LawFlash

NLRB Rulemaking Seeks to Clarify Joint-Employer Standard

September 20, 2018

On September 14, the National Labor Relations Board published a Notice of Proposed Rulemaking that could fundamentally change the joint-employer standard established by Browning-Ferris in 2015 and provide more clarity and stability for parties dealing with a joint-employer allegation.

As the Buddhist monk Bodhidharma is credited as saying, “Many roads lead to the path, but basically there are only two: reason and practice.” Since 2015, when the National Labor Relations Board (NLRB or the Board) overruled 30 years of joint-employer jurisprudence in its Browning-Ferris Industries of California[1] decision, the path was certainly leading somewhere, but many questioned whether reason or practice were ultimate destinations.

There was renewed hope for clarity when the Board in December 2017 reversed the Browning-Ferris decision in Hy-Brand Industrial Contractors[2] and reinstated the traditional joint-employer test that had previously stood for three decades.[3] However, that hope was short lived, as the Board vacated Hy-Brand after an unprecedented intervention of the Board’s inspector general, causing the recusal of Member William Emanuel, which left no majority to reverse Browning-Ferris. Thus, the Browning-Ferris joint-employer standard remained, and continues to be the law of the land.

A new rulemaking development may change that.

NLRB Signals Intended Rulemaking

In May 2018, the Board announced its intention to consider rulemaking to address the standard for determining joint-employer status under the National Labor Relations Act. On May 9, 2018, Chairman John Ring, via an NLRB press release (NLRB Considering Rulemaking to Address Joint-Employer Standard), stated the following:

Whether one business is the joint employer of another business’s employees is one of the most critical issues in labor law today. The current uncertainty over the standard to be applied in determining joint-employer status under the Act undermines employers’ willingness to create jobs and expand business opportunities. In my view, notice-and-comment rulemaking offers the best vehicle to fully consider all views on what the standard ought to be. I am committed to working with my colleagues to issue a proposed rule as soon as possible, and I look forward to hearing from all interested parties on this important issue that affects millions of Americans in virtually every sector of the economy.

NLRB Publishes NPRM

On September 14, 2018, the NLRB published a notice of proposed rulemaking (NPRM), with Member Lauren McFerran dissenting.[4] Under the proposed regulation, the basic premise of the joint-employer standard remains: An employer may be considered a joint employer of a separate employer’s employees only if the two employers share or codetermine the employees’ essential terms and conditions of employment, such as hiring, firing, discipline, supervision, and direction. The true change in the proposed regulation is that, to constitute a joint employer, an employer must possess and actually exercise substantial, direct, and immediate control over the essential terms and conditions of employment of another employer’s employees in a manner that is not limited and routine.

Review of the Path That Led Us Here

If the proposed standard sounds familiar, it should. The regulation arguably reinstates the traditional joint-employer standard that Browning-Ferris toppled back in 2015.

Under the traditional standard, the Board rejected the notion that indirect, minimal, or hypothetical control should establish a joint-employer relationship and concluded instead that joint-employer status would require proof of a significant degree of direct and immediate control over the employees in question.[5]

In Browning-Ferris, the Board applied the long-established principle that a joint-employer relationship exists if two or more entities “share or codetermine those matters governing the essential terms and conditions of employment.” The big change in Browning-Ferris was the Board’s announcement that it would no longer require direct and immediate control by an alleged joint employer over the terms and conditions of employment. Instead, the Board determined that the right to control, even if unexercised, may be sufficient to establish a joint-employer relationship, as would indirect control (control exerted through detailed instructions to the other employer’s supervisors).

In analyzing whether a joint-employer relationship exists, the Board stated that a case-by-case, fact-intensive evaluation of the allocation and exercise of control in the workplace must be undertaken. The Board also expanded the definition of “essential terms and conditions of employment” to include wages and hours, in addition to the hiring, firing, discipline, supervision, and direction of employees. Then-Members Philip Miscimarra and Harry Johnson[6] dissented in the Browning-Ferris decision, arguing that “[t]he result is a new test that confuses the definition of a joint employer and will predictably produce broad-based instability in bargaining relationships. It will do violence as well to other requirements imposed by the Act, notably including the secondary boycott protection that Congress afforded to neutral employers.”

