Labor Board’s Joint Employer Rule Faces Court, Congress Hurdles

The National Labor Relations Board’s new rule for determining when two businesses jointly employ the same workers will face challenges in litigation and on Capitol Hill.

The International Franchise Association, whose members include McDonald’s Corp., Yum! Brands Inc., and Subway IP LLC, has vowed to stop the rule issued Thursday by any means, including a lawsuit. Sens. Bill Cassidy (R-La.) and Joe Manchin (D-W.Va.) said they’ll introduce a Congressional Review Act resolution to kill the regulation.

The double-barreled opposition underscores the extent to which many businesses—especially in the franchise industry—feel threatened by the new joint employer rule. Joint employers share liability for unfair labor practices as well as obligations to negotiate with unions.

“It’s extremely disappointing that the board cannot show any restraint whatsoever,” said Roger King, senior counsel at the HR Policy Association, which represents employers. “I just don’t think the board members fully understand the reach of the joint employer doctrine.”

The NLRB’s Democratic majority lowered the bar for multiple companies to qualify as joint employers under federal labor law, in a rule scheduled to take effect on Dec. 26.

Under the rule, evidence that one company indirectly controlled essential job terms and conditions of workers employed by another outfit could trigger a joint employer finding. Proof that one business had the contractual right to set job terms, even if that right was never exercised, could also trigger such a finding.

“The Board’s new joint-employer standard reflects both a legally correct return to common-law principles and a practical approach to ensuring that the entities effectively exercising control over workers’ critical terms of employment respect their bargaining obligations,” NLRB Chair Lauren McFerran said in a statement.

While supporters of the rule say it will help hold powerful companies that control workers accountable under federal labor law, opponents characterize it as an attack on small businesses and a disruption to normal contractual relationships. The IFA likely won’t be the only group to sue.

Explaining the Change

The joint employer rule rescinded the 2020 regulation issued by an all-Republican board, which limited joint employer evidence to just direct and immediate control actually exercised over workers. That Trump-era rule in turn overwrote the broader standard handed down by a Democratic-majority board in 2015’s Browning-Ferris Industries.

The US Court of Appeals for the District of Columbia Circuit in 2018 largely upheld the Browning-Ferris standard, which is similar to the test in the NLRB’s new rule.

But that precedent wouldn’t play a major role in the new rule’s most immediate point of vulnerability, said Mark Kisicki, an employer-side labor lawyer at Ogletree, Deakins, Nash, Smoak & Stewart PC.

To survive a legal challenge, the NLRB must adequately justify why it changed its joint employer standard from the 2020 rule, a requirement for major agency policy changes under the US Supreme Court’s 2016 ruling in Encino Motorcars LLC v. Navarro.

The board’s main justification for its new rule is that the standard in the previous regulation didn’t comport with common law, but it came up short on that rationale, Kisicki said. The board also failed to explain why the change is necessary to facilitate effective collective bargaining, he said.

A Major Question?

Court challengers are likely to launch several lines of attack, including that the standard clashes with common law and that the rule is arbitrary and capricious, in violation of the Administrative Procedure Act.

The major questions doctrine might also be a basis for challenge, given that the impact of the rule is so broad and that the term joint employer isn’t defined in the National Labor Relations Act, said James Paretti, an attorney with the management-side firm Littler Mendelson PC.

Federal courts have nixed agency regulations by invoking that doctrine, which requires that Congress must speak clearly when empowering agencies to regulate issues of vast significance.

The once-obscure doctrine gained prominence after the Supreme Court used it to block the Occupational Safety and Health Administration’s Covid vaccinate-or-test rule and invalidate the Environmental Protection Agency’s Clean Power Plan.

But a legal test to determine joint employer status doesn’t seem so significant and so at the margins of the NLRB’s authority that it could implicate the major questions doctrine, said Matthew Bodie, a law professor at the University of Minnesota.

“Yes, they could argue it may have a big impact on franchises,” said Bodie, a former NLRB attorney. “They might say it will destroy the industry, but really it might mean they either have to lay off some control over franchisees or come to the bargaining table. Neither of those are ruinous or that substantial of an imposition.”

Congress, White House

While it could take months or even years to resolve a legal challenge, the outcome of lawmakers’ push to scrap the rule should play out much faster—and if successful, could cripple the NLRB’s ability to respond.

In addition to nullifying a regulation, the CRA prohibits an agency from issuing a rule that does “substantially the same” as the nullified measure. Given the limited policy options in defining a joint employer test, that restriction has the potential to leave the Trump-era rule locked in place permanently.

There may be support in both the Republican-controlled House and the Democratic-controlled Senate. Manchin and Cassidy’s announcement of a CRA resolution against the joint employer rule comes after Sen. Kyrsten Sinema (I-Ariz.) said she’d back such an effort, in remarks at a franchise industry event last month.

“They just attack small businesses everywhere they get a chance, it’s just horrible,” Manchin said.

Although Manchin said the CRA resolution will “absolutely” pass Congress, he predicted President Joe Biden will veto it. It’s unlikely that rule opponents could muster the necessary supermajorities in both chambers to override a veto.

Celine McNicholas, general counsel and director of policy and governmental affairs at the left-leaning Economic Policy Institute, agreed that Biden likely would veto the resolution if it reached his desk.

“It would be very hard to go into the election cycle claiming to be the most pro-union president and support that resolution,” McNicholas said.

—With assistance from Diego Areas Munhoz