On February 27, the National Labor Relations Board (NLRB) published a final rule formally withdrawing its 2023 joint employer rule and confirming the standard that has been in place under the National Labor Relations Act (NLRA) since 2020. This action stabilizes the issue of how joint employer status is defined and tested under the NLRA – with a narrower definition of joint employment – and follows a federal court decision that blocked implementation of the broader 2023 rule.
This alert will cover the status of the NLRB’s joint employer rule and other recent developments at the federal level that are pertinent to employers, franchisors, businesses, and nonprofit organizations relative to the tests for joint employer and independent contractor status.
Background
In October 2023, the NLRB published a new joint employer rule that would have broadened joint employer liability by recognizing indirect and merely potential control over essential terms and conditions of employment as relevant to finding joint employer status. However, in March 2024, a federal district court enjoined the 2023 rule, leaving the previously effective 2020 joint employer rule in place. The board’s new rulemaking is an administrative step required to cement the status of the regulation.
What the Final Rule Does
The final rule confirming the governing standard requires that, in order for a court or agency to find that two separate entities are joint employers, it must be shown that the entities each possess and exercise “substantial direct and immediate control” over at least one essential term or condition of employment. This framework is significantly narrower than the 2023 standard, which would have allowed findings of joint employment based on indirect or unexercised control. The final rule also defines and limits essential terms and conditions of employment. These include:
- Hiring and discharge
- Wages, benefits, and other compensation
- Hours and scheduling
- Assignment of duties
- Supervision of work
- Work rules and disciplinary authority
- Workplace health and safety conditions
Practical Implications for Business
More certainty for businesses using contractors or franchise models
The narrower 2020 standard reduces joint employer risks for companies that rely on staffing agencies, franchisees and subcontractors.
Lower likelihood of bargaining obligations
Because the standard requires actual, substantial and direct control, fewer entities will be pulled into collective bargaining relationships by virtue of their business arrangements.
Contractual flexibility remains important
Although indirect control is no longer determinative, employers should still review contracts to ensure they don’t inadvertently exercise direct control in ways that could trigger joint employer findings.
Other Legislative and Agency Activity
Currently pending in Congress is legislation known as the American Franchise Act (H.R. 5267), which seeks to establish a clear, narrow joint employer standard to preserve the traditional franchise model. It responds to shifting federal interpretations that have jeopardized franchisor‑franchisee independence and increased the risk of employment‑related liability. The proposed standard would ensure that the same joint employer test applies under the NLRA and the Fair Labor Standards Act (FLSA),creating consistency for wage/hour, union and labor relations matters.
On a slightly different but related front, the Department of Labor (DOL) issued a new proposed independent contractor rule on February 26 (“proposed rule”). The proposed rule would rescind the DOL’s 2024 independent contractor rule and replace it with a modified version of its 2021 rule – restoring a clearer, more predictable framework for determining whether a worker is an employee or an independent contractor under the FLSA, and applying that same test to the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).
The proposed rule would re-adopt the 2021 rule’s framework with minor modifications. This frames the analysis around economic dependence – whether the worker is in business for themself or dependent on an employer for work; and establishes two “core factors” that generally carry the greatest weight:
- Control over the work
- Opportunity for profit or loss based on initiative or investment
The framework includes three additional factors that are to be less probative: skill required, permanence of the relationship and whether the work is part of an integrated unit of production. Additional factors would be allowed consideration only if they relate directly to whether the worker is truly in business for themself.
Businesses of all types will want to incorporate these developments into management of their workforces and keep an eye out for further developments regarding the American Franchise Act and the proposed independent contractor rule.
If your business has questions about evaluating contract structures, workforce models and compliance strategies in light of these developments, please contact Mark Mathison, or your regular Lathrop GPM attorney.