Your company has decided to hire a staffing agency.
You sign a contract that states the staffing agency will provide temporary workers to your company. The contract contains legalese reserving your company’s right to exercise limited control like assigning work and setting hours. You tell the staffing agency that your company is open Monday through Friday from 9:00 a.m. to 5:00 p.m. Aside from that, you leave the details up to the staffing agency. Your company never actually exercises the limited control reserved to it in the contract, and the staffing agency in fact takes control of the temporary work force – by hiring, supervising, and disciplining workers and handling day-to-day employment. Could your company be considered a joint employer of these workers? Could your company face joint liability with the staffing agency for any labor law violations? If these workers attempt to unionize, might you be required to bargain with a union over the terms and conditions of their employment?
According the National Labor Relations Board (NLRB) and the Department of Labor (DOL), the resounding answer is “yes.” The NLRB and DOL have recently expanded joint employer standards.
Late last year, the NLRB made sweeping changes to its joint employer standard in Browning-Ferris Industries of California, Inc., announcing that a company is a joint employer if it exercises “indirect control” over working conditions or if it has “reserved authority” to do so. This marks a significant departure from the joint employer test that the NLRB has used since 1984, which required that a putative joint employer actually exercise control over essential terms and conditions of employment. Prior NRLB decisions required that the type of control exercised be “direct and immediate.”
The DOL’s Wage and Hour Division followed suit in January 2016, issuing enforcement guidance on joint employment under the Fair Labor Standards Act. The guidance purported to clarify the DOL’s existing regulations addressing joint employer relationships, which were last amended in 1961. Like the NLRB, the DOL’s guidance sets forth a much broader standard for joint employment findings. Congress has recently obtained evidence that the agencies collaborated to expand employer liability.
Proponents of the new joint employer rules justify them to address the rise in contracting, franchising, flexible work relationships in the new economy, and other similar employment practices. New rules expand enforcement of worker protections like minimum wages, overtime pay, and the right to unionize. Employer groups argue that new rules undermine the predictability of the law, which has been applied uniformly for over 30 years. It is unclear how much “indirect control” or “reserved authority” will cause a joint-employer finding.
These new standards have troubling impacts. For example, franchisors are uncertain how to proceed under the new standards. While they await further rulings on the subject, franchisors are changing the ways in which they deliver guidance and support, such as avoiding direct contact with employees and instead communicating directly with the franchisees. Franchisors are considering taking other steps such as providing less support and training to franchisees for key functions like sales, marketing, technology, customer service, recruitment, and business advice. This would place considerably higher costs on franchisees, reducing operating margins and risking profitability. Franchise owners are assessing options for addressing these added expenses, including: (i) passing costs on to consumers, (ii) reducing products/services, and (iii) reducing or eliminating jobs. See Crews, A., Zhang, K. and Liuzza, C. “FRANdata Key Findings and Survey Results: 2015 National Labor Relations Board Joint-Employer Ruling.” Survey. frandata.com. FRANdata, 2015.
According to survey results released by FRANdata, an independent research company that conducted hundreds of telephone surveys with franchisors to determine how they are reacting to the expanded joint employer standard, an estimated 600,000 jobs may be lost, or not created, in the next two years. The survey results predict that at least 40,000 franchise businesses operating in more than 75,000 locations are at risk of failure because of these recent legal developments.
The hidden exposure of new joint employer law is all over the business world. In financing relationships, lenders often reserve the right to approve labor and employment contracts like collective bargaining agreements. Insurers must analyze whether joint employer rules impact coverage in current policies and the need to write policies differently. In mergers and acquisitions, the parties must take care to analyze their indemnifications and other terms. Companies have to plan for practices, like collective bargaining, where they previously had no role. Entire bodies of law will rotate liability like never before, for example, neutral employer protection from strikes and picketing will be lost for many.
Browning Ferris has appealed the NLRB’s ruling to the D.C. Circuit of the U.S. Court of Appeals. The NLRB, DOL, and courts will churn out application of the new rules over time. Companies cannot afford to “wait and see” before making adjustments. Although joint employment status is a factual inquiry that will vary from employer to employer, companies should review their employment practices, contractual arrangements, and course of dealing in light of the significant changes in the law announced by the NLRB and DOL.
Charles S. Birenbaum is a shareholder in Greenberg Traurig LLP’s San Francisco office and serves as the firm’s Chair of Northern California. He focuses his practice on traditional labor and employment law matters, and has wide-ranging experience litigating in state and federal courts as well as various administrative agencies. He can be reached at firstname.lastname@example.org or (415) 655-1300.