Federal Court Vacates NLRB Joint Employer Rule, Restores 2020 “Substantial Direct and Immediate Control” Standard

  • A U.S. district court ruled that the NLRB’s 2023 joint employment regulations—which provided that indirect or reserved control, even if never exercised, could be sufficient to establish joint employment—was defined overbroadly.
  • The court restored prior regulations requiring “substantial direct and immediate control” to establish joint employment.
  • The court also ruled that challenges to NLRB regulations are properly brought first in federal district court.
  • Appeals are likely to follow.

On March 8, 2024, the U.S. District Court for the Eastern District of Texas struck down regulations promulgated by the National Labor Relations Board (the “NLRB” or “Board”) defining joint employment (the “new Rule” or “2023 Rule”) under the National Labor Relations Act (the “NLRA” or “Act”).1 

For now, joint-employer status will continue to be determined under the regulations adopted by the Board in 2020 (the “2020 Rule”). The 2020 Rule provides that an employer will be considered a joint employer under the NLRA only when it exercises “substantial direct and immediate control” over the essential terms and conditions of another company’s employees.

Joint-employer status can have profound consequences for employers. A joint employer may be required to bargain with a union representing jointly employed workers; may be subject to joint and several liability for unfair labor practices committed by the other employer; and may be subject to labor picketing that would otherwise be unlawful. The 2023 Rule’s broad definition of joint employment was in line with the aggressive pro-labor stance the Board has taken throughout the Biden administration.

The breadth of the 2023 Rule was staggering. Under the Rule, any entity that exercised or even had reserved the right to exercise control (including indirect control) over at least one essential term of employment would be a joint employer with the workers’ undisputed employer, even if such reserved control had never in fact been exercised. The 2023 Rule would have treated virtually every entity that contracts for labor as a joint employer because virtually 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.”

In vacating the 2023 Rule, the district court: (a) declared the substance of the new 2023 regulations to be contrary to law, insofar as they went beyond the bounds of the common-law definition of employment; and (b) vacated the 2023 Rule’s purported rescission of the 2020 Rule as arbitrary and capricious under the Administrative Procedure Act (APA).2 With respect to indirect control, or reserved control that had never actually been exercised, the court specifically held that the 2023 Rule was unlawfully broad to the extent it would have allowed a joint-employer finding to be predicated on either one of these elements standing alone.

The court’s decision marks yet another chapter in the long and tumultuous history of joint-employer status under the NLRA. It is unclear whether the Board will appeal this decision immediately or allow other legal challenges to play out before seeking appellate review. The issue may ultimately be determined by the U.S. Supreme Court.

Background on Joint Employment

Joint-employer status has been among the most controversial topics the Board has addressed in the last decade, and the Board’s position has gone back and forth dramatically as the composition and political control of the Board has shifted.

In 2015, the Board issued its decision in Browning-Ferris Industries of California, Inc., 362 NLRB 1599 (2015) (BFI), which upended years of precedent by dramatically expanding the definition of joint employer and categorizing many more independent companies as joint employers.  Under BFI, two entities were deemed joint employers based on the mere existence of reserved joint control, indirect control, or control that was limited and routine. This contrasted starkly with the prior standard, which required the putative joint employer to exercise actual control over essential employment terms, with such control being “direct and immediate.” BFI thus drastically increased the universe of potential joint employers, and was the subject of intense negative scrutiny, including congressional hearings geared toward overturning the decision.

In December 2018, the U.S. Court of Appeals for the District of Columbia Circuit upheld portions of BFI.  The appeals court ruled that while evidence of reserved or indirect control could be appropriate factors to consider in determining joint-employer status, the Board in this case had applied the concept of “indirect control” too broadly. 

The appeals court returned the case to the Board, directing that it reevaluate the case by considering “indirect control” of only those factors directly related to the terms and conditions of employment of the subject employees. The court noted that by “failing to distinguish evidence of indirect control that bears on workers’ essential terms and conditions from evidence that simply documents the routine parameters of company-to-company contracting,” the Board had exceeded its authority and “overshot” the common-law mark. Moreover, the court held, “‘global oversight’ is a routine feature of independent contracts,” which should not be a factor relevant to the analysis of a joint-employment relationship.

In response to the DC Circuit’s decision, in February 2020 the Board promulgated the 2020 Rule, which states that joint-employer status may be found only where a company exercises “substantial direct and immediate control” over the essential terms and conditions of another company’s employees, largely rejecting the BFI standard. The 2020 Rule makes clear that a business will be considered a joint employer of a separate company’s employees only if the business possesses and exercises substantial direct and immediate control over one or more essential terms and conditions of employment of another company’s employees. The 2020 Rule specifies that these essential terms and conditions of employment are wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction.  It further provides that even where an employer exercises direct control over another employer’s workers, it will not be held to be a joint employer if such control is “limited and routine.”

In September 2022, a newly constituted Board proposed revised regulations that would have repealed the 2020 Rule and gone beyond even the Board’s prior BFI standard. Those regulations were finalized in October 2023. The 2023 Rule was originally slated to become effective on December 26, 2023. Facing legal challenges, the Board postponed the effective date to February 26, 2024. That effective date was further postponed by the district court to March 11, 2024. The court’s March 8 decision means that, at least for now, the 2023 Rule will not go into effect, and analysis of joint-employer status will proceed under the 2020 Rule.

Going Forward

The 2023 Rule represented the most extreme shift of the pendulum toward the broadest definition of joint employment that we have seen under the Act. Given the enormous practical and legal consequences that a finding of joint-employer status may have on an employer—and given the lengthy and litigious path that has led to this final rule—we expect that the rule will be embroiled in litigation for some time. Littler Workplace Policy Institute (WPI) will continue to keep readers apprised of relevant developments.

See Footnotes

1 Littler represented plaintiffs Associated Builders and Contractors, Inc., and the International Franchise Association in the U.S. district court.

2 Separately, the court denied the Board’s motion to transfer the case to the U.S. Court of Appeals for the DC Circuit, where a separate challenge to the rule is pending, holding that APA challenges to NLRA regulations are properly brought first in federal district court. 

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.