If a National Labor Relations Board proposed rule is implemented as drafted, businesses that contract with third parties to provide labor or services would face significantly more risk of being held jointly liable with these third-party providers when they're involved in labor disputes.

In what some are calling the latest example of the NLRB's attempt to reverse the perception that the Board has become employer-friendly, the rule that the NLRB is proposing would make a mere reserved right to control terms and conditions of employment sufficient to establish joint employment status, even if that reserved right exists on paper only and is never actually exercised.

Potential Joint Employer Situations

Questions about the existence of a joint employment arrangement often involve franchisors or staffing agencies, but they can also arise in a wide variety of situations in which the employees of one business work under terms set by a contract with another. For example, joint employer relationships have been found when one entity contracts for cleaning services or when a company employs delivery drivers employed by another company. In effect, anytime a company's employees provide service under a contract with another company, the potential for joint employer liability exists.

The definition – and implications – of joint employer status are important in the labor relations context because the Board will order joint employers to share responsibility for any collective bargaining obligations and/or labor law violations, regardless of either employer's relative involvement in the underlying conduct. In the cleaning services example, the entity desiring cleaning services at its office headquarters might be required to bargain with the cleaning service company and the services union over wages, schedules, and working conditions.

The Current and Proposed Standards

Under the Board's current standard, an employer must "exercise substantial direct and immediate control" over essential terms and conditions of work to qualify as a joint employer. Basically, to be joint employers, both employers must "actually determine" wages, fringe benefits, hours of work, or another of the employment subjects expressly enumerated in the rule (29 C.F.R. § 103.40). As a result, indirect control and a never-exercised contractual reservation of a right to control essential terms and conditions of employment are insufficient to create a joint employment relationship.

But that is all set to change under the proposed rule. Under the Board's proposed rule, merely "possess[ing] the authority to control" essential terms and conditions of employment will be enough to establish joint employer status – even if the business never exercises its contractual authority to influence wages, hours, or other working conditions. Evidence of indirect control or control exercised through an intermediary person or entity will also be sufficient to establish status as a joint employer. Consequently, significantly more businesses will be at risk of incurring bargaining obligations and unfair labor practice liabilities.

What Would Change Mean for Alleged Joint Employers?

In practical terms, this means a business could be required to bargain over the terms and conditions of a supplier's employees, even though the business does not control all the terms or conditions of employment for these employees. Joint employer status also could deprive the business of its status as a neutral employer if there is a strike or labor dispute and also expose the business to liability for actions by the supplier that violate the NLRA. Given the Board's recently demonstrated willingness to entertain special remedies for labor violations, this should be of particular concern.

Employees may also be required to bargain with different entities than they initially expected. Bargaining with two employers instead of one can be significantly more challenging. Not only are the logistics of bargaining more complicated, but different businesses may have different strategies and priorities for what they each want to achieve at the bargaining table. Two or more employers might also be concerned about reducing liability and maintaining separate status under other laws that apply a different joint employer standard. Negotiating collective bargaining agreements may thus become more contentious and drag out even longer before the parties reach an agreement.

Because the new standard puts businesses at risk for being responsible for violations of the NLRA by contracted parties, businesses may also opt to forgo subcontracting opportunities altogether, deciding that the benefits are not worth the risks that joint employment brings. Should that happen, it may mean fewer opportunities and fewer jobs in the marketplace.

The Board Has a History of Changing Its Joint Employer Test

This is not the first time the Board has dramatically shifted its position on this issue, and it's only one example of how a change in administration can lead to an overhaul of NLRB case law and rules.

Historically, the NLRB required a company to have direct and immediate control over the terms and conditions of employment of another company's workers before finding joint employment. But in 2015, the Obama Board handed down a decision in Browning-Ferris Indus. that broadened the joint employer test to allow consideration of indirect control and a contractual reservation of the right to control as factors in the joint employer analysis.

Then, in a Board decision commonly referred to as HyBrand issued just two years later, the Trump Board reversed Browning-Ferris and returned to the long-standing, pre-2015 standard. The Board then went one step further. The 2020 Board implemented agency rulemaking (rather than relying only on adjudication) to codify its return to the narrower standard, limiting the circumstances in which entities are considered joint employers. Businesses had hoped that codifying the standard through agency rulemaking would introduce stability and clarity to an important albeit changing legal issue. That hope may prove to be short lived. Now, just over two years out, a majority of the Biden NLRB is again using administrative rulemaking, but this time to broaden the standard.

Not all the Board members support the proposed rule change, however. The two Board members appointed under the Trump administration believe the proposed rule is a "step backwards." If enacted, they say disputes will lead to case-by-case decisions that ultimately provide less, not more, guidance to businesses, employees, and labor unions. They contend the proposed rule offers no meaningful guidance regarding which "common-law agency principles" apply or how those principles will be applied for determining the existence of an employment relationship. The two dissenting members also dispute the majority's assertion that case law supports a determination of joint employer status based solely on any never-exercised contractual reservation of a right to control essential terms and conditions of employment. They also argue that the proposed rule injects uncertainty into the definition of "essential terms and conditions of employment" where there had once been clarity. This is because the proposed rule exchanges an exhaustive and clearly defined list of "essential" subjects of employment with an open-ended, non-exhaustive list. It also provides no guidance for determining whether an unlisted subject is an "essential" term of employment or not, other than to suggest that it may depend on the particular industry.

What's to Come?

Whether any of the deficiencies identified by the dissenting members will be rectified remains to be seen. The proposed rule has not been finalized, and interested parties have until November 7, 2022, to submit initial comments. But for now, the pre-2015 standard still applies.

We anticipate the rulemaking process will likely yield a joint employer test that closely resembles the proposed rule. Businesses are likely to mount legal challenges, which may slow the implementation of the final rule. Assuming the rule survives these challenges, then businesses should expect increased labor risks as a result of the change.

This is an evolving area and there is still much to be determined. DWT will continue to monitor developments regarding the proposed rule and will keep you apprised of any developments. If you would like to learn more about the impending changes from the Board and minimize the risk of inadvertent joint responsibility, please reach out to any of the advisory's authors.