Federal Court Strikes Down NLRB’s New Joint Employer Rule, Leaving 2020 Rule in Place for Now

At a Glance

• The 2023 rule, which was set to take effect on March 11, would have expanded the joint employer test to include reserved and indirect control — potentially exposing franchisors to claims that their franchise agreements and brand standards make them joint employers of their franchisee’s employees for purposes of collective bargaining and labor disputes.
• The federal district court concluded that the 2023 rule is unlawful because it would expand joint employment beyond the outer limits set by the common-law definition of employment.
• Other courts are likely to weigh in. The NLRB may appeal to the Fifth Circuit. A parallel suit brought by the Service Employees International Union regarding the scope of the 2023 rule is currently pending before the D.C. Circuit. Either or both of those cases may ultimately go to the U.S. Supreme Court.
• We conclude with two relevant handouts that identify franchisors’ best practices.

On March 8, 2024, a federal district court in Texas vacated the National Labor Relations Board’s 2023 joint employer rule. The 2023 rule, which was set to take effect on March 11, would have expanded the joint employer test to include reserved and indirect control — potentially exposing franchisors to claims that their franchise agreements and brand standards make them joint employers of their franchisee’s employees for purposes of collective bargaining and labor disputes. The court’s decision means that the NLRB’s narrower, more franchise-friendly 2020 rule remains in effect for now; but further action by courts and the NLRB is likely.

The NLRB’s 2020 and 2023 Joint Employer Rules

The battle over the NLRB’s definition of joint employment stretches back at least a decade, but the current litigation focuses on the Board’s two most recent rules.

In 2020, the NLRB issued a rule providing that an entity is a joint employer of another entity’s employees only if the entity exercises “substantial direct and immediate control” over one or more essential terms and conditions of employment. Reserved control and indirect control could be considered, but were not by themselves sufficient to create a joint-employer relationship.

In 2023, a differently constituted NLRB rescinded the 2020 rule and issued a new, two-part rule. Under the 2023 rule, an entity would be deemed a joint employer if it (1) has an employment relationship with the employee under common-law agency principles and (2) has the authority to control one or more of seven categories of essential terms and conditions of employment, including two that were not mentioned in the 2020 rule: “work rules and directions governing the manner, means, and methods of the performance” and “working conditions related to the safety and health of employees.” The 2023 rule also provided that reserved control or indirect control alone could meet the standard.

The Decision Vacating the 2023 Rule

Shortly after the 2023 rule was announced, the U.S. Chamber of Commerce, International Franchise Association and other business groups filed an action challenging the rule in the U.S. District Court for the Eastern District of Texas. The plaintiffs argued that the 2023 rule is both “contrary to law” and “arbitrary and capricious.”

In its March 8 decision, the court granted summary judgment to the plaintiffs and vacated the 2023 rule. Specifically, the court concluded that the 2023 rule is unlawful because it would expand joint employment beyond the outer limits set by the common-law definition of employment. As the court explained, the 2023 rule “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 court did not provide a “definitive resolution” of the plaintiffs’ arbitrary and capricious challenge to the 2023 rule, but it signaled that the rule likely would fail on this ground, too, because the NLRB failed to “reasonably address the disruptive impact of the new rule on various industries, resolve ambiguities in a way making the rule more predictable than common-law adjudication, or explain how the rule does anything other than mandate piece-meal bargaining.”

The court also vacated the portion of the 2023 rule that rescinded the 2020 rule. The rescission, the court held, was arbitrary and capricious because it lacked a sufficient rationale. The court rejected as “legally erroneous” the NLRB’s primary rationale that the 2020 rule “must be rescinded because it is contrary to the common-law agency principles incorporated into the Act.” Even assuming the 2020 rule was narrower than the common-law bounds, the court explained, the NLRB has discretion to act within those bounds based on its policy expertise. As for the alternative rationale of “policy considerations,” the court concluded that the NLRB had not articulated why, in the absence of the 2023 rule, it would be preferable to have no rule than to leave the 2020 rule in place.

What Comes Next

The court’s decision means that the 2023 rule has not taken effect and the 2020 rule remains in place. This decision, however, is almost certainly not the final word on the issue.

Other courts are likely to weigh in. The NLRB may appeal the March 8 decision to the U.S. Court of Appeals for the Fifth Circuit. A parallel suit brought by the Service Employees International Union regarding the scope of the 2023 rule is currently pending before the U.S. Court of Appeals of the D.C. Circuit . Either or both of those cases may ultimately go to the U.S. Supreme Court.

In addition, the SEIU previously filed a suit seeking to strike down the 2020 rule. That litigation has been on hold in light of the 2023 rule but may now come back to life.

Finally, the NLRB could start another rule-making process to rescind the 2020 rule. If the 2020 rule were rescinded or struck down in litigation, the joint employer standard would revert to the NLRB’s 2015 Browning-Ferris decision, as upheld in part by the D.C. Circuit in 2018. The standard from Browning-Ferris includes reserved and indirect control, but the D.C. Circuit held that the weight the Board assigned to such control exceeded the common-law limits.

Franchisors’ Best Practices

Given the uncertainty of where the joint employer odyssey ends and its ultimate impact on the franchise business model, franchisors are well served to examine closely any changes they can make to their franchise systems to reinforce the roles and responsibilities of the franchisor, franchisee and system as a whole.

Here are two relevant handouts that identify franchisors’ best practices:

• Five Best Practices for Franchisors to Reinforce and Protect Franchisor-Franchisee Relationship
• Utilizing the Franchise Agreement and Operations Manual to Protect the System and Appropriately Define the Roles and Responsibilities of the Parties