NLRB’s Joint Employer Rule Vacated

Key Points

• On March 8, 2024, Judge J. Campbell Barker vacated the NLRB’s new joint employer rule (Rule) and preserved the Board's 2020 rule in a lawsuit filed by a coalition of industry associations, led by the U.S. Chamber of Commerce and represented by a team of Akin lawyers, in the U.S. District Court for the Eastern District of Texas.
• The new Rule adopted a broad interpretation of who is a “joint employer” under the NLRA—imposing joint-and-several liability on virtually every entity that hires contractors subject to routine parameters, defines the terms of those contracts or collaborates with a third party of any kind in achieving common goals that have a potential or indirect effect on the third party’s employees.
• The new Rule replaced a long-established standard that limited joint employment to entities that possess and exercise substantial direct and immediate control over the essential terms and conditions of employment so as to “meaningfully” permit collective bargaining. The broad sweep of the new Rule called into question whether businesses with longstanding franchising and contracting practices, private equity firms and joint ventures could be liable for the decisions of third parties over whom they had little, if any, control.

Introduction

The National Labor Relations Act (NLRA) gives employees the right to unionize and imposes obligations on employers to collectively bargain with unions representing their employees. Failing to recognize those rights and obligations can expose an employer to liability for unfair labor practices. When there’s more than one entity on the scene, the National Labor Relations Board (NLRB or Board) treats them as “joint employers” if they jointly decide the terms and conditions of employment for one set of employees. But deciding when an entity is a joint employer has not always been straightforward, and so the Board resorted to rulemaking, first in 2020 and most recently the 2023 Rule.

On March 8, 2024, Judge J. Campbell Barker vacated the NLRB’s new joint employer rule (Rule) and preserved the 2020 rule in a lawsuit filed by a coalition of industry associations, led by the U.S. Chamber of Commerce and represented by a team of Akin lawyers, in the U.S. District Court for the Eastern District of Texas. The new Rule adopted a broad interpretation of who is a “joint employer” under the NLRA—imposing joint-and-several liability on virtually every entity that hires contractors subject to routine parameters, defines the terms of those contracts or collaborates with a third party of any kind in achieving common goals that have a potential or indirect effect on the third party’s employees. The new Rule thus called into question whether businesses in industries with longstanding contracting and franchising practices, private equity firms and joint ventures would be liable for the decisions of third parties over whom they had little, if any, actual control. The Rule was originally scheduled to become effective December 26, 2023, but that date had been postponed to March 11, 2024, during the litigation.

Background

In 1947, Congress amended the NLRA to clarify the meaning of “employer” and “employee” in response to Supreme Court precedent that had purported to define “employee” based on general “economic and policy considerations within the labor field,” rather than common-law principles. Although the NLRA does not define “employer” (other than to state that it included “any person acting as an agent of an employer, directly or indirectly”), the Act (as amended) defines “employee” to exclude “any individual having the status of an independent contractor.” The Supreme Court now recognizes that the NLRA requires the Board and the courts to apply general common-law agency principles, not labor and economic policies, in distinguishing between employees and independent contractors under the Act.

The Board has long recognized that two entities can sometimes be considered “joint employers” of particular employees—making each employer obligated to bargain collectively with those employees under the NLRA. But the NLRA does not define “joint employer.” Instead, like the definition of “employer” or “employee,” Congress expected the Board and the courts to apply common-law agency principles.

For decades, the Board drew from the common law a straightforward framework: firms were “joint employers” if they exercised “direct,” “immediate” and “substantial” control over the same employees’ essential terms of employment. Things changed in 2015, however, when the Board decided in Browning-Ferris Industries that “compelling policy reasons” warranted a different approach. The Board announced a new test allowing a “joint employer” finding whenever a firm exercised “indirect” control over the terms of employment for another firm’s employees, or even if it possessed just potential control. The D.C. Circuit later reversed, holding that the Board (i) provided no blueprint for what counts as indirect control, (ii) failed to differentiate between the aspects of indirect control relevant to status as an employer and common-law third-party contract relationships, and (iii) never delineated what terms and conditions of employment the two entities needed to control to make collective bargaining “meaningful.” Although the Court found that indirect and reserved control were relevant to determining joint employer status, it expressly declined to decide whether such indirect or reserved control alone would be sufficient.

