NLRB Issues New Joint Employer Rule Requiring Direct Control (1)

The National Labor Relations Board released details of a new rule that restricts the circumstances in which franchisers and businesses that use workers hired by third parties can be held jointly liable for violations of federal labor law.

The NLRB’s new formulation of joint-employer liability requires that a company exercise “substantial direct and immediate” control over the most important elements of a worker’s job, like discipline or hiring and firing, to be considered the worker’s employer. The final rule will be formally published in the Federal Register on Wednesday. It will take effect April 27.

The rule has major economic implications for some of the largest businesses across the country that rely on franchisees and subcontracted workers, including McDonald’s and Google. lt immediately reduces companies’ risk of significant litigation and related costs for unfair labor practices, and likely eliminates their responsibility in many cases to bargain with franchise or subcontracted workers if the workers choose to form a union.

“This final rule gives our joint-employer standard the clarity, stability, and predictability that is essential to any successful labor-management relationship and vital to our national economy,” NLRB Chairman John Ring (R) said Feb. 25 in announcing the final rule.

The rule’s pro-employer stance prompted a leading House Democrat on Feb. 25 to threaten to use congressional power to block it. Labor unions and worker advocates are also near certain to challenge the regulation in court.

Meanwhile, the Trump administration is moving to curb joint employer liability under other labor and employment laws. A Labor Department regulation narrowing joint employment for minimum wage and overtime pay purposes is set to take effect in March. The Equal Employment Opportunity Commission is working on a third regulation that would update joint-employer liability for workplace discrimination and harassment.

McDonald’s recently won a federal appeals court judgment in a class action alleging the company is a joint employer of its franchisees’ workers under a separate federal wage and hour law. The fast-food giant is also still working to settle an NLRB action that was brought under the board’s previous interpretation of joint employment under the National Labor Relations Act.

The NLRB’s new rule is a blow to Democratic lawmakers, unions, and worker advocates who argued business groups were given too much input on the regulation, which scraps the more expansive test for determining joint-employer liability the board outlined in a 2015 decision known as Browning-Ferris. The Browning-Ferris test required only that a business have indirect control over working terms and conditions to be considered a joint employer.

Supporters of that Obama-era policy say franchises and similar business models allow large corporations to evade legal responsibility for workers who are often crucial to their operations. They point out the board decided to update joint-employer liability via the formal notice-and-comment rulemaking process after it was forced to scrap a case decision that would have overturned Browning-Ferris because one of its members, Republican William Emanuel, was found to have a conflict of interest.

Republicans have largely supported the NLRB’s move away from the more stringent Browning-Ferris standard, arguing along with business groups that the policy harmed economic growth and threatened the franchise business model.

The rule defines important terms, such as “direct and immediate control” and what constitutes “substantial” direct control. Evidence of an employer’s indirect control is relevant insofar as the complainant also includes evidence of direct control, the NLRB said in its announcement.

Democrats Vow to ‘Stop’ Rule

The Trump administration has embraced the federal government’s approach to joint-employer liability as part of its government-wide effort to reduce regulatory burdens on businesses.

The Labor Department, which handles disputes over minimum wage, overtime, and other issues regarding pay, released in January a new joint-employer policy similar to the NLRB’s rule. The DOL policy is an interpretive regulation, as opposed to the formal rule the NLRB issued. Interpretive regulations typically do not get as much deference in court as a formal rule, which carries the force of law.

Reactions to the NLRB’s final rule were split along partisan lines.

“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,” Rep. Virginia Foxx (R-N.C.), ranking member of the House Education and Labor Committee, said in a Feb. 25 statement.

AFL-CIO President Richard Trumka called the rule “a step backward” in modernizing “outdated” labor law. He said it would “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.”

Rep. Rosa DeLauro (D-Conn.), chair of a House Appropriations subcommittee with jurisdiction over labor issues, told Bloomberg Law Feb. 25 that she’s committed to using legislative powers to block or invalidate the rule.

“Big businesses are looking to avoid responsibility for their egregious violations of workers’ rights, and the Trump-controlled NLRB is more than happy to let them off the hook by rigging the rules against people living paycheck to paycheck,” DeLauro said. “As Chair of the House Appropriations Subcommittee that funds the NLRB, I will use any Congressional authority we have to stop this rule.”

Legal Challenge Likely

Strong disagreement between conservatives and liberals over joint-employment policy means the final rule is likely to be challenged in court. Ethical questions raised during the board’s development of the rule also could factor into potential litigation.

Sens. Elizabeth Warren (D-Mass.), Bernie Sanders (I-Vt.), and Kirsten Gillibrand (D-N.Y.) foreshadowed a potential lawsuit challenging the rule in May of last year.

“Almost everything the board does centers around disputes in which different parties see the issues very differently, so it’s quite possible that various parties may litigate challenges to the rule,” Philip Miscimarra, a former NLRB chairman who now heads special appeals at law firm Morgan Lewis, told Bloomberg Law on Feb. 25.

Miscimarra dissented from a more employee-friendly formulation of joint-employer policy the board enacted in 2015, and he was chairman during a failed effort to reverse those policies in 2017.

The final rule the NLRB issued Feb. 25 was developed by Chairman John Ring and two sitting Republican colleagues. The board’s two other seats—both Democratic posts—are currently vacant, although the White House is expected to announce appointments in the coming weeks.

—Jaclyn Diaz contributed to this report.