Texas Federal Court's Invalidation of 2023 NLRB Joint Employer Rule Buys Employers Time

The United States District Court for the Eastern District of Texas just struck down the National Labor Relations Board’s (NLRB) new rule that broadened the test for determining when separate businesses may be considered joint employers within the meaning of the National Labor Relations Act. The decision was issued days before the NLRB’s new rule was supposed to go into effect on March 11.

Under the Trump-era joint employer rule, employees were required to demonstrate that a company exercised “substantial direct and immediate control” over the essential terms and conditions of another company’s employees to establish joint-employer status.

The Biden-era NLRB rule was released in October of 2023 and, as expected, was very employee-friendly. Under the 2023 final rule, an entity may be considered a joint employer of another employer’s employees if the two share or codetermine the employees’ essential terms and conditions of employment. In other words, companies will be treated as joint employers if 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 employee’s essential terms and conditions of employment.” Simply having the authority to control one essential term and condition of a worker’s employment, satisfies the joint employer test, whether or not a business exercises that control.

The NLRB rule lists the essential terms and conditions of employment, which are: Wages, benefits, and other compensation; hours of work and scheduling; assignment of duties to be performed; supervision of the performance of duties; work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline; tenure of employment, including hiring and discharge; and working conditions related to the safety and health of employees.

Industry advocates became concerned that the NLRB’s new standard would destroy the franchise industry and disrupt business-to-business agreements for outsourced labor and subcontracting. This concern prompted the US Chamber of Commerce and other business groups to file the lawsuit in Texas federal court.

The federal judge in Texas, Judge J. Campbell Barker, vacated the NLRB rule finding that the NLRB’s new test is unlawfully broad because an entity could be deemed a joint employer simply by having the right to exercise indirect control over one essential term. “That would treat 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.”

The Service Employees International Union also filed a petition in the D.C. Circuit for review requesting that the NLRB expand the essential job terms that a company could control in order to be classified as a joint employer. In the SEIU’s view, the NLRB’s new standard does not go far enough in protecting employees.

As a challenge under the Administrative Procedure Act, when an agency rule is found to be arbitrary and capricious as the Texas Federal Court did here, the injunction will have a nationwide effect. The NLRB may decide to appeal the decision to the Fifth Circuit Court of Appeals, though it has not yet indicated whether it will do so.

Meanwhile, businesses should continue to review and revise their contracts with third parties for potential indications that they have the authority to exercise any type of control over the essential terms and conditions of a third party’s employees. Third parties may include franchisees, professional employer organizations, subcontractors, staffing companies, and more. Businesses will need to weigh whether having any measure of control over employees of another employer is worth the risk of being found a joint employer with the liabilities and responsibilities that come with it.

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