In response to the D.C. Circuit’s decision, the Board in 2020 largely reinstated the longstanding joint-employer standard that had been in place for decades until 2015. The 2020 rule required that a joint employer must possess and exercise substantial direct and immediate control with a regular or continuous consequential effect on an essential term or condition of employment so as to “meaningfully” permit collective bargaining. The 2020 rule also defined a limited set of discrete essential terms and conditions of employment—namely, “wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction.”

Just two years later, a newly constituted Board proposed to rescind and replace the 2020 rule on the ground that the common law purportedly conferred joint-employer status based solely on indirect or reserved control over a third party’s employees. The Board received nearly 13,000 comments—mostly critical—in response. Nevertheless, on October 27, 2023, the Board published its new Rule, which provided that a firm is a “joint employer” if it merely possesses the authority to control (whether directly, indirectly or both) one or more of the employees’ essential terms and conditions of employment. In place of the 2020 rule’s discrete list of essential terms of employment, the new Rule introduced several broad categories, such as “directions governing the manner, means, and methods of the performance,” and “working conditions related to the safety and health of employees.”

Industry Group Lawsuit

On November 9, 2023, a group of industry associations filed a lawsuit against the NLRB in the Eastern District of Texas challenging the new Rule. On March 8, 2024, the Court vacated the new Rule after declining the Board’s invitation to transfer the case to the D.C. Circuit, where the Service Employees International Union had filed a petition for review of the Rule. Based on the Act’s text, structure and purpose (all pointing in the same direction), the Eastern District of Texas held that district courts, not court of appeals, possess initial jurisdiction over challenges to Board rulemakings.

On the merits, the Court agreed with the industry groups challenging the new Rule, holding that the Rule “would treat virtually every entity that contracts for labor as a joint employer because every contract for third-party labor has terms that impact, at least indirectly, at least one of the specified ‘essential terms and conditions of employment.’” Given that reality, the Court concluded, the Rule “exceeds the bounds of the common law and is thus contrary to law.”

The Board defended the Rule, arguing that it established two steps for determining whether an entity is a joint employer: first, the purported joint employer “must qualify as a common-law employer of the disputed employees,” and second, “it must also have control over one or more essential terms and conditions of employment, as those are defined in the Rule,” of the same employees. But the Court was unpersuaded. After all, the Court reasoned, the second step served no filtering function because it was “coextensive with or a superset of the first” step.

Even if the Board’s “preferred interpretation” of the Rule was correct, the Court explained, that interpretation “appears” arbitrary and capricious as no more “predicable than common-law adjudication.” The Court further explained that the Board “backhanded” the “disruptive impact of the new rule on various industries” and failed to “explain how the rule does anything other than mandate piecemeal bargaining that will likely promote labor strife rather than peace.” However, the Court ultimately concluded that there was no need to resolve these arbitrary and capricious arguments given its “conclusion on the unlawfulness of the rule’s sweep beyond common-law limits.”

Finally, the Court agreed that the Board’s recission of the 2020 Rule was arbitrary and capricious. Even assuming that the 2020 rule is narrower than common-law bounds, the Court explained, “that does not make it unlawful because the Board may still act on its ‘policy expertise’ within those bounds.” The Court also stressed that the Board gave no justification for the rescission standing alone.

Implications for Employers

The Board will likely appeal the Eastern District of Texas’s decision to the United States Court of Appeals for the 5th Circuit. But, for the time being, the 2020 Rule remains effective. As a result, businesses that work with third parties—whether in franchising, contracting, joint ventures or dealing with portfolio companies—can rely on the 2020 Rule. That Rule narrows the class of employers that can be held jointly liable for labor violations and obligations.