In December 2017, then-Chairman Miscimarra, Member Marvin Kaplan, and Member Emanuel, forming a majority, issued the decision in Hy-Brand. There, the Board overruled the 2015 Browning-Ferris case and returned to the pre–Browning-Ferris standard that governed joint-employer liability. As noted above, the Board vacated the Hy-Brand decision in February 2018, after Member Emanuel was involuntarily recused from the case, thereby leaving no majority to overrule Browning-Ferris. As a result, Browning-Ferris again became controlling legal precedent. Since 2015, the Board’s test resulted in several entities being found, or being in danger of being found, to be joint employers.

Hurdles of Rulemaking

The rulemaking process begins with an NPRM, which issued on Friday, September 14, 2018 in the case of the joint-employer rule. However, there is also a period of public comment, and sometimes public hearings, prior to a proposed rule’s effective date. Currently, public comment for the proposed joint-employer rule is set for 60 days, and there are no proposed hearings. Note: If you need assistance in having a comment submitted on your behalf, please discuss with any of the lawyers listed in the Contacts section below.

The Board’s last experience with rulemaking took place in 2014, when the Board reissued its NPRM for an election reform rule that substantially changed union representation procedures and greatly accelerated the timing of elections.[7] The Board received thousands of comments and held several days of public hearings. Many comments questioned the Board’s motivation for issuing the rule.

Here, the mere announcement by the Board in March that it was looking into rulemaking promoted congressional inquiries and attacks on the Board’s impartiality. As a result, it is extremely likely that the proposed joint-employer rulemaking will face similar hurdles and political headwinds along its path.

If the Proposed New Rule Goes Into Effect As-Is, How Will It Be Applied?

Under the NLRB’s proposed new rule, an employer may be found to be a joint employer of another employer’s employees only if it possesses and exercises substantial, direct and immediate control over the essential terms and conditions of employment and has done so in a manner that is not limited and routine. The Browning-Ferris standard of indirect influence and contractual reservations of authority no longer would be sufficient to establish a joint-employer relationship.

The Board sets forth 12 hypotheticals to help parties understand how the new rule could be applied in certain circumstances, particularly with respect to when direct and immediate control has or has not come into play. We include each hypothetical below, followed by commentary from our perspective and experience.

EXAMPLE 1 to § 103.40

Company A supplies labor to Company B. The business contract between Company A and Company B is a “cost plus” arrangement that establishes a maximum reimbursable labor expense while leaving Company A free to set the wages and benefits of its employees as it sees fit. Company B does not possess and has not exercised direct and immediate control over the employees’ wage rates and benefits.

Commentary
This example clearly shows that Company A, not B, retains substantial and immediate control over essential terms and conditions of employment such as wages, hours, and working conditions. A mere overall reimbursement ceiling for all labor-related costs is not evidence of direct control under the new rule.

EXAMPLE 2 to § 103.40

Company A supplies labor to Company B. The business contract between Company A and Company B establishes the wage rate that Company A must pay to its employees, leaving A without discretion to depart from the contractual rate. Company B has possessed and exercised direct and immediate control over the employees’ wage rates.

Commentary
This is the flip side of Example 1. Here, Company B possesses control of wages by setting an inflexible wage rate. However, note that the Board does not state in the example that this situation evinces “substantial” (i.e., adequate) control for a joint-employer finding overall.

EXAMPLE 3 to § 103.40

Company A supplies line workers and first-line supervisors to Company B at B’s manufacturing plant. On-site managers employed by Company B regularly complain to A’s supervisors about defective products coming off the assembly line. In response to those complaints and to remedy the deficiencies, Company A’s supervisors decide to reassign employees and switch the order in which several tasks are performed. Company B has not exercised direct and immediate control over Company A’s line workers’ essential terms and conditions of employment.

Commentary
Here, Company B operates the facility at which Company A’s employees work and makes the complaints to Company A’s management. But Company A, not Company B, decides to make assignment changes for the employees. Thus, Company A, not Company B, exercises immediate and direct control over the employees.

EXAMPLE 4 to § 103.40

Company A supplies line workers and first-line supervisors to Company B at B’s manufacturing plant. Company B also employs supervisors on site who regularly require the Company A supervisors to relay detailed supervisory instructions regarding how employees are to perform their work. As required, Company A supervisors relay those instructions to the line workers. Company B possesses and exercises direct and immediate control over Company A’s line workers. The fact that Company B conveys its supervisory commands through Company A’s supervisors rather than directly to Company A’s line workers fails to negate the direct and immediate supervisory control.

