Labor & Employment Law Daily NLRB joint employer rule’s definitions promise clarity, limit employer bargaining obligations
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Thursday, February 27, 2020

NLRB joint employer rule’s definitions promise clarity, limit employer bargaining obligations

By Ronald Miller, J.D.

The final rule will be effective April 27.

The NLRB issued its final rule governing joint-employer status under the NLRA on February 26, 2020. Under this final rule, an entity may be considered a joint employer of a separate employer’s employees only if the two share or co-determine the employees’ essential terms and conditions of employment, which are exclusively defined as wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction.

According to the Board, the final rule restores the joint-employer standard that was applied for several decades prior to the 2015 decision in Browning-Ferris. As indicated in its original notice of proposed rulemaking (NPRM), the Board believes that the final joint-employer rule will foster predictability and consistency regarding determinations of joint-employer status in a variety of business relationships, thereby enhancing labor-management stability, the promotion of which is one of the principal purposes of the NLRA.

A Fact Sheet about the final rule is also available.

Employer-employee relationship. The NLRA defines the terms “employer” and “employee.” Under Section 2(2) of the Act, “the term ‘employer’ includes any person acting as an agent of an employer, directly or indirectly,” but excludes certain governmental entities, entities subject to the Railway Labor Act, or any labor organization (other than when acting as an employer). Section 2(3) provides that “the term ‘employee’ shall include any employee, and shall not be limited to the employees of a particular employer, unless the Act explicitly states otherwise … but shall not include … any having the status of an independent contractor….”

The text of the Act and its legislative history further establish that, in determining whether an employment relationship exists between a putative employer and employee, common-law agency principles are controlling. Those principles require that, in making this determination, the Board was required to focus on the control exercised by a putative employer over a person performing work for it.

Joint employment. The NLRA does not include the term “joint employer.” That concept has been developed by the Board and reviewing courts to address situations where two or more separate entities engaged in a business relationship jointly affect the terms and conditions of employment of a group of employees.

However, the Board has never attempted to comprehensively define the “essential terms and conditions of employment” that are relevant to the joint-employer inquiry, even though the standard itself inherently implies that it is control over those terms and conditions of employment that is determinative of joint-employer status. Moreover, the joint employment standard does not specify the extent of control that must be shown before the two entities may be found to “share or codetermine” that essential term or condition.

For at least 30 years (from no later than 1984 to 2015), evidence of indirect control was typically insufficient to prove that an entity was the joint employer of another employer’s workers. Even direct and immediate supervision of another employer’s employees was insufficient to establish joint-employer status where such supervision was “limited and routine.”

Browning-Ferris standard. That changed significantly in 2015, when a divided five member Board issued its ruling in Browning-Ferris, overruling Board precedent, and substantially relaxing requirements for proving a joint-employer relationship. Specifically, the majority held that it would no longer require proof that a putative joint employer has exercised any “direct and immediate” control over the essential terms and conditions of employment of another employer’s workers. Under the Browning-Ferris standard, a company could be deemed a joint employer even if its control over the essential working conditions of another business’s employees was indirect, limited and routine, or contractually reserved but never exercised.

In December 2018, the D.C. Circuit issued its review of Browning-Ferris. The court held that the Board was required to apply the common law of agency in determining whether an entity was a joint employer of particular employees. Further, the court upheld the Board’s longstanding right-to-control standard as “an established aspect of the common law of agency.” In addition, the appeals court concluded that the common law “permits consideration of those forms of indirect control that play a relevant part in determining the essential terms and conditions of employment. The court therefore affirmed Browning-Ferris’s “articulation of the joint-employer test as including consideration of both an employer’s reserved right to control and its indirect control over employees’ terms and conditions of employment.”

The D.C. Circuit, however, faulted the Browning-Ferris Board for failing to confine its inquiry to “indirect control over the essential terms and conditions of the workers’ employment.” The Board did not sufficiently articulate “the scope of the indirect-control element’s operation,” the appeals court said, remanding the case to allow the Board to more fully flesh out this aspect of its joint-employer analysis.

Rulemaking. Rather than restore the NLRB’s pre-Browning Ferris joint-employer standard through case adjudication, the Board did so via rulemaking, with the greater precision, clarity, and detail that a formal regulation allows, the agency noted. The NLRB issued an NPRM concerning joint-employer status under the NLRA on September 13, 2018. The proposed rule included a number of hypothetical examples illustrating how it would apply to particular scenarios. However, the Board decided to omit the hypothetical scenarios from the final rule and has instead provided more specific guidance in the text of the rule itself.

The final rule, like the NPRM, provides that an entity is a joint employer of a separate employer’s employees only if the two employers share or co-determine the employees’ essential terms and conditions of employment. However, the Board has modified the proposed rule to define “share or co-determine” as the possession and exercise of “such substantial direct and immediate control over one or more essential terms or conditions of their employment as would warrant a finding that the entity meaningfully affects matters relating to the employment relationship of those employees.”

