New National Labor Relations Board (NLRB) Joint Employer Rule Explained
On October 27, 2023, the National Labor Relations Board (NLRB) passed a new standard for determining a business’s joint-employer status. Over the decades, the definition of joint employer has narrowed and expanded. So, it’s essential for all businesses to understand the new rule and how it will impact their obligations to workers.
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What is a joint employer under the new rule
Section 3(d) under the Fair Labor Standard Act defines an employer to “include any person acting directly or indirectly in the interest of an employer in relation to an employee.” If more than one employer holds influence or control over the work an employee performs, then both organizations would be deemed an employer of that given worker. This dual obligation is defined as a joint employer and the new ruling changes who falls within this group and has obligations to employees.
The new NLRB rule considers the “joint employers’ authority to control essential terms and conditions of employment, whether or not that control is exercised.” Under that definition, an employer does not need to be actively supervising or engaged with the worker to be deemed a joint employer. Ultimately, the NLRB broadened the definition of what it means to be a joint employer, opening untold numbers of organizations up to legal obligations to workers that didn’t apply under the prior rule.
7 terms and conditions that determine joint-employer status
Key to the new ruling is an organization’s influence over “essential terms and conditions of employment.” The NLRB defines seven terms and conditions that determine whether a business has control over a worker and would then be defined as a joint-employer for that worker under the new rule. In other words, if you have input over any of the below, the NLRB rule may classify your company as a worker’s employer:
- Wages, benefits, and other compensation
- Work hours and scheduling
- Duty assignments and work responsibilities
- Supervising work performance of assigned duties
- Work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline
- Employment tenure, including hiring and discharge
- Working conditions related to the safety and health of employees
If an organization controls any of these factors in relation to its workers, it meets the definition of joint employer of that worker or group of workers.
What does reserved and indirect control mean?
Control is broken down into two categories: reserved control and indirect control. The idea of reserved powers goes back to Constitutional standards, whereby if powers to the federal government weren’t specifically enumerated, they were reserved for the states. The same standard applies to reserved control related to the joint employer rule. If an employer holds authority over terms and conditions of employment but does not exercise it, they still are deemed an employer because they can exercise that control at any time. This possibility impacts the other employer’s decision-making regarding these terms. In essence, the NLRB sought to apply the standards of common law to the 2023 rule.
By including indirect control in the definition of joint employer status, the NLRB specifies employer control exercised by intermediaries or controlled third parties within the statute. The goal is to prevent employers from shirking worker obligations by filtering an employee relationship through third parties. This, too, was taken from common law standards, and courts have previously upheld this standard.
Brief history of joint employer rulings
The idea of joint employment goes back to 1939 when the Fair Labor Standard Act’s (FLSA) Wage and Hour Division issued Bulletin No. 13, which said that “two or more companies may be jointly and severally liable for a single employee’s hours.” Additional interpretations were enacted over the ensuing decade, each with varying interpretations of which employers held worker obligations.
2015 Browning-Ferris Decision
In 2015, the NLRB issued a decision on the Browning-Ferris Industries of California, Inc., which dramatically expanded the definition of a joint employer. This added many more companies to the category of joint employers than had been the case prior. It defined employers that had reserved, indirect, or limited control and made them liable for many more workers. In contrast, the prior standard required “direct and immediate” control of employee terms and conditions. This broader definition was challenged in court but upheld by The US Court of Appeals.
2020 Joint Employer Rule
The 2020 rule again revisited the issue. The Federal Register recapped the 2020 rule, which introduced two new definitions of joint employers: vertical and horizontal joint employers.
Section 791.2(a)(1) defined vertical employers:
“[t]he other person [that is benefitting from the employee’s labor] is the employee’s joint employer only if that person is acting directly or indirectly in the interest of the employer in relation to the employee,” and then cited FLSA section 3(d) for the definition of an employer.
Section 791.2(e)(2) addressed horizontal employers:
“if the employers are acting independently of each other and are disassociated with respect to the employment of the employee,” they are not joint employers.[59] It further stated that, “if the employers are sufficiently associated with respect to the employment of the employee, they are joint employers and must aggregate the hours worked for each for purposes of determining compliance with the Act.”
With this new vertical/horizontal framework, the 2020 joint employer rule relied on four factors to determine whether vertical joint employment was appropriate. A company must control: 1) Hiring or firing the employee; 2) supervision and control over the employee’s work schedule or conditions of employment to a substantial degree (emphasis added); 3) determining pay and method of payment; 4) maintaining employee records.
What changed in the 2020 joint employer rule
The 2020 rule was significant in that it modified the prior standard in two ways. First, it limited employers to those who “hire and fire,” now excluding those who have the ability to hire and fire, but do not exercise those powers. Next, it added the phrase “to a substantial degree” when referencing the conditions and scheduling of employment. This removed those with a tangential business relationship from being classified as a joint employer.
Court decision vacating joint employer rule of 2020
Following the new definition, 17 states and the District of Columbia sued the Department, saying the rule violated the Administrative Procedure Act (APA). After it was ruled that the states did not have standing, several trade organizations stepped in to take up the case. The court later vacated the joint employer rule’s “novel vertical standard,” which it found “arbitrary and capricious” and in violation of the FLSA. It further found it violated the APA in three ways because it did not:
- Explain why it departed from the Department’s prior interpretations
- Consider the conflict between it and the Department’s Migrant and Seasonal Agricultural Worker Protection Act (MSPA) joint employment regulations
- Give adequate consideration to the cost to workers
Concerns about the new joint employer ruling
Some in the business community are concerned that the 2023 joint employer ruling settled on the broadest interpretation yet. A group of business groups, including the U.S. Chamber of Commerce, filed suit challenging the rule and calling it overly broad.
The U.S Chamber of Commerce criticized the new rule, saying it made businesses liable for “workers they don’t employ at workplaces they don’t own or control.” Concern partly stems from what detractors call ambiguity in the employee-employee relationship.
Implications for small businesses and franchises
Concerns extend to those worried the new rule would hold both a franchise and a corporate brand jointly liable for labor violations. The spokesperson for the International Franchise Association (IFA) said the 2023 rule changed the rules in the middle of the game, turning hundreds of thousands of franchise owners into “middle managers at their own businesses.” The IFA expects the new rule to negatively impact franchisees because of the similarity it holds to former rules, which they say resulted in thousands of lost jobs, billions increased franchise costs, and a spike in lawsuits.
The NLRB counters these claims, saying the new rule “establishes a uniform joint-employer standard” and that the Board still needs to conduct fact-specific analysis on a case-by-case basis to determine whether specific employers meet this standard. The implication is that many franchises, temp agencies, and staffing firms would not meet the new standard and would be unaffected.
Impact on labor unions
In terms of collective bargaining, once an entity is determined to be a joint employer, it would be required to bargain over the essential terms of conditions of employment, as would any employer. However, it would not have to bargain over terms over which it had no control.
Conclusion
Joint employer status has been an active part of federal regulations since 1939. While the definition of joint employer has shifted over the years, the 2023 NLRB rule is the broadest standard yet. Its goal was to align the joint employer standard with common law. In doing so, the NLRB defined seven terms and conditions that determined whether a business has control over a worker, which included wages and benefits, work hours and scheduling, work assignments and supervision, work rules, hiring and firing, and working conditions related to worker safety. The 2020 rule narrowed the definition to four conditions and based it more on direct control over workers and employment terms, but portions were vacated, leading to the new rule being passed in October 2023 and effective since February 26. 2024.