Commentary
Here, the Board believes that Company B is still ultimately directing A’s employees, even though it is doing so through the supervisory conduit of Company A’s first-line supervisors. This example shows that the “indirect control” concept from Browning-Ferris still persists in the proposed regulation and that the Board still believes such regular interaction between the two companies’ management is “direct control.” However, note that the Board does not state in the example that this situation evinces “substantial” (i.e., adequate) control for a joint-employer finding overall.

EXAMPLE 5 to § 103.40

Under the terms of a franchise agreement, Franchisor requires Franchisee to operate Franchisee’s store between the hours of 6:00 a.m. and 11:00 p.m. Franchisor does not participate in individual scheduling assignments or preclude Franchisee from selecting shift durations. Franchisor has not exercised direct and immediate control over essential terms and conditions of employment of Franchisee’s employees.

Commentary
Although Franchisor sets the operating hours of Franchisee’s store, Franchisor does not control the actual working hours or scheduling of Franchisee’s employees, and thus there is no evidence of direct and immediate control.

EXAMPLE 6 to § 103.40

Under the terms of a franchise agreement, Franchisor and Franchisee agree to the particular health insurance plan and 401(k) plan that the Franchisee must make available to its workers. Franchisor has exercised direct and immediate control over essential employment terms and conditions of Franchisee’s employees.

Commentary
The voluntary contractual specification of a particular health and pension plan to be offered to Franchisee’s employees results in direct and immediate control because the employees only have one option desired by the Franchisor, although it was apparently also desired by the Franchisee. Again, note that the Board does not state in the example that this situation evinces “substantial” (i.e., adequate) control for a joint-employer finding overall.

EXAMPLE 7 to § 103.40

Temporary Staffing Agency supplies 8 nurses to Hospital to cover during [a] temporary shortfall in staffing. Over time, Hospital hires other nurses as its own permanent employees. Each time Hospital hires its own permanent employee, it correspondingly requests fewer Agency-supplied temporary nurses. Hospital has not exercised direct and immediate control over temporary nurses’ essential terms and conditions of employment.

Commentary
This example shows that a change in the amount of work of temporary employees, because of substitution by regular employees, is not evidence of direct and immediate control of the temporary employees.

EXAMPLE 8 to § 103.40

Temporary Staffing Agency supplies 8 nurses to Hospital to cover for temporary shortfall in staffing. Hospital manager reviewed resumes submitted by 12 candidates identified by Agency, participated in interviews of those candidates, and together with Agency manager selected for hire the best 8 candidates based on their experience and skills. Hospital has exercised direct and immediate control over temporary nurses’ essential terms and conditions of employment.

Commentary
This example provides the flip side to Example 7. Here, the Hospital becomes involved in interviewing, assessing, and hiring candidates based on the Hospital’s evaluation of their qualifications. Evidence of direct and immediate control results. However, note that the Board does not state in the example that this situation evinces “substantial” (i.e., adequate) control for a joint-employer finding overall.

EXAMPLE 9 to § 103.40

Manufacturing Company contracts with Independent Trucking Company (ITC) to haul products from its assembly plants to distribution facilities. Manufacturing Company is the only customer of ITC. Unionized drivers—who are employees of ITC—seek increased wages during collective bargaining with ITC. In response, ITC asserts that it is unable to increase drivers’ wages based on its current contract with Manufacturing Company. Manufacturing Company refuses ITC’s request to increase its contract payments. Manufacturing Company has not exercised direct and immediate control over the drivers’ terms and conditions of employment.

Commentary
This example, similar to Example 2, reveals that the “customer” entity sticking to the terms of a business contract with an employer—even where the customer is the sole customer of the employer—does not evidence direct and immediate control of the employees who work on the contract, even where the contract precludes a wage increase in collective bargaining negotiations. This example illustrates a stark difference when compared to the likely result under the Browning-Ferris standard.

EXAMPLE 10 to § 103.40

Business contract between Company and a Contractor reserves a right to Company to discipline the Contractor’s employees for misconduct or poor performance. Company has never actually exercised its authority under this provision. Company has not exercised direct and immediate control over the Contractor’s employees’ terms and conditions of employment.

