Decision Leaves Franchisors, Contractors, Parent Companies, and Other Employers Vulnerable to Costly Labor Obligations and Violations

HIGHLIGHTS:

  • The NLRB, in a long-anticipated 3-2 decision along party lines, established a new and broader standard for determining whether two separate companies will be deemed joint employers under the National Labor Relations Act.
  • Unions representing the employees of franchisees, subcontractors or subsidiary companies will have few if any legal obstacles to hold the respective franchisors, contractors and parent companies jointly liable for unfair labor practices and other violations under the Act, for which those entities had no direct involvement.
  • The wide range of businesses, especially franchises, whose business practices are likely to be affected by this decision speaks to the significance of its holding.

The National Labor Relations Board (NLRB or Board), in a long-anticipated 3-2 decision along party lines, established a new and broader standard for determining whether two separate companies will be deemed joint employers under the National Labor Relations Act (Act), the federal framework governing labor management relations in the private sector. In the Aug. 27, 2015 decision, Browning-Ferris Indus. of Cal. d/b/a BFI Newby Island Recyclery, 362 NLRB No. 186, the majority (all Democratic appointees), held that BFI Newby Island Recyclery was a joint employer with a wholly distinct company, Leadpoint Business Services, where BFI had contracted with Leadpoint to provide BFI with temporary employees for work at BFI’s recycling facility. BFI did not supervise Leadpoint’s employees. The union at issue sought to represent Leadpoint’s employees in a secret ballot election.

Notwithstanding that the labor services agreement between BFI and Leadpoint expressly stated that Leadpoint was the sole employer of personnel it supplied, the NLRB analyzed the arrangement between the parties and concluded, while updating its decades-old standard, that they were joint employers. Accordingly, if the union wins the election, BFI, along with Leadpoint, will be required to negotiate a collective bargaining agreement with the union covering wages, hours, and other terms and conditions of employment of Leadpoint’s employees. The holding of this decision, undoubtedly, will be stretched by unions to cover relationships beyond contractor-subcontractor and to obligate purported joint employers to duties beyond sitting at the bargaining table.

New Joint-Employer Standard: Less Defined and More Onerous

Under the revised standard, a company may be found to be a joint employer even if it does not supervise the employees of another company with which it contracts or otherwise has a legal relationship. The new standard, therefore, makes it significantly easier and will likely be used to establish joint-employer status of a franchisor (when the franchisee is the actual, hands-on employer) or, as in the case at issue, BFI, a contractor, who outsources certain functions to a subcontractor staffing company, subjecting the joint employer to a host of obligations and potential liabilities under the Act, beyond collective bargaining. Now, unions representing the employees of franchisees, subcontractors or subsidiary companies will have few if any legal obstacles to hold the respective franchisors, contractors and parent companies jointly liable for unfair labor practices and other violations under the Act, for which those entities had no direct involvement.

Old v. New Joint-Employer Standard

“Meaningful” Changes to Key Requirements

More than 30 years ago, in NLRB v. Browning-Ferris Industries of Pennsylvania, the Third Circuit established the joint-employer standard requiring that two entities must “share or co-determine those matters governing essential terms and conditions of employment.” The Board formally adopted this standard a few years later and explained that essential terms include such key activities as hiring, firing, discipline, supervision, and direction of the other entity’s employees as such terms and conditions “meaningfully” affect an employment relationship. Over many years, the Board has refined this standard and made clear that “limited and routine” supervision over the other entity’s employees – even when it is direct – is insufficient to meet the requirements to create joint-employer liability.

NLRB Changes Picture by Remote Control

Now, in effectively stripping away the requirements for active and meaningful involvement by both (or more) entities, the Board has established a new standard in determining whether two (or more) entities are joint employers of a single workforce, with the following inquiries:

  1. Are both employers within the meaning of the common law (where an employer is one who “controls or has the right to control”)?
  2. Do both employers share or codetermine those matters governing the “essential terms and conditions of employment”?

In evaluating whether a putative employer possesses sufficient control over employees to qualify as a joint employer, the Board will not merely consider what control has been actually exercised, but also whether the entity in question has exercised control over terms and conditions of employmentindirectly through an intermediary, or whether it has reserved the authority to do so. As an example of indirect control, the Board’s decision discussed an episode where a BFI manager contacted Leadpoint after observing two Leadpoint employees drinking on the job, which led to discipline. The burden of proving joint-employer status remains unchanged and belongs to the party asserting that relationship. Those “essential terms” that may trigger joint-employer status when a putative employer is involved in determining them include wages and hours, dictating the number of workers to be supplied, controlling scheduling, seniority, overtime, assignment work, and determining the manner and method of work performance.

The Board attempted to elucidate the boundary for a finding of joint-employer status by stating that “a putative employer’s bare rights to dictate the results of a contracted service or to control or protect its own property [do not] constitute probative indicia of employer status.” The determination will depend on whether a putative employer “affects the means or manner of employees’ work and terms of employment, either directly or through an intermediary.” A joint employer will be required to bargain only on the terms and conditions that it controls (or has retained the latent ability to control). The Board has justified this significant expansion of the joint-employer standard by observing that the erstwhile standard, which required “direct and immediate control” for a joint-employer finding was “out of step with changing economic circumstances, particularly the recent dramatic growth in contingent employment relationships.”

The Dissent: Confused and Concerned

The lengthy, forceful dissent criticized the new rule’s breadth, which it argues will lead to instability, concluding that “no bargaining table is big enough to seat all of the entities that will be potential joint employers under the majority’s new standards.” It argued that expanding the parties subject to bargaining will disrupt the bargaining process and result in uncertainty because numerous “cooks ... in a single kitchen ... is a recipe for dyspeptic collective bargaining.” The dissent also expressed concern about maintaining individual employer’s information, using the hypothetical example of a cleaning company who is deemed a joint employer with its client, a business who contracts with the company for cleaning services. The cleaning company could be required to turn over data on pricing for all its clients – information it otherwise would keep confidential from any particular client.

In addition, remote “parent” employers that are not engaged in direct control over employees may be subject to economic protest activity from their subsidiary or subcontractor’s employees that would have otherwise constituted unlawful secondary activity. Along the same lines, the dissent observed that joint employers would not be free to end contractual relationships with unionized contractors, as they otherwise would be. Tying contracting entities to contracts that may no longer make business sense could render those entities noncompetitive in their markets.

What Is Likely to Come: Legal and Compliance Challenges

BFI may appeal the Board decision, but only after the union representation election is concluded and the union representative is certified. Any appeal could take years, while the finality of this decision remains inconclusive for potentially affected employers and contractors. Certain employer-centered lobbying groups have begun seeking congressional action to prevent the enforcement of this new standard.

Why the New Joint-Employer Standard Matters

The wide range of businesses, especially franchises, whose business practices are likely to be affected by this decision speaks to the significance of its holding. The Board will apply this new standard retroactively. Companies that have been operating subject to franchise agreements or other outsourcing of staff management should particularly consider the potential impact of this new standard on their obligations in the face of union organizing or collective bargaining demands, and consult counsel for guidance.