By John Telford

On February 25, 2020, the National Labor Relations Board (the Board”) issued its final rule setting forth the standard for determining joint-employer status under the National Labor Relations Act (“NLRA”).  The new rule effectively overturned the overly-broad joint employer standard announced in the NLRB’s 2015 Browning-Ferris decision, where the Board ruled that joint-employer status could be found based solely on an entity’s indirect and/or reserved-but-unexercised control over the terms and conditions of employment of a nominally separate entity’s workforce.

The Board stated that it intended for the new rule to return, with clarifying guidance, to the carefully balanced law as it existed before the Board’s departure in Browning-Ferris.  The rule provides that an entity will be considered a joint-employer of another employer’s employees only if the entity exercises “substantial direct and immediate control” over the essential terms and conditions of employment of the other employer’s employees.  The rule enumerates an exhaustive list of those essential terms and conditions: wages, benefits, hours or work, hiring, discharge, discipline, supervision and direction; and provides that the putative joint-employer must possess and exercise such substantial direct and immediate control over at least one of those terms as to warrant a finding that the entity affects matters relating to the employment relationship.  The rule further defines that control is not “substantial” if only exercised on a sporadic, isolated or de minimis basis.

The rule clarifies that a joint-employer relationship will not be established solely by the indirect and/or reserved-but-unexercised control over essential terms or conditions of employment or the control over non-essential terms and conditions of employment that may be mandatory subjects of bargaining.  Evidence of this lesser form of control may be probative of joint-employer status, but only to the extent that its supplements and reinforces evidence of direct and immediate control.  Further, indirect control does not include control or influence over setting the objectives, basic ground rules or expectations of another entity’s performance under a contract.

In criticizing the prior Browning-Ferris analysis, the NLRB noted that the Obama Board failed to draw meaningful distinctions between direct and immediate control and indirect and/or reserved-but-unexercised control, giving both equal weight.  The final rule re-establishes a “commonsense hierarchy” that recognizes the superior force of evidence of actually exercised direct and immediate control as compared to indirect and reserved-but-unexercised control.

The Board modified its proposed rule based on public comments and the DC Circuit’s decision in Browning Ferris.

In response to the nearly 29,000 comments and the DC Circuit’s Browning-Ferris decision following the announcement of its proposed rule, the Board modified the final rule in several significant ways.   First, the Board expanded the list of essential terms and conditions of employment to add “wages, benefits, hours or work” to “hiring, discharge, discipline, supervision and direction” and expressly stated that this was an exhaustive list of all essential terms and conditions.  Second, while the proposed rule was silent on the value of any control beyond the direct and immediate control of essential terms or conditions of employment, the final rule provides that indirect or reserved-but-unexercised control over essential terms of employment or control over mandatory subjects of bargaining that are not essential terms of employment may be considered, but would not be sufficient without more to make an entity a joint employer.  Instead, such factors may  weigh in the analysis but only to the extent that they supplement and reinforce evidence of the entity’s direct and immediate control over a particular essential term or condition of employment.  Third, the Board decided to omit hypothetical scenarios from the final rule and, instead, provide more specific guidance as to what does or does not constitute direct and immediate control in the text of the rule itself.  Fourth, the final rule does not include “limited and routine” as a general qualifying term and uses that term solely in the context of control over supervision.

Through the rule-making process, the Board provided granular guidance on the distinction between direct/immediate control and indirect/reserved-but unexercised control.

In announcing the final rule, the Board explained that the use of rulemaking provided it with the ability to “give this complex, nuanced and vitally important issue the kind of comprehensive and detailed explication it deserves…resulting in greater clarity and certainty of the law under the NLRA.”   The following chart summarizes that guidance from the Board relating to each essential term and condition of employment.