Commentary
While Company has the right to discipline Contractor’s employees, it has never exercised that right. A key component in the proposed standard is not only the possession of a right, but also the exercise of the right (generally, under this proposed regulation, an employer may be found to be a joint employer of another employer’s employees only if it possesses and exercises control). But note Example 11 below.

EXAMPLE 11 to § 103.40

Business contract between Company and Contractor reserves a right to Company to discipline the Contractor’s employees for misconduct or poor performance. The business contract also permits either party to terminate the business contract at any time without cause. Company has never directly disciplined Contractor’s employees. However, Company has with some frequency informed Contractor that particular employees have engaged in misconduct or performed poorly while suggesting that a prudent employer would certainly discipline those employees and remarking upon its rights under the business contract. The record indicates that, but for Company’s input, Contractor would not have imposed discipline or would have imposed lesser discipline. Company has exercised direct and immediate control over Contractor’s employees’ essential terms and conditions.

Commentary
This example again somewhat recalls the Browning-Ferris standard. Here, Company possesses the right to discipline, but has never exercised that right. In Example 10, the Board states that the mere possession of a right isn’t significant enough to result in a joint-employer relationship. Here, arguably, there was not enough control either, in that Company gives no straightforward direction or order to discipline/terminate the employees, just suggestions. But in this example, a suggestion and not a direction still amounts to evidence of direct and immediate control. Also, note that the Board does not state in the example that this situation evinces “substantial” (i.e., adequate) control for a joint-employer finding overall.

EXAMPLE 12 to § 103.40

Business contract between Company and Contractor reserves a right to Company to discipline Contractor’s employees for misconduct or poor performance. User has not exercised this authority with the following exception. Contractor’s employee engages in serious misconduct on Company’s property, committing severe sexual harassment of a coworker. Company informs Contractor that offending employee will no longer be permitted on its premises. Company has not exercised direct and immediate control over offending employee’s terms and conditions of employment in a manner that is not limited and routine.

Commentary
One apparent distinction here is that Company has only disciplined on a one-off basis, which stays within the “limited and routine” guideline. Another implicit distinction is that Company may be legally required to take such action in this example (as it would in some jurisdictions), though the Board does not mention that.

Conclusion

While the path has been long and winding, assuming that rulemaking is completed and the proposed standard becomes the actual joint-employer standard, there will be more clarity—and theoretically more stability—in the joint-employer world.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, or if you are interested in having a comment submitted on your behalf, please contact any of the following Morgan Lewis lawyers:

Century City
Harry Johnson

Chicago
Ross Friedman

Los Angeles
Nicole Buffalano

Philadelphia
Joseph Ragaglia
Steven Wall

Washington, DC
Daniel Bordoni
Jonathan Fritts
Philip Miscimarra



[1] 362 NLRB No. 186 (Aug. 27, 2015), petition for review docketed Browning-Ferris Indus. of Cal. v. NLRB, No. 16–1028 (D.C. Cir. filed Jan. 20, 2016). The DC Circuit now has Browning-Ferris for a second time. It initially remanded the case back to the NLRB pursuant to a December 18, 2017 motion by the NLRB requesting the remand so that the Board could reconsider the case based on the standard of its then-newly issued Hy-Brand, infra. decision. On March 1, 2018, the Board asked the DC Circuit to revive its review of Browning-Ferris in light of the Board’s February 27, 2018 decision to vacate Hy-Brand.

[2] 366 NLRB No. 26 (Feb. 26, 2018).

[3] See TLI, Inc., 271 NLRB 798 (1984), enfʼd mem. 772 F.2d 894 (3d Cir. 1985); Laerco Transportation, 269 NLRB 324 (1984).

[4] Then-Member Pearce and Member McFerran, being part of the Browning-Ferris majority, opined that the Browning-Ferris decision is the better standard, and that the Board should have acted through adjudication rather than rulemaking.

[5] See TLI, Inc., and Laerco Transportation, supra.

[6] Both Philip Miscimarra and Harry Johnson now practice labor law at Morgan Lewis.

[7] The Board tried to adopt a similar rule making many of the same changes several years earlier, but the 2011 rule was invalidated by the US District Court for the District of Columbia (May 14, 2012), and the NLRB agreed to voluntary dismissal of its appeal (December 2013).