to which they are subcontracted is actually in charge, the Board decides whether that user company is jointly liable with the direct employer. In other words, the new rule could widen the number of companies that must participate in labor negotiations – or be liable for unfair labor practices — alongside their franchisees or independent contractors.
In their lawsuit, the groups challenge the new rule on three grounds. First, the groups contend that the rule is overbroad and directly contradicts the long-established common-law definition that limits joint employment to relationships of actual and substantial control. For decades, the Board drew from the common law straightforward framework and held that firms were joint employers only if they exercised “direct,” “immediate,” and “substantial” control over the same employees’ essential terms of employment. The new approach allows an entity to be a joint employer of another employer’s employees if they share or codetermine – or could share or codetermine– the employees’ essential terms and conditions of employment whether or not the alleged joint employer wields that power itself or through another entity, or has used that power or merely retains it.
Second, the new rule abandons an important principle of meaningful collective bargaining. The groups argue that the structure and purpose of the NLRA require that an employer possess enough control over essential terms and conditions of employment such that collective bargaining between a union and that employer is “meaningful.” The plaintiffs in the lawsuit argue that the new rule requires firms with no meaningful interest and no real leverage to be at the bargaining table.
Finally, the new rule replaces a clear standard that businesses have relied upon to tailor their business arrangements with uncertainty that threatens chaos and indeterminacy across major industry sectors. Specifically, the new rule will have a major impact on franchise business models. If the rule goes into effect, joint-employer status may be established merely by the indirect or reserved control over a broad range of matters, “including wages, benefits, and other compensation; hours of work and scheduling; the assignment of duties to be performed; supervision of performance of duties…” This will substantially affect and harm franchisees, as franchisors scale back on the support and services they supply to their franchisees for fear of being found to be joint employers.
In addition to the three challenges above, the groups also challenge the Board’s justification for the change.
Further complicating the fate of the rule is a November 6, 2023, petition filed by the Service Staffing International Union, requesting the District of Columbia Court of Appeals to review the joint-employer rule. Debates regarding which level of federal court, district or circuit, has priority in reviewing the NLRB’s rule could slow down both challenges.
Franchisors will need to work with closely with Human Resources to address or extend services to franchisees and teach franchisees how to lead their employees. Franchisors will have to monitor franchisees and managers more closely to ensure compliance with regulations and be prepared to get more involved in the employee management side if the rule does survive its legal challenges. Other businesses who use staffing agencies or other subcontracted workers should also evaluate their business models.
Ballard Spahr regularly works with employers on federal and state employment law compliance issues including updating policies and procedures, training management staff and working collaboratively with human resources departments and in-house counsel on management matters.