Texas Federal Judge Strikes Down NLRB’s New Joint-Employer Rule

Quick Hits

• A U.S. District judge in Texas struck down the NLRB’s new joint-employer rule that would have placed more employers at risk of being deemed joint employers.
• The ruling found that the new rule failed to create a clear standard for employers to follow and that the NLRB’s rescission of a prior rule was arbitrary and capricious.
• The new NLRB rule was set to take effect on March 11, 2024.

In Chamber of Commerce of the United States of America v. National Labor Relations Board, U.S. District Judge J. Campbell Barker struck down the NLRB joint-employer rule published in October 2023, finding the NLRB’s new test was unlawfully broad because an entity could be deemed a joint employer simply by having the right to exercise indirect control over one essential term.

The judge further found that the Board’s rescission of the prior rule was “arbitrary and capricious” and restored the rule published by the Board in 2020 under the Trump administration. The district court decision was issued just days before the new rule was set to take effect on March 11, 2024.

The NLRB’s new joint-employer rule had raised concerns with employers, particularly those that rely on staffing agencies or subcontractors, as it created a risk that employers would be deemed joint employers and be forced to bargain with employees over various terms and conditions over which they only have indirect influence.

2023 NLRB Joint-Employer Rule

In October 2023, the NLRB issued its new rule for determining whether two or more entities may be considered joint employers of a set of workers for purposes of the National Labor Relations Act (NLRA). Under the prior 2020 rule, entities may only be considered joint employers if they exercise actual and direct control over a specified and clearly defined list of essential terms and conditions of employment.

Under the 2023 rule, employers could be considered joint employers if: (1) they shared “an employment relationship with those employees under common-law agency principles” and (2) they “share[d] or codetermine[d] those matters governing employees’ essential terms and conditions of employment,” which the rule defined as having “control (whether directly, indirectly, or both)” over “one or more of the employees’ essential terms and conditions” whether or not the entity actually exercised such control.

The new rule further enumerated seven specific “essential terms and conditions of employment” based on what the Board considers to be “core subjects of collective bargaining”: “(1) wages, benefits, and other compensation; (2) hours of work and scheduling; (3) the assignment of duties to be performed; (4) the supervision of the performance of duties; (5) work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline; (6) the tenure of employment, including hiring and discharge; and (7) working conditions related to the safety and health of employees.”

The rule would have required entities deemed joint employers to collectively bargain with the representatives of the employees over the terms and conditions over which they possessed control, even if those terms were not considered “essential.” Importantly, this would have applied regardless of whether a putative joint employer retained direct or indirect control on those terms and conditions of employment and regardless of whether the putative joint employer actually exercised such control or simply retained the right to do so in the future.

The Chamber of Commerce and a group of business representatives challenged the new rule, alleging that it is inconsistent with the common law and that it is arbitrary and capricious in that it ignores the practical impact the ruling will have on employers and labor relations. In pushing for summary judgment, the plaintiffs argued that the second part of the test is always met when the first part of the test is met.

The Board had postponed the December 26, 2023, effective date of the rule to February 26, 2024, which was further postponed by the district court to March 11, 2024.

‘Disruptive Impact’ and ‘Labor Strife’

In his decision, Judge Barker agreed with the plaintiffs that the first part of the test under the 2023 joint employer rule—that the entities have a common-law employment relationship with the workers—subsumes the second part or that the second part does not add anything meaningful to the test.

The judge found that any employer under common-law agency principles “must have the power to control ‘the material details of how the work is to be performed’” and would thus meet the rule’s “test for determining an essential term and condition of employment.” The judge pointed out that even the Board “has not been able to come up with any example of an entity satisfying step one but not step two.”

While falling short of finding the rule itself was arbitrary and capricious, Judge Barker found that the rule failed to establish a clear standard for employers and ignored the practical implications for employers, particularly on contractor and subcontractor relations. The judge noted that the rule would “likely promote labor strife rather than peace by forcing an underdefined category of entities to take a seat at a bargaining table and negotiate over a multitude of influences that may otherwise be presented (and resolved) only through the invisible hand of the marketplace.”

Additionally, the judge ruled that the Board’s decision to rescind the 2020 rule, which was based on its alleged contrariness to common-law agency principles and/or its otherwise alleged failure to promote the policies of the NLRA, was “arbitrary and capricious” under the Administrative Procedure Act (APA).

The judge found the NLRB’s rationale for rescinding the rule to be “legally erroneous” since the Board “has long been permitted to draw on its expertise to erect prudential requirements” within the bounds of the common law. Even the Board’s understanding of “the lawfulness of the 2020 rule is ‘internal[ly] inconsisten[t]’” as the purported second step of the 2023 test would have “limit[ed] the class of common-law employers that qualify as joint employers,” the judge said. 

Key Takeaways

The NLRB’s 2023 joint-employer rule would have expanded the joint-employer rule and created a risk that entities could be deemed joint employers over workers of a separate company simply if the putative joint employer exercises or retains the right to exercise (even if not exercised in reality) direct or indirect control over a large range of “terms and conditions of employment.” In particular, the rule did not contain carve-outs or exceptions for certain industries or make clear how it would impact common business relationships, particularly regarding the construction industry, franchisors, staffing agencies, and healthcare companies.

Judge Barker’s ruling struck down the rule, at least for now. The NLRB is reportedly exploring its options on whether to appeal the ruling to the Fifth Circuit Court of Appeals or reexamine its efforts to expand its joint-employer rule. However, even under the recent case law standard that applied prior to the now-stricken rule, employers may want to consider the risk that they can still be found to be a joint employer of another company’s employees if they do actually exercise “substantial direct and immediate control” over “essential terms and conditions of employment,” such as hiring, discipline, firing, wages, and other employment benefits.

Ogletree Deakins’ Traditional Labor Relations Practice Group will continue to monitor developments and will provide updates on the Texas and Traditional Labor Relations blog.

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