Essential Term Direct and Immediate Control NOT Direct and Immediate Control
Wages Actually determining wage rates and/or salary of another employer’s individual employees Entering into a cost-plus contract (with or without a maximum reimbursable wage rate)
Benefits Actually determining the fringe benefits of another employer’s employees by selecting benefit plans and/or level of benefits Allowing another employer to participate in an employer’s benefit plans through an arm’s-length contract
Hours of Work Actually determining the work schedules or work hours, including overtime, of another employer’s employees Establishing an enterprise’s operating hours or when it needs services provided by another employer
Hiring Actually determining which particular employees will he hired and which will not Requesting changes in staffing levels or setting minimal hiring standards such as those required by government regulation
Discipline/Discharge Actually deciding to discipline or discharge another employer’s employee Bringing misconduct or poor performance to the attention of another employer; expressing a negative opinion or another employer’s employee; refusing to allow another employer’s employee to continue performing work under a contract; refusing to allow another employer’s employee to access its premise; setting minimal standards of performance or conduct
Supervision/Direction Actually instructing another employer’s employees how to perform their work; issuing performance appraisals for another employee; assigning particular employees to their individual work schedules, positions and tasks Providing instructions that are limited and routine and consist primarily of telling another employer’s employees what work to perform, or where and when to perform the work; setting schedules for completion of a project; describing the work to be accomplished
     

 

Consistent with the provisions of the final rule, an evaluation of the type of control in the right-hand column should not be conducted unless the proponent of joint-employer status proves that the entity exercised direct and immediate control over at least one essential term and condition of employment.

“Indirect control” does not include routine business to business contractual terms inherent in contractual relationships between entities, though the line between probative and irrelevant arrangements remains vague. 

The final rules provides that “indirect control” does not include “control or influence over setting the objectives, basic ground rules or expectations for another entity’s performance under contract.”  While not specifically addressed in the text of the final rule, in promulgating the final rule the Board explained that social responsibility provisions, such as contractual provisions requiring workplace safety practices, sexual harassment policies, morality clauses that protect the reputation of the contracting entity, wage floors or other measures to encourage compliance with the law or to promote desired practices generally will not make joint employer status more likely under the Act and will constitute the setting of basic ground rules or expectations for the third-party contractor.

In justifying the final rule, the Board made it clear that it was rejecting an economic realities test and stated that an entity’s ability to cancel a contract (even an at-will contract) or terminate a business relationship with another entity should not be deemed reserved control relevant to the joint-employer inquiry.  The Board also indicated that being the exclusive purchaser of a manufacturer’s product or a donor conditioning donations to a nonprofit on changes to terms and conditions of the nonprofit’s employees will not be the kind of control that is relevant to the joint-employer analysis.

Further, the Board noted that policies prohibiting disruption of operations or unlawful conduct generally constitute the type of basic ground rules and expectations.  These basic ground rules and expectations would also likely include contractual specifications of timeframe and production standards for a parts supplier and a requirement that the supplier certify that it has a drug and alcohol testing program.

The Board noted that divining the line between indirect control and ground rules will largely depend on the enterprise, citing for example that a business that engages a food service contractor to staff its lunchroom merely sets “basic ground rules or expectations” by specifying when the lunchroom is open,  is not evidence of indirect control, and should not even be considered.  “Accordingly, what is indirect or reserved control over an essential term and condition of employment versus what is merely a setting of objectives, basic ground rules or expectations for a contractor’s performance is an issue of fact to be determined on a case-by-case basis.” As such, when evaluating current relationships with contractual partners or establishing new ones, employers should consult with counsel.

Why the rule is important to employers.

The NLRB’s final rule is consistent with the joint-employer rule recently promulgated by the Department of Labor implementing the Fair Labor Standards ActAnd the Equal Employment Opportunity Commission has expressed interest in a similar rule for nondiscrimination laws.  Each of these agencies understands the importance of clarifying the scope of the employer-employee relationship in the ever-changing economy.  Under the NLRA, re-establishing the limited scope of joint employer status is critical, as an overly-broad joint employer standard would result in a company being required to bargain with a union whose bargaining relationship derives from organizing another employer’s workforce, opening up the company to picketing and other activity that would otherwise be secondary and unlawful and subjecting the company to joint and several liability for the other employer’s unfair labor practices.

As the Board stated – “A less demanding standard would unjustly subject innocent parties to liability for others’ unfair labor practices and coercion in others’ labor disputes.  A fuzzier standard with no bright lines would make it difficult for the Board to distinguish between arm’s-length contracting parties and genuine joint employers.  Accordingly, preserving the element of direct and immediate control over essential terms draws a discernible and predictable line, providing ‘certainly beforehand’ for the regulated community.”

The NLRB’s rule will go into effect April 27, 2020.  Opponents of the rule have promised legal challenges, but the Board’s willingness to modify the terms of the proposed rule based on the submitted comments and to tailor the final rule to the DC Circuit Court’s decision in Browning-Ferris should increase the likelihood that the final rule will survive.