Federal Court Tosses NLRB’s Expanded Joint Employer Rule

By Fiona Ong - Shawe Rosenthal LLP

March 11, 2024

In a victory for employers, a federal district court judge in Texas vacated (or blocked) the National Labor Relations Board’s 2023 Final Rule that sought to rescind and replace the Trump Administration’s 2020 Rule establishing the current test for determining whether two entities (for example, a staffing agency and its host company) are joint employers. The NLRB’s new Rule would have resulted in more findings that two entities are joint employers. Under federal labor law, a joint employer is required to bargain with a union selected by its jointly-employed workers and may be held liable for the unfair labor practices committed by the other employer.

The Prior Standards. The issue of joint employer status has been a focus of the Board over the past decade, with major swings in the standard occurring during each change in administration. Historically, the issue was decided on a case-by-case basis, applying a common-law test that assessed whether direct and/or actual control was exercised by each potential employer over the worker in question.

In 2015, in Browning Ferris Industries, the Board under the Obama Administration revised the joint employer standard. Specifically, the Obama Board held that it would not require proof that an alleged joint employer exercised “direct and immediate” control over the essential working conditions of another company’s workers. Additionally, the Obama Board stated that it would find joint employment even where a company’s control over another employer’s workers was indirect, limited and routine, or contractually reserved but never exercised.

The Current Standard. In 2020, under the Trump Administration, the Board issued a Final Rule narrowing the circumstances under which joint employment is found – only “if two employers share or codetermine the employees’ essential terms and conditions of employment.” In order to make this showing, “the entity must possess and exercise such substantial direct and immediate control over one or more essential terms or conditions of [the purported employees’] employment as would warrant finding that the entity meaningfully affects matters relating to the employment relationship with those employees.” The Board further stated that indirect control or contractually-reserved but unexercised control would be insufficient to establish a joint employer relationship.

The 2020 Rule provided an exclusive list of the “essential terms and conditions of employment” as follows: wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction. No other terms and conditions exist for purposes of this standard. (Our February 25, 2020 E-lert provides a detailed explanation of “direct and immediate control” as to each of these terms and conditions of employment, as well as definitions of key terms, such as “indirect control” and “contractually reserved authority”).

The 2023 Rule. The new Final Rule, issued in October 2023 and originally scheduled to take effect on December 26, 2023 before several delays, sought to rescind the Trump Administration’s 2020 Rule and effectively reinstate and expand the Browning Ferris Industries standard. (We provided a detailed explanation of the 2023 Rule in our October 26, 2023 E-lert.

The 2023 Rule set forth a two-step test: (1) that the entity must qualify as a common-law employer of the workers in question and, if so (2) that the entity has control over one or more essential terms and conditions of employment. The 2023 Rule also expanded the list of the terms and conditions of employment to include work rules and directions governing the manner, means, and methods of the performance, as well as working conditions related to the safety and health of employees. Importantly, the 2023 Rule provided that joint employer status would be found if one of the employers possessed only “indirect” or “contractually reserved” control over one of these terms and conditions of employment.

The Judge’s Ruling. The Texas federal district court judge found that the 2023 Rule was unlawful and that the attempt to rescind the 2020 Rule was arbitrary and capricious. This means that the 2023 Rule has been barred and the 2020 Rule remains in effect – at least for now.

The judge first dispensed with the argument that he did not have jurisdiction over the matter. The National Labor Relations Act authorizes U.S. Courts of Appeals to review certain Board “orders.” The judge found that this provision was intended to cover Board decisions as to unfair labor practice charges, but contrary to the Board’s argument, it did not cover Board rulemaking. Consequently, the judge found that he did, in fact, have the authority to decide this matter.

The judge then turned to the 2023 Rule itself, finding that the two-step process (i.e. (1) common law employer status and (2) control over an essential term or condition of employment) was flawed in that “an entity satisfying step one, along with some other entity doing so, will always satisfy step two” and that the Board could offer no examples to the contrary. Thus, “the Rule’s joint-employer inquiry has just one step for all practical purposes.” The judge further found that the Rule also provides that the possession of reserved or indirect control establishes joint employer status without having to demonstrate an employment relationship at all.

The judge also found problematic the broad scope of the listed essential terms and conditions of employment and broad classification of potential influence over those. It found “[t]hat would treat virtually every entity that contracts for labor as a joint employer because virtually every contract for third-party labor has terms that impact, at least indirectly, at least one of the specified ‘essential terms and conditions of employment.’” This, according to the judge, “exceeds the bounds of the common law and is thus contrary to law.”

Finally, the judge rejected the 2023 Rule’s attempt to rescind the 2020 Rule as arbitrary and capricious. The argument that the 2020 Rule failed to fully promote the policies of the National Labor Relations Act was incorrect in that the test that it established was actually within the bounds of the long existing common-law test. Moreover, there were no policy considerations for rescinding the 2020 Rule, as the Board did not explain how returning to a common-law standard was preferable to the 2020 Rule.

What Does This Mean? For now, the current Trump Board rule, making joint employer findings less likely, continues to apply. There will undoubtedly be an appeal to the (conservative and business-friendly) U.S. Court of Appeals for the Fifth Circuit. Any further developments beyond that will likely turn on the outcome of the forthcoming presidential election. Moreover, although the current Rule reflects the commonsense reality that companies should not be required to bargain with or be held liable for the unfair labor practices of businesses they contract with, there are many other statutes that apply different standards to a joint-employer analysis. These include the Department of Labor’s rescission of the Trump DOL’s final joint-employer rule under the Fair Labor Standards Act (and consequent lack of clarity as to its approach), which we discussed in our July 2021 E-Update, and the Equal Employment Opportunity Commission’s interpretation of joint employment under anti-discrimination laws, as well as many courts’ interpretations under these laws, which can differ from agency interpretations. Companies engaging in contractual relationships with other businesses must remain keenly aware that the potential impact of the joint employer doctrine may differ depending on the context and jurisdiction at issue.  Employers must choose whether to take actions to minimize the likelihood that they will be deemed a joint employer or accept the reality of a joint employment relationship and the resulting obligation to verify compliance with applicable laws.

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