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The National Labor Relations Board (NLRB or Board) recently announced its Final Rule for determining joint-employer status; the Final Rule is a return to the Obama era joint employer standard. The new Rule will take effect on December 26, 2023.

A Return to the Obama Standard – More Companies Will be Found Joint Employers

According to the not-so-new Rule, an entity can be deemed a joint employer if each “employer” has the authority to control “essential terms of employment,” irrespective of whether this control is directly or indirectly exercised. In fact, even if the authority exists, but is not used, joint employer status can be found.

“Essential terms of employment” includes:

1. Wages;
2. Benefits;
3. Hours of work;
4. Assignment of duties;
5. Supervision;
6. Work rules;
7. Tenure of employment; and
8. Working conditions related to safety and health.

As a result, if an employer can influence even one of the essential terms, joint employer status can be found. In contrast, the 2020 (Trump) rule imposed a higher threshold, demanding a joint employer exhibit “substantial direct and immediate control” over employment conditions. Unexerted and indirect control was insufficient.

 

Why Does Unexerted and Indirect Control Count?

The NLRB specifically addressed the need to include unexerted authority. The rationale is even if an employer does not exert control over the terms of employment, the reserved power can be very impactful. The Board suggested the threat of one employer being able to control an employment term is enough to cause the other employer to change its behavior. In essence, the threat of “if you don’t do it, I will,” is enough to control the outcome.

In some business arrangements, such as a recruiting agency, a good argument may be made that unexerted and indirect control is limited, if not non-existent. Moreover, there is no on-going relationship between the “employers” and the employee—the recruiting agency merely places employees and moves on. But in other business relationships, such as many franchises and staffing companies, unexerted and indirect control can be very influential and very common as the business relationship among the parties is on-going.

For example, in most franchise models, the franchisor can have significant residual impact on the franchisee. Consider this, the franchisee may want to buy more outlets or move to a new geographic area. In such cases, staying in the franchisor’s good graces is imperative and could strongly influence the franchisee.

Few will argue the franchisor will cause a joint employer finding if it mandates financial success or excellent quality of the product/service. More nuanced, however, is the franchisor’s desire to control the customer experience. Such points of control could include employee uniforms, communications with customers, employee training, wage and benefit packages relative to the marketplace, and much more. All these factors can be considered “essential terms of employment.”  If the Board can demonstrate this kind of control or influence, the Board will likely find joint employer status.

Are Franchises Covered?

The franchise model was specifically considered in this rulemaking process. The Board identified franchises as one of five types of small businesses (under 50 employees) most likely to be impacted by the joint employer rule. The Board expressly stated, “Franchisors generally exercise some operational control over their franchisees, which potentially renders the relationship subject to application of the Board’s joint-employer standard.”

This has caused backlash from the International Franchise Association, a bipartisan group of US Senators, and many other groups. There is even a lawsuit already challenging the legality of this Rule. While the impact of the Final Rule is yet to be seen, a new report found 74% of franchisees expressed a high level of concern at the prospect of increased franchisor control, and 55% expressed a high level of concern that franchisor support will be reduced as a result of this Rule.

 

What Will Happen Next?

There is tremendous speculation on what will happen next. Many think the cost of owning a small business will dramatically increase thereby making the barriers to entry rise. As a further result, all potential targets of this new Rule will have to make a choice: do they change their ways of doing business to avoid a finding of joint employer status or do they maintain the status quo and risk becoming a joint employer? Alternatively, potential targets could cross their fingers and hope the legal process invalidates the Rule or a new administration takes over and orders the Rule reversed. The future is hard to predict and fraught with peril.

Regarding the possibility of a legal challenge, this could happen in at least two ways. First, special interest groups or potential targets can play offense and challenge the Rule, as has already been done. Second, the Board may find a test case and try to enforce the Rule. The test case is an opportunity for the potential target to play defense and overturn the Rule. As a final note, the last time this happened, the NLRB went after McDonald’s to enforce their rule and show the country the strength of their conviction. After six years of battling with the Board, McDonald’s and 30 franchises (11 of which were represented by Brody and Associates) defeated the joint employer finding.

 

Conclusion

If your business is susceptible to a joint employer finding, changing employment practices immediately could avoid a joint employer finding. Of course, all companies must find a balance between avoiding a joint employer finding and business operations. For example, franchisors must weigh the risks of a joint employer finding against relaxing control over brand standards and putting the brand at risk. Regardless, one thing is certain: time is not on the Employers’ side. If fundamental changes are not made now, a joint employer finding could be imminent.

Brody and Associates regularly advises management on all issues involving unions, staying union-free, complying with the newest decision issued by the NLRB, and training management on how to deal with all these challenges.  If we can be of assistance in this area, please contact us at pyp@brodyandassociates.com or 203.454.0560.