‘Joint Employment’ Decision Does Little to Clarify Legal Landscape for Chains and Franchisors

On December 28, 2018, the majority of a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit mostly upheld an expansive “joint employment” standard adopted by the National Labor Relations Board (NLRB) during the Obama administration. That standard expanded the reach of potential “employer” responsibility with respect to labor relations matters before the Board under the National Labor Relations Act, and affected restaurant owners and operators in franchise systems, joint ventures and parent-subsidiary relationships. 

But the 2-1 decision arguably did little to clarify the bounds of such potential employer responsibility. In any event, the decision may be moot because the current NLRB under the Trump administration has begun the process of issuing joint employer regulations that would be more “friendly” to employers.

Background

The background of the NLRB joint employment issue is long and convoluted. Before 2015, the Board said that an entity was not a “joint employer” of another entity’s employees for purposes of the National Labor Relations Act (“NLRA”) unless, at a minimum, it exercised “direct and immediate control” over the other entity’s employees. Under that standard, for example, franchisors and franchisees, and other separate entities that operated at arm’s length in contractual or similar business arrangements, were usually treated as “separate” employers for purposes of union organizing rules, picketing, boycotts and unfair labor practice responsibility. The only exception applied when one entity exercised “direct and immediate” control of the employees of the other entity.

That changed in 2015. In Browning-Ferris Industries, the Obama administration Board voted 3-2 along party lines to adopt a new standard. That majority decided that an entity was a joint employer of another entity’s employees if it had indirect or potential (“reserved”) control over the other entity’s employees, even if the control was not actually exercised. Under that standard, for example, a franchisor’s or a parent corporation’s indirect or potential control over another entity’s employees could make the franchisor or parent entity a responsible party as an “employer” – a “joint employer” – with respect to union organizing and labor disputes, including unfair labor practice proceedings.

In short, the Obama Board standard means that more entities are “employers” subject to Board power under the NLRA with respect to certain groups of employees and labor disputes. More “employers” means more targets for effective union organizing, more leverage of union bargaining power, and a broader scope of responsibility for unfair labor practices, liability, and injunctive relief.

For example, status as an “employer” can make the entity a target of various types of picketing, boycotts, or other protected concerted activity that would not be lawful if the entity were a “secondary” employer and if the activity were directed at it as a neutral third party to the “primary” labor dispute.

In late 2017, the Trump administration Board overruled Browning-Ferris in Hy-Brand Industrial Contractors,Ltd. and Brandt Construction Co., but the action was short-lived: the Inspector General of the NLRB found that Board Member William Emanuel should have recused himself because his former law firm had represented one of the parties to the Browning-Ferris case. As a result of the Inspector General’s ruling, the Board vacated Hy-Brand, putting Browning-Ferris back in place.

In the late spring of 2018, NLRB Chairman John Ring announced that the Board would issue regulations addressing the “joint employer” issue. The proposed regulations, issued in September, would restore the pre-2015 standard, which required that the entity exercise “direct and immediate control” over the other entity’s workers before it could be considered a joint employer.

The NLRB has extended the comment period on the proposed regulations several times. At the time of this article,  comments were due January 28, 2019 and replies to comments were due February 11, 2019. The Board stated the reason for the extension as follows: “In light of the unique circumstance presented by the December 28, 2018 issuance by the United States Court of Appeals for the District of Columbia Circuit of its decision in Browning-Ferris Industries of California v. NLRB … [the Board] is extending the time for submitting comments … in order to permit issues raised by that decision to be addressed.” It added, “Due to the partial government shutdown, the Office of the Federal Register is unable to publish the notice of this extension.”

While the Board’s rulemaking was taking place, Browning-Ferris Industries of California, Inc., was seeking court review of the 2015 Board decision, resulting in the D.C. Circuit decision issued as 2018 ended.

The D.C. Circuit Decision

The panel majority, in an opinion written by Judge Patricia A. Millett and joined by Judge Robert L. Wilkins, held that because the NLRA does not define “employer,” the law should be interpreted consistent with common law. Thus, the common law of agency controls who is a “joint employer” under the NLRA. Under the common law, Judge Millett said, unexercised reserved control and indirect control are relevant factors in the joint employer inquiry, and the NLRB can weigh those factors as it wants. Thus, to the extent that the NLRB had viewed reserved and indirect control as factors in determining joint employer status, the 2015 Board decision was proper.

However, the panel majority went on to find that the 2015 Board panel majority in Browning-Ferris Industries had failed to distinguish between indirect control over essential terms and conditions of employment – which is relevant to the joint employer inquiry – and indirect control over routine matters related to contracting — which is not relevant. According to the majority opinion, the Board needed to distinguish between types of indirect control that affect employees’ “essential terms and conditions of employment,” in contrast to those that are “intrinsic to ordinary third-party contracting relationships between companies.” Thus, the majority remanded the case to the NLRB, directing it to make the proper application of the factors relevant to “essential terms and conditions of employment.”

Unfortunately for employers, labor unions and labor practitioners, the D.C. Circuit panel majority did not provide a comprehensive listing of the factors that are relevant to the joint employment inquiry. Likewise, it did not clarify whether unexercised reserved or indirect control – standing alone – would be enough for a finding of joint employer status. Judge A. Raymond Randolph, dissenting, argued that the majority opinion was both “confused and confusing,” at least in part, because it did not address this critical issue.

Judge Randolph also argued that the court should have sent the case back to the NLRB to allow the current Board majority to complete the ongoing rulemaking process related to the joint employment issue. Finally, he argued that the majority opinion misinterpreted the common law of agency.

What Now for Restaurant Franchisors, Franchisees, and Chain Owners and Operators?

The D.C. Circuit decision can be read to restrict the Board’s ability, either through case adjudication or rulemaking, to restore the pre-Browning Ferris standard, which would have required a “joint employer” to exercise direct and immediate control of employees. Applying the common law of agency, a future Board could find “joint employment” whenever the entity in question had reserved or indirect control over the employees of another entity, even if that control was never exercised. The court’s decision may provide ammunition to organized labor and its political supporters to continue or even step up their efforts to cast broad “legal nets” under the NLRA to capture franchisors, parent corporations, and joint venture partners as “joint employers” of employees of franchise or chain restaurant operations. That has long been one of their goals, with well-publicized Board litigation against McDonald’s being a prime example.

Next steps in the joint employment epic may include a request from either the Board or Browning-Ferris for en banc review by all D.C. Circuit judges. In the alternative, or after an en banc decision, the unsuccessful party could request review by the U.S. Supreme Court. In the meantime, the Board with its current Republican majority is likely to press forward with its joint employment rulemaking regardless of the D.C. Circuit decision.

Legislative Action is Unlikely While Congress is Divided

Status as a “joint employer” can arise under the NLRA in various contract and ownership situations in and outside of the restaurant business, potentially including contracting-out of operations, employee leasing, staffing agencies and their clients, parent corporations and subsidiaries, joint ventures, franchising, subcontracting, licensing, creditor-debtor, and trustee in control relationships in any industry unless the Board has given up jurisdiction. Any employing entity in one of these relationships may find itself caught up in a “joint employment” quandary at some point. Restaurant groups with franchise or subsidiary chain operations will want to keep a close eye on the issue as it progresses at the Board and in the courts.

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