On February 26, 2020, the National Labor Relations Board (“NLRB” or the “Board”) released a new rule for determining joint employment status under the National Labor Relations Act which will take effect April 27, 2020.

What Changed and What is the Impact This new rule requires direct and immediate control over a group of workers, and rolls back the Browning-Ferris Industries test that was set forth in 2015 by a divided Board under the Obama administration. The NLRB’s legal test for joint employment impacts whether workers can collectively bargain with multiple employers and thus hold them jointly liable for labor violations. This rule is particularly important for franchisors, staffing agencies, third-party management companies and labor providers, whose business models call for multiple entities having some amount of interaction or influence over a group of workers.

Under the new rule, an entity may be considered a joint employer of a separate entity's employees only if the two share or codetermine the employees’ essential terms and conditions of employment, which are exclusively defined under the NLRB rule as wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction. To establish that an entity shares or codetermines the essential terms and conditions of another employer’s employees, the entity must possess and exercise substantial direct and immediate control over one or more essential terms or conditions of their employment as to meaningfully affect matters relating to the employment relationship with those employees.

The new rule makes clear that examples of a business indirectly controlling or maintaining an unexercised contractual ability to control those terms of employment — which could have led to a joint employer finding under the Browning-Ferris Industries test — can be considered as part of the Board’s joint employer analysis only to lend support to evidence of direct control. They can’t by themselves lead to a finding of joint employment if no evidence of substantial direct control exists. Further, the final rule states that common elements of third-party contracts will not be enough to convert businesses into joint employers, such as a business setting minimal standards for hiring, performance, or conduct for a contractor, requiring that a contractor maintain workplace safety or sexual-harassment policies, or a franchisor taking steps to protect its trademark.

New Rule's Practical Effect and What May Come Next While the broader Browning-Ferris Industries tests engulfed more contractors and franchisors into labor disputes and negotiations, the practical effect of the new NLRB rule is to decrease the risk of litigation arising out of labor practices. And in many cases, it may eliminate entities’ need to bargain with franchise or subcontracted workers if such workers belong to a union.

The topic of joint employment has been hotly contested over the last five plus years. The new rule is likely to face legal challenges from worker advocates who view the Board’s stance as hurting low-wage workers and incentivizing businesses to cut corners. These groups believe the revamped test makes it easier for employers to evade liability for unlawful activity by outsourcing work and essentially hiding behind its third-party contractor or franchisee. It is also possible that a future Board, under a different administration, could propose its own new rule addressing the joint employment issue.