NLRB’s Proposed New Rule Would Expand Joint Employer Status to Entities With Indirect Control Over Worker Conditions

The Board’s most recent proposed rule could increase potential liability for certain businesses using a franchise model, contracting for temporary workers through a staffing firm, or entering agreements with independent contractors. The rule would greatly expand the current scope of joint employer liability by allowing for a finding of joint employment where an entity merely reserves but does not use the right to exercise control over “essential terms and conditions of employment” of the employees.

Changes Under the Proposed New Rule

The proposed new rule would replace the current 29 C.F.R. § 103.40, which the Board issued in February 2020 (2020 Rule). So what’s changed to justify revisiting the issue now, just two years after the Board went through lengthy notice and rulemaking procedures on this very subject? Only the composition (and corresponding ideology) of the Board. The 2020 Rule was promulgated by a Board comprised of Trump administration appointees. The majority of the current Board was appointed by the current administration.

As expected in this political football game, the proposed new rule departs significantly from its predecessor. First, and most notably, it greatly expands the circumstances in which joint employment status can be found. The 2020 Rule requires an employer to “possess and exercise … substantial direct and immediate control over one or more essential terms or conditions of … employment,” and provides specific circumstances that constitute direct and immediate control for each enumerated essential term and condition.

By contrast, the proposed new rule provides that an employer may have joint employer liability where the employer “possess[es] the authority to control (whether directly, indirectly, or both),” or “exercise[s] the power to control (whether directly, indirectly, or both),” one or more of the essential terms and conditions. And rather than providing specific circumstances where this possession or exercise of authority exists, the new rule says it is “determined under common-law agency principles.” The proposed rule further provides the caveat that joint employer liability can be found when the employer possesses the authority to control, regardless of whether control is exercised; when the employer exercises the power to control indirectly, regardless of whether the power is exercised directly; and when control is exercised through an intermediary person or entity.

In short, the ability to control the essential terms and conditions of employment, either directly or indirectly, and absent any actual exercise of this control, is sufficient for a finding of joint employer status under the proposed new rule.

The new rule expands what terms and conditions of employment are considered “essential.” The 2020 Rule provided a set list of essential terms and conditions limited to “wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction.” The proposed new rule expands essential terms and conditions of employment to encompass a non-exhaustive list, including:

• Wages, benefits, and other compensation
• Hours of work and scheduling
• Hiring and discharge
• Discipline
• Workplace health and safety
• Supervision
• Assignment
• Work rules and directions governing the manner, means, or methods of work performance

The proposed new rule also explicitly provides that a party asserting joint employer status need only prove the status by a preponderance of the evidence standard, while the 2020 Rule requires a finding based on the totality of facts in the particular employment setting.

Support for and Dissent from the Proposed Rule

Highlighting the ideological differences among Board members on this subject, the Board’s notice of proposed rulemaking is accompanied by majority and dissenting opinions. The majority opines that the proposed new rule will “restore the Board’s focus” in joint employer analysis to a position “consistent with the common law and relevant court decisions.” Specifically, the majority argues the new rule will codify the standard adopted by the Obama Board in Browning-Ferris Industries, Inc., d/b/a BFI Newby Island Recyclery, 362 NLRB 1599 (2015) (“BFI”), and provides a “definite, readily available standard” that will “reduce uncertainty and litigation over the basic parameters of joint-employer status.”

Dissenting, Board Members Kaplan and Ring (who were part of the majority when the Board issued the 2020 Rule,) counter that the proposed new rule does not articulate the common-law agency principals applicable to the determination of joint employer status or provide any true guidance to the regulated community. The dissenters also lament that the proposed new rule eliminates the guidance currently in the 2020 Rule related to conduct that constitutes direct and immediate control, resulting in unions, employers, and employees finding “no guidance in the rule itself.” The dissenters further argue that the proposed rule goes “well beyond common-law limits and anything contemplated by the Board’s decision in BFI,” beyond the scope of the NLRB’s authority to define joint employment.

Next Steps

This latest proposed rulemaking provides yet another example of the strong headwinds employers face under the current Board. Certain independent contractor or franchisor relationships may have an increased risk of a finding of joint employer status under the NLRA if this proposed rulemaking goes into effect, in particular depending on what terms and conditions of employment are considered “essential” in light of the new rule’s non-exhaustive list. Interested parties have until November 7, 2022, to submit comments to the Board. The Board has asked commenters to address a few specific questions, including whether the 2020 Rule should be rescinded and not replaced; whether the 2020 Rule should be amended, and if so, how; and whether there are any reliance interests related to the 2020 Rule that the Board should assess.