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Final NLRB Rule Less Likely To Find “Joint Employer” Status Final NLRB Rule Less Likely To Find “Joint Employer” Status

Final NLRB Rule Less Likely To Find “Joint Employer” Status

Final “Joint Employer” Rule

In a favorable development for many businesses and the franchise community, the National Labor Relations Board (“NLRB”) published a final rule (the “Rule”) to clarify the standard for determining joint employer status under the National Labor Relations Act (“NLRA”). The new NLRB Rule goes into effect on April 27, 2020.

The Rule was published shortly after the Department of Labor (“DOL”) published its own rule, which also narrowed the definition of joint employment under the Fair Labor Standards Act (“FLSA”). The DOL rule sets the joint employer standard for wage and hour-related complaints under federal law.

The Rule clarifies that a business or franchisor will be considered a “joint employer” of another entity’s employees only if the business exercises “substantial direct and immediate control” over one or more essential terms of employment of another employer’s workers. This new Rule is more flexible than the old NLRB rule, because basic franchise structures, such as setting quality and operational standards, should now not be enough to make a franchisor a joint employer.

Essential Terms and Conditions

The Rule provides that control by an employer over the essential terms and conditions of employment must be related to one or more of the following: wages, benefits, hours of work, hiring, discharge, discipline, supervision and direction.

Direct and Immediate Control

Under the new Rule, “substantial direct and immediate control” is defined for each of these essential terms and conditions of employment as follows:
  • Wages – The employer must determine the wage rate, salary or other rate of pay that is paid. The definition excludes from consideration cost-plus contracts that establish wage reimbursement rates.
  • Benefits – The employer determines the benefit plan (health insurance or pension) or level of benefits of the supplied employees.
  • Hours of work – The employer determines the work schedules or hours worked, including overtime of the supplied employees. Establishing operating hours does not indicate control.
  • Hiring – The employer determines which employees are hired and which are not hired. Setting minimal hiring standards would not demonstrate control over hiring.
  • Discharge – The employer must make the actual decision to terminate the employee. However, providing negative reviews to the other employer would not demonstrate control over the discharge decision.
  • Discipline – The employer must make the actual decision to suspend or discipline the employee. A report of misconduct does not demonstrate direct and immediate control over discipline as long as it is provided to the other employer and not to the employee.
  • Supervision – The employer must actually provide instructions on how to perform the work or issue performance appraisals. Limited and routine instructions on what work to perform or when and where to perform the work, but not how to perform it, does not indicate control.
  • Direction - the employer assigns work schedules, positions and tasks to specific employees. Actually setting schedules or describing the work to be accomplished does not indicate control. 
The final Rule makes the list of essential terms exhaustive. As a result, if an employer exercises direct control with another entity over portions of the employment relationship not listed above, that will not be enough to establish joint employer status.

Substantial Control

The Rule also states that control exercised on a sporadic, isolated or de minimis basis will not be considered to be “substantial.” Under the new Rule, indirect control and/or contractually reserved control over essential employment terms may be considered for joint employer status. However, indirect or contractual control is only relevant if it serves as additional evidence of “substantial direct and immediate control” of essential terms of employment.

The “Old” Rule

The new Rule replaces the prior broad standard adopted by the NLRB in its 2015 Browning-Ferris decision. In that decision, the NLRB only required indirect control of another entity’s employees to determine joint employer status. This old rule pulled many businesses into joint employer status. For example, under Browning-Ferris, contractually reserving but never exercising authority to control essential terms and conditions of another business’ employees may have been sufficient to establish joint employer status. The Rule clarifies that these contractual provisions are not evidence of direct and immediate control.

Related DOL Rule

In January, the U.S. DOL announced a final rule updating its regulations interpreting joint employer status under the FLSA. This is the first substantive update by the DOL to FLSAs joint employer rule in more than 60 years. The DOL rule addresses the question of who is the employer when more than one unrelated entity shares control over an individual employee or group of employees.

In the final rule, effective March 2020, the DOL announced a four-factor balancing test for determining joint employer status under the FLSA. This test considers whether the alleged joint employer:
  • hires or fires the employee;
  • supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  • determines the employee’s rate and method of payment; and
  • maintains the employee’s employment records.
The DOL rule clarifies that no single factor solely can be used in determining joint employer status, and the weight to give each factor will vary depending on the circumstances. Before it was approved, there was an increased potential for franchisors to be pulled into FLSA claims. With the new rule, if the franchisor is meeting the four-step test and is generally removed from the direct oversight of workers, it will not be considered a joint employer under the new DOL rule. Also, staffing companies that place an employee with another employer are not liable for FLSA claims if they have no direct or indirect oversight under the four-part test. On the other hand, those companies that directly engage staffing companies or other similar vendors, will want to be sure and examine those relationships, since they can no longer declare joint liability in FLSA claims, except in limited circumstances under the four-part test.

What’s Next?

If two entities are joint employers under the Rule, both employers must bargain with the union that represents the jointly employed workers, both are potentially liable for unfair labor practices committed by the secondary employer, and both are subject to lawful boycott and union picketing if there is a labor dispute.

The final Rule provides significant clarification whether a business is a joint employer. After Browning-Ferris, many employers backed away from relationships with temporary agencies, distributors, suppliers, and third-party vendors out of concern of being viewed as joint employers. With the new Rule, employers may feel more comfortable in revisiting these relationships, while being careful to avoid direct control over other entities.

The Equal Employment Opportunity Commission (“EEOC”) has recently announced it also plans to issue a rule clarifying when an employer should be classified as a joint employer under federal anti-discrimination laws, such as Title VII, the Age Discrimination in Employment Act (“ADEA”), or the Americans with Disabilities Act (“ADA”). At this time, the EEOC has not published a proposed rule on joint employment. Employers must recognize that the potential impact of the joint employer doctrine may be different depending on which government agency or court’s interpretation is applicable.

The new federal standards from the NLRB, DOL, and potentially the EEOC, are a part of the Trump administration’s larger efforts to reverse Obama-era employment standards and replace them with more employer-friendly interpretations.

Since the new NLRB and DOL rules are federal regulations and not federal laws passed by an act of Congress, a new administration can overturn or change them without Congressional consent. With the uncertainty of the 2020 election and possible changes to the administration or Congress, businesses and franchisors may be hesitant to drastically change business operations.

Employers should also keep in mind that state laws governing wages, discrimination, retaliation, unemployment benefits, workers’ compensation, and payroll taxes often have their own separate standards for who is deemed an employee.

Many of these standards (such as the stringent ABC test required to prove independent contractor status in California and New Jersey) are difficult for many companies to satisfy, even when workers are happy with how they are being classified.

As the workplace continues to transform, employers should monitor these ongoing changes, establish any new compliance requirements, and take appropriate actions to minimize the likelihood that they will be deemed a joint employer.  More laws and regulations should be anticipated in the future.

Gary Blachman, partner, and Paul Brunkhorst, associate, are attorneys with Ice Miller LLP and can be reached at 312-726-1567 or www.icemiller.com

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
 
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