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NLRB Rule Aids Franchise Unionization

Nov. 27, 2023
Joint employer standard aimed at fast-food and staffing firms.

A final rule adopted by the National Labor Relations Board (NLRB) will make it easier for union-organizing campaigns aimed at large franchise operations like McDonald’s to succeed and will impact other employers who now need to take a close look at their legal arrangements with certain suppliers, like staffing firms.

This rule was proposed last year by a board currently dominated by President Biden’s Democrat and pro-labor board majority. The new rule replaces the joint employer standard that was adopted in 2020 by the Republican majority of the Trump-era board and reinstates an earlier one that had been issued in 2015 by a Democrat majority board under President Obama.

Although the change is not as radical as more recent ones adopted by the board to support its goal of advancing the unionization of the American workforce, it is considered to be another step in that policy direction and will require changes in the terms under which many non-union employers currently do business with each other.

“The new joint employer rule will almost certainly transform a slew of relationships understood and assumed to be arms’ length ones into joint employer relationships,” say attorneys Joshua Ditelberg and Cary Reid Burke of the Seyfarth Shaw law firm. “The consequences could be significant. A joint employment finding could saddle an unsuspecting employer with liability for an unfair labor practice or with brand new (and expensive) bargaining obligations.”

The change boils down to defining how much control an employer must exercise or be able to exercise over another company’s workers to be considered a joint employer under federal labor law. The Obama era and Biden era boards hold that an employer only needs to enjoy the potentiality of management control of the other firm’s workers, while the Trump era board emphasized the necessity of exercising actual and ongoing control.

The final rule states that from now on employers could be held to be joint employers if they “possess the authority to control (whether directly, indirectly, or both), or exercise the power to control (whether directly, indirectly, or both), one or more of the employees’ essential terms and conditions of employment.”

The new rule also clarifies that a joint employer must bargain collectively with employees’ union representative with respect to any term or condition of employment that it possess the authority to control or exercises the power to control—even for non-essential terms or conditions of employment, which is an unwelcome expansion of the bargaining obligation, according to attorneys Fiona W. Ong, Chad Horton and Eric Hemmendinger of the Shawe Rosenthal law firm.

They point out that the board will find that a state of joint employment exists in situations where two employers “share or co-determine” essential terms and conditions of employment, even if one of the employers possesses only “indirect” or “contractually reserved” control. Under the new rule, this also now specifically includes authority exercised through an intermediary.

Essential Employment Conditions

The new rule broadens what the NLRB will deem to be an essential term and condition of employment to include:

• Wages, benefits and other compensation.

• Hours of work and scheduling.

• The assignment of duties to be performed.

• The supervision of the performance of duties.

• Work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline.

• The tenure of employment, including hiring and discharge.

• Working conditions related to the safety and health of employees.

Attorneys with the Jackson Lewis firm urge employers to analyze how the new rule will affect them. “In some instances, advance planning and a proactive review of commercial arrangements that can pose an elevated risk of a joint-employer finding may position employers to avoid unintended and unanticipated consequences of these arrangements,” they say.

“Possessing the authority to control is sufficient to establish status as a joint employer regardless of whether control is exercised,” these attorneys warn. “Reserved control, therefore, is sufficient to establish a joint-employer relationship.”

In addition, they note that the board also highlighted indirect control, such as through intermediaries like staffing or temporary agencies, and confirmed that “control exercised through an intermediary person or entity is sufficient to establish status as a joint employer.”

However, the Shawe Rosenthal attorneys explain that under the new rule, authority over other matters not deemed essential employment conditions will not be sufficient to trigger joint employer status. They also specifically assert that “evidence of an entity’s control over matters that are immaterial to the existence of an employment relationship under common-law agency principles and that do not bear on the employees’ essential terms and conditions of employment is not relevant to the determination of whether the entity is a joint employer.”

Employers should expect that the new rule will result in a wave of increased board findings of joint employer relationships. This will occur even where one company’s control over essential terms and conditions of employment is considered to be “indirect” or “reserved” but not exercised, Ong, Horton and Hemmendinger stress.

“Employers utilizing staffing agencies will likely be significantly impacted by this rule once it is finalized,” they say. “And similarly, the franchise relationship will be fertile ground for the assertion of joint employer status. Further, companies utilizing onsite contractor employees subject to certain work rules of the host company may be unwittingly ensnared by this new standard if the rules govern ‘the manner, means and methods’ of work performance and discipline.”

The board certainly expects the rule to fuel a major change in how employer-employee relationships are defined under federal labor law. When the final rule was announced, NLRB Chairman Lauren McFerran opined that the change “reflects both a legally correct return to common-law principles and a practical approach to ensuring that the entities effectively exercising control over workers’ critical terms of employment respect their bargaining obligations under the National Labor Relations Act.”

She also predicted that we won’t have very long to wait before we can see the concrete results of the change applied to individual cases. “While the final rule establishes a uniform joint-employer standard, the board will still conduct a fact-specific analysis on a case-by-case basis to determine whether two or more employers meet the standard.”   

The effective date of the new rule is Feb. 26, 2024, and the board said the new standard will only apply to cases filed after the effective date, and it will not be applied retroactively. The original effective date was Dec. 26, 2023, but was delayed, the NLRB said, “to facilitate resolution of legal challenges with respect to the rule.” Lawsuits challenging the legal validity of the joint employer regulations is pending in two federal courts in Texas and Washington, D.C.

Whether the regulations take effect on February 26 remains to be seen because a court could enjoin the regulations from taking effect, notes David Phippen, an attorney with the law firm of Constangy, Brooks, Smith & Prophete.

“In the meantime, however, employers should know that the current NLRB majority views joint employment expansively,” he recommends. “Even without new regulations, the board is likely to interpret the National Labor Relations Act to find joint employment whenever it can, so as to have as many employers as possible responsible for unfair labor practices and obligated to bargain with organized labor.”

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