The Board has also modified the proposed rule to factor indirect control over essential terms or conditions of the workers’ employment, and control over mandatory subjects of bargaining other than essential terms and conditions of employment, into the joint-employer analysis—”but only to the extent [they] supplement[] and reinforce[] evidence of the entity’s possession or exercise of direct and immediate control over a particular essential term and condition of employment.”

Contractually reserved control. Evidence of contractually reserved control over an essential term or condition of employment is probative for the purpose of determining whether an entity possesses or exercises direct and immediate control over that essential term or condition. Similarly, evidence of indirect control over an essential term or condition of employment may be probative of whether the control possessed and exercised is substantial.

Depending on the circumstances of a particular case, evidence of control over a nonessential term or condition that nonetheless constitutes a mandatory subject of bargaining may be probative of whether an entity possesses or exercises substantial direct and immediate control over an essential term or condition of employment.

Evidence of an entity’s contractually reserved or indirect control over an essential term or condition of employment, or its control over mandatory but nonessential subjects of bargaining, is not, however, otherwise probative of whether the entity “meaningfully affects matters relating to the employment relationship.” Under the final rule, a putative joint employer reaches that threshold only through possession and exercise of substantial direct and immediate control over one or more essential terms and conditions of employment.

Indirect control. The Board modified the proposed rule to factor indirect control into the joint-employer analysis, but not to find it sufficient, without more, to make an entity a joint employer. Under the final rule, evidence of indirect control over essential terms and conditions of employment is probative of joint-employer status, but only to the extent that it supplements and reinforces evidence of direct and immediate control over essential terms and conditions.

The definition of “indirect control” excludes “control or influence over setting the objectives, basic ground rules, or expectations for another entity’s performance under a contract,” and evidence of control that by definition does not count as direct and immediate control may fall within this exclusion and so not constitute indirect control, either.

Contractually reserved but unexercised right to control. The final rule recognizes contractually reserved but unexercised control as a potentially relevant consideration. It provides that evidence of an entity’s contractually reserved but never exercised authority over the essential terms and conditions of another employer’s employees is probative of joint-employer status, but only to the extent it supplements and reinforces evidence of direct and immediate control over essential terms and conditions of employment.

In addition, the distinction drawn between indirect control that may be relevant to a joint-employer determination and “decisions that set the objectives, basic ground rules, and expectations for a third-party contractor also applies to contractually reserved but unexercised control.”

Limited and routine control. The Board revised the proposed rule to delete “limited and routine” as a general qualifying term and instead to use that term solely in the context of defining what is and is not direct and immediate control over supervision. Thus, the final rule provides that an entity does not exercise direct and immediate control over supervision when its instructions are limited and routine and consist primarily of telling another employer’s employees what work to perform, or where and when to perform the work, but not how to perform it.

“Substantial” direct and immediate control. The final rule retains the requirement that direct and immediate control over essential terms and conditions of employment be “substantial” to give rise to joint-employer status. As defined in the final rule, “substantial” direct and immediate control means direct and immediate control that has a regular or continuous consequential effect on an essential term or condition of employment of another employer’s employees. Such control is not “substantial” if it is only exercised on a sporadic, isolated, or de minimis basis.

“Essential” terms and conditions. The final rule expands the list of essential terms and conditions of employment to include wages, benefits, and hours of work, in addition to hiring, firing, discipline, supervision, and direction. Importantly, the final rule makes the list of essential terms exhaustive.

Lastly, the final rule has been revised to provide that an entity’s control over other mandatory subjects of bargaining not considered essential terms and conditions of employment is probative of joint-employer status, but only to the extent it supplements and reinforces evidence of direct and immediate control over essential terms and conditions of employment.

Congressional review. This rule has been classified as a major rule subject to congressional review. What that means is that at the conclusion of the congressional review, if the effective date has been changed, the Board will have to establish a new effective date by publishing a document in the Federal Register or to withdraw the rule.

Ogletree attorney: “A huge step forward.” According to Mark G. Kisicki, a Shareholder in the Phoenix office of management firm Ogletree Deakins, the final rule is a “huge step forward in clarity and stability for employers, employees, and unions.” He noted it was a fundamental criteria for the NLRB to act in a way that ensures stability in labor relations, and taking this step via rulemaking was significant in that regard.

With respect to the Board’s rulemaking activity generally, Kisicki told Labor and Employment Law Daily that there are disadvantages to the Board’s typical approach of individual adjudications—which are often limited by facts and not easily applicable to other situations—while by resorting to rulemaking, the Board here had the advantage of “getting all it needed” from all potential stakeholders, not just parties and amicus, because of the availability of notice and comment. And here there were close to 30,000 comments.

As to the substance of the rule, Kisicki focused on the definitional aspects of the rule, which were added after comments were provided on the proposed rule. Ogletree submitted comments including definitional comments—for example, in the proposed definition of essential terms and conditions of employment, the list of eight included the words “such as,” which commenters believed created opportunity for confusion and litigation. Removing “such as” clearly limited the list, and Kisicki fully expects that the Board will now use that clear definition of essential terms and conditions of employment in other contexts.

