NLRB Blocked from Implementing Expansive Joint Employer Rule

A federal district court recently vacated the National Labor Relations Board’s 2023 joint employer rule (2023 Rule), which would have expanded the standard to hold separate companies joint employers based on indirect or reserved control, even if never actually exercised.

The district court’s ruling preserves the National Labor Relations Board’s (NLRB’s or Board’s) 2020 joint employer rule (2020 Rule), which requires “substantial direct and immediate control” to establish joint employer status.

The NLRB has several response options at this stage: (1) appeal the district court’s ruling; (2) rescind the 2020 Rule, which will reinstate the pre-2020 joint employer standard, and then address future joint employer issues through case-by-case adjudication; or (3) issue a new and revised joint employer rule.

BACKGROUND

On March 8, 2024, the US District Court for the Eastern District of Texas vacated a 2023 rule issued by the NLRB, which would have vastly expanded the circumstances under which separate companies can be considered joint employers.[1] Joint employer status can have significant legal consequences, including obligations to recognize a union, bargain with that union, and be bound by a collective bargaining agreement; joint liability for unfair labor practices; and legal vulnerability to union picketing during labor disputes.

The district court’s ruling preserves the NLRB’s 2020 Rule on the joint employer standard, which the 2023 Rule sought to rescind and replace. Under the 2020 Rule, a company is deemed a joint employer of another company’s employees only if it actually exercises “substantial direct and immediate control” over the employees’ essential terms and conditions of employment—for example, wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction.[2]

The 2023 Rule, which would have gone into effect on March 11, 2024, deems virtually any company that contracts for third-party labor as a joint employer. The 2023 Rule provided that a company would be a joint employer if it exercised control over (whether directly, indirectly, or both), or had the right to control (whether directly, indirectly, or both), one or more of the employees’ essential terms and conditions of employment—even if that control was only reserved and never actually exercised.[3]

The 2023 Rule also broadens the definition of “essential terms and conditions of employment” to include “work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline,” and “working conditions related to the safety and health of employees.”[4]

In its March 8 decision, the district court held the 2023 Rule contrary to the NLRB’s authority because it exceeded the bounds of the common law definition of an employer.[5] The court also found that the Board failed to provide a sufficient justification for rescinding the 2020 Rule.

‘Substantial Direct and Immediate Control’ is the Operative Standard – For Now

Given the district court’s ruling, the 2020 Rule’s “substantial direct and immediate control” standard is the operative NLRB joint employer standard—at least for the time being. The district court’s ruling is the latest development in an area of law that has been in flux for much of the last decade. The Board is likely to take action in response to the district court’s decision, which may include one or more of the following:

• Appeal District Court’s Ruling to the US Court of Appeals for the Fifth Circuit: A successful appeal by the NLRB could result in reinstatement of the expansive standard set forth in the 2023 Rule. Alternatively, if only the 2023 Rule’s rescission of the 2020 Rule were to be upheld, the joint employer standard would revert to the Board’s prior precedent in Browning-Ferris, which established an approach similar to—although not quite as expansive as—the 2023 Rule.[6] The Board may then choose to abandon rulemaking for the joint employer standard and establish future joint employer policy through case-by-case adjudication (see below).
• Rescind 2020 Rule and Promulgate New Joint Employer Standard Through Adjudication: The Board could engage in new rulemaking to rescind the 2020 Rule, which would require a lengthy notice and comment process. As noted above, a rescission of the 2020 Rule would restore the Board’s prior precedent in Browning-Ferris,[7] which established an approach similar to the 2023 Rule. The Board could then decide future joint employer issues through case-by-case adjudication, which is how the Board addressed joint employer issues prior to the 2020 Rule.[8] The Board could adopt a new standard under this case adjudication approach that is very similar, if not identical, to the 2023 Rule without engaging in rulemaking.
• Issue a New and Revised Joint Employer Rule: If unsuccessful on appeal, the Board could engage in a new round of rulemaking and promulgate a modified version of the 2023 Rule that attempts to address legal deficiencies identified by the district court. This likely would be difficult for the Board to do because the aspects of the 2023 Rule that are central to the Board objectives—permitting reserve and indirect control alone to determine joint employer status—was what the court found most offensive. Nevertheless, it is possible that the Board could initiate rulemaking and propose language that attempts to address the court’s concerns while expanding the significance of these factors in the joint employer analysis.

Whatever approach or combination of approaches the Board ultimately decides to take, employers can expect that the current Board will continue to pursue an expansion of the joint employer standard because it creates additional leverage and impact for union organizing, collective bargaining, and labor law litigation. As a result, companies should continue to consider ways to structure their contractual relationships and draft contractual terms to minimize the risk of a joint employer finding to address potential application of a “reserved and indirect” control standard in the future. However, for the time being, the current Board’s effort to adopt that standard is stalled.