NLRB Extends Effective Date of Joint Employer Rule in Wake of Legal Challenges

The National Labor Relations Board (“NLRB”) recently announced that the effective date of its new “joint employer” final rule will be postponed by two months as a result of several legal challenges to the rule. The final rule, which provides the standard for joint employer status under the National Labor Relations Act (“NLRA”), was scheduled to become effective on December 26, 2023. However, the NLRB extended the final rule’s effective date to February 26, 2024, in order to “facilitate resolution of legal challenges with respect to the rule.”

Significance of the Final Rule

The final rule, which was released on October 26, 2023, will replace the 2020 standard enacted during the Trump Administration, and will establish a much broader framework for determining when two entities may be considered joint employers of particular employees. To satisfy the 2020 standard, workers are required to demonstrate that a company exercises “substantial direct and immediate control” over the essential terms and conditions of another company’s employees. Under the expansive final rule, companies will be treated as joint employers where they “possess the authority to control (whether directly, indirectly, or both) or to exercise the power to control (whether directly, indirectly, or both) one or more of the employees’ essential terms and conditions of employment.” Thus, under the final rule, it is immaterial whether a company actually exercises control over the terms and conditions of an employee’s employment. As long as the company has the authority to control one essential term and condition of a worker’s employment—even if that authority is never exercised—the joint employer test will be satisfied.

For a more detailed discussion of the final rule and the recent history of the NLRB’s joint employer standard, please see “NLRB Adopts New Final Rule and Again Broadens Join-Employment Analysis” at https://www.maynardnexsen.com/publication-nlrb-adopts-new-final-rule-and-again-broadens-joint-employment-analysis.

Legal Challenges to the Final Rule 

Soon after the final rule was issued in late October it drew the ire of legislators and a variety of business organizations. First, on November 8, the Service Employees International Union (“SEIU”) filed a petition for review with the U.S. District Court for the D.C. Circuit. Although the SEIU generally supports the final rule, it requests that the NLRB expand the essential job terms that a company could control in order to be classified as a joint employer. In other words, the SEIU contends that the final rule does not go far enough in protecting employees.

On November 9, a collection of business advocacy groups led by the U.S. Chamber of Commerce filed suit against the NLRB in the U.S. District Court for the Eastern District of Texas. In that suit, the business groups allege that the final rule is overly broad and establishes a standard for determining joint employer relationships that directly contradicts what the common law would require. The business groups also claim that the final rule violates administrative law because it is “arbitrary and capricious” and “threatens chaos and indeterminacy in national labor relations.” Additionally, the business groups contend that the NLRB lacked justification for issuing the final rule given that the existing joint employer standard only went into effect in 2020. The business groups claim that the final rule will have a negative impact on the economy, as it will require employers to reevaluate virtually all of their contractual dealings to determine whether a joint employer relationship exists.

After the lawsuit was filed in the Texas district court, the NLRB filed a motion seeking to transfer the action to the D.C. Circuit on the grounds that final NLRB orders may only face review by U.S. circuit courts. Notably, the D.C. Circuit previously upheld a joint employer standard similar to the test espoused in the final rule, and thus a decision to transfer the case to the D.C. Circuit would be considered favorable for the NLRB in its efforts to uphold the final rule. It is likely that both the Texas district court and the D.C. Circuit will be required to address the jurisdictional conflict, and the issue may ultimately be decided by the U.S. Supreme Court.

In addition to the dueling lawsuits, a coalition of Republican Senators and Representatives, along with Democratic Senator Joe Manchin of West Virginia, introduced a Congressional Review Act (“CRA”) resolution to overturn the final rule, which they contend jeopardizes the franchise business model by imposing additional liability on franchisors and creates legal uncertainty for small businesses. On the other hand, twenty-two Democratic legislators wrote to the NLRB in support of the final rule.

Finally, on November 15, Senator Bill Cassidy, M.D. (R-LA) notified the NLRB that the Government Accountability Office determined that, by setting the final rule’s implementation date as December 26, the NLRB violated the CRA mandate that the implementation of all major federal rules must be delayed 60 days from when they are received by Congress. Following receipt of Senator Cassidy’s letter, the NLRB announced on November 16 that it would extend the deadline for the implementation of the final rule to February 26, 2024.

What it Means for Employers 

Because of the pending litigation over the final rule, it is unclear if the final rule will take effect on February 26. However, companies should continue to prepare for its implementation by reviewing their agreements with third parties, including staffing agencies and subcontractors, to assess whether those agreements could be viewed as providing or reserving the right to control an essential term or condition of another entity’s employees. In addition, employers should be aware that the NLRB currently takes a broad view of joint employment, and until the final rule is implemented it will likely interpret the existing regulations broadly in favor of a determination of joint employment.

Our Maynard Nexsen team is available to assist employers in evaluating the impact of the NLRB’s final rule on their business practices. Please contact us for additional information or guidance.