Now, in § 103.40 (c)(1-8), the Board takes each of the eight “essential” terms and conditions and specifies “in a clear and concise fashion” not only what direct and immediate control looks like, but it also provides “specific caveats” as to what is not the exercise of direct and immediate control. This approach, Kisicki said, provided “provided a level of clarity that we have never had.”

In conclusion, Kisicki stressed that the NLRA is unique in its purposes and goals, and the Act is specifically designed to address collective “groups” of employees—other employment laws protect the rights of individuals. As such, joint employment relationships under the NLRA should not be susceptible to being created by one-off situations (e.g., one entity’s manager bringing a worker’s poor performance to the attention of another entity) where the Act’s purpose is to put the focus on the entity that has to bargain collectively with employees’ representatives. In his opinion, this is where the new rule proves so valuable.

Lawmakers respond. In Washington, the response from Republicans was about as expected, while Democrats were notably silent. Senator Lamar Alexander (R-Tenn.), Chair of the Senate Health, Education and Labor Committee, said the rule was “positive news for the men and women operating our nation’s 733,000 franchise establishments,” noting that the Obama-era standard had discouraged companies from franchising altogether. “The NLRB’s new rule provides clarity and predictability and helps protect this important path to the middle class for small businessmen and women across the country.”

Rep. Virginia Foxx (R-NC), ranking member of the House Committee on Education and Labor, stated in a release that, “[a]fter years of uncertainty created by the Obama-era NLRB, today’s final joint-employer rule will restore a reasonable interpretation of the National Labor Relations Act, and it will create clarity and increased opportunity for entrepreneurs and workers alike. As our economy continues to flourish under Republican pro-growth policies, I applaud the NLRB for finalizing this long-overdue rule, which will allow more Americans to pursue the American Dream free from unnecessary and burdensome union harassment and government red tape.”

A boon for the franchise industry. The International Franchise Association (IFA), whose members perhaps benefit most from the new, tighter joint employment standard, praised the final rule, the latest in a series of “unparalleled pro-franchise actions from the federal government” in recent months, according to the trade group. The nation’s 733,000 franchise businesses employ 7.6 million workers and contribute $675 billion to U.S. economic output, according to IFA, which lobbied hard on joint-employer issues in recent years.

“For years, franchise businesses have struggled under an expansive and unclear joint employer standard,” said Robert Cresanti, IFA President and CEO. “Today’s final rule fixes that. By restoring clarity and common sense to the definition of ‘joint employer,’ America’s franchise brands and franchise businesses will be able to grow and give back to their communities with a clear understanding of the roles and responsibilities of each party.”

According to IFA, the expanded joint-employer standard cost the American economy $33.3 billion per year, led to 376,000 fewer job opportunities, and resulted in a stunning 93% increase in lawsuits against franchise businesses, according to an economic impact study jointly conducted by IFA and the U.S. Chamber of Commerce.

The organization said the SEIU had spent $180 million “to co-opt critically important issues for political gain,” pointing to the years-long McDonald’s labor dispute at the Board. The latest NLRB rulemaking “should put an end to the SEIU’s multi-million dollar and misguided campaign against franchise brands and businesses regarding joint employment law,” Cresanti said.

Worker advocates decry the rule. But left-leaning think tank Economic Policy Institute (EPI) estimates that U.S. workers will lose $1.3 billion in wages annually as a result of the rule, which strips U.S. workers of collective bargaining rights, according to the organization.

In substantially narrowing the circumstances in which a business can be held to be a joint employer under the NLRA, the Board has made it easier for these entities “to avoid responsibility and liability” under the Act while “making it harder for workers to hold all parties who set their terms of employment accountable,” according to Celine McNicholas, EPI director of government affairs and labor counsel, and Heidi Shierholz, senior economist and EPI’s director of policy.

“Weakening the joint-employer standard has serious adverse consequences for working people, such as depriving workers of the ability to bargain with the employer contracting for their services through an intermediary, who in most cases is the employer with ultimate control over wages, hours, and working conditions,” EPI argues. In its view, the solution is for the U.S. Senate to follow on the heels of the House and pass the controversial Protecting the Right to Organize (PRO) Act.

AFL-CIO President Richard Trumka largely mirrored these comments. “This rule will allow companies to manipulate the system to limit working people’s freedom to negotiate for fair wages and benefits by hiring contractors to serve as a shield between the companies and their obligations to employees,” he stated. “It is a step backward in modernizing our outdated labor laws, by empowering corporations and special interests instead of supporting rules that will level the playing field and reflect the true nature of today’s economy.”

“The Trump administration and its politicized National Labor Relations Board, once again, are taking sides by turning their backs on working people. But they should note that working people across America are on the rise. We are not afraid to speak up and fight back against these blatant attacks that undermine our freedom to bargain collectively with employers. We will continue to push back until we have an impartial and fair NLRB.”

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