Federal Judge Guts DOL Joint Employer Rule; Unions Cheer

Should a company be liable for negotiating a collective bargaining agreement alongside one of its contractors or franchisees even if it doesn’t set any workplace rules? U.S. District Judge Gregory Woods of the Southern District of New York thinks it should. On September 8, Judge Woods struck down a key portion of a rule change finalized in January by the Department of Labor that narrowed the circumstances for assigning an employer ‘joint’ or ‘dual’ status and thus forcing it to collectively bargain. The DOL rule, he concluded, contravened the Fair Labor Standards Act, and was “arbitrary and capricious.” Attorneys general in 17 states and the District of Columbia had filed suit in late February to enjoin enforcement. As a result of the decision, unions have a far wider basis for suing an employer for unfair labor practices.

Union Corruption Update has covered this deceptively crucial issue several times (see here and here) in the context of recent decisions by the National Labor Relations Board (NLRB). In August 2015, the NLRB, at the time possessed of a 3-2 pro-union majority, ruled that a parent company, Browning-Ferris Industries (BFI) of California, had to negotiate with one of its labor contractors, Leadpoint Business Services, which was in contract talks with International Brotherhood of Teamsters Local 350. The union represented workers at a Milpitas (Santa Clara County) recycling plant. Leadpoint was the direct employer, setting wages, benefits, schedules and other labor standards. The local, knowing that Browning-Ferris had far deeper pockets than Leadpoint, saw it to its advantage to force BFI into those talks. Yet before that could happen, Browning-Ferris had to be classified as a joint employer. And the company was not about to go along with that. BFI did not exercise “direct and immediate control” over the worksite – the standard that the NLRB itself had established in a pair of rulings back in 1984 with respect to a “vertical” employer relationship with a franchisee or a contractor, as opposed to a “horizontal” relationship in which two employers share the same functions.

Unable to convince Browning-Ferris to negotiate, Local 350 filed suit against the firm with the National Labor Relations Board’s Oakland regional office. The office in turn in August 2013 ordered a representation election held. Plant workers voted for representation. But the office later would rule that BFI’s role did not meet the “direct and immediate control” threshold, and ordered all ballots indefinitely impounded. The Teamsters appealed to NLRB headquarters in Washington, D.C. The prospects for overturning the decision was good. Then-NLRB General Counsel Richard Griffin already had recommended broadening the definition of a vertical joint employer to include indirect as well as direct control. This led a path to the August 2015 NLRB decision and a 2016 Labor Department legal interpretation (there had been a similar interpretation in 2014) urging investigators to look at the “economic realities” of the workplace. A large company that farms out labor operations to a third party to avoid negotiating with a union, asserted the board and the department, can be an employer of record even without exercising direct control.

Unions now had a powerful weapon for organizing. But they soon would encounter a new problem: the election of Donald Trump as president in November 2016. In short order, the new Trump administration rescinded the Obama-era DOL memos and made appointments to the NLRB that gave the board a majority that leaned toward individual worker choice. A reversal of Browning-Ferris happened in December 2017. The board, in Hy-Brand Industrial Contractors, Ltd., ruled 3-2 that proof of potential direct control is not sufficient to establish a joint employer relationship. The restoration, however, would be short-lived. In February 2018, the board vacated Hy-Brand on the grounds that a member of the majority, William Emanuel, previously had worked for a law firm involved in the case and thus should have recused himself.

The NLRB then worked on developing a new rule to clarify joint employer status in accordance with the National Labor Relations Act. In September 2018, the board issued a Notice of Proposed Rulemaking that would assign a company joint status “only if the two employers share or codetermine the employee’s essential terms and conditions of employment, such as hiring, firing, discipline, supervision and direction.” In effect, the NLRB was proposing a pre-Browning-Ferris standard. The rule change received nearly 30,000 public comments. With some modifications, it became final on February 26, 2020.

Parallel to this, the U.S. Department of Labor had developed its own joint employer standard. Using the Fair Labor Standards Act as a guide, the regulation, announced on January 12, 2020 and published in the Federal Register days later, while not legally binding, was intended as a guide for deciding whether a parent company could be liable for labor violations committed by a subordinate employer. The new rule, the first DOL effort since 1958 to clarify the nature of a joint employer relationship, was well-timed. The previous month, McDonald’s prevailed in a long-running dispute with various labor organizations. While a truncated NLRB, by a 2-1 margin, ruled that the restaurant chain had to pay $170,000 to settle worker claims against plaintiff franchisees, more importantly, the board concluded that McDonald’s was not a joint employer and therefore not bound by franchisee workplace rules.

The heart of the final rule was a “four-factor balancing test.” What defined a joint employer was whether the parent company: 1) hires or fires employees; 2) supervises and controls employee work schedules or conditions of employment to a substantial degree; 3) determines employee rates and methods of compensation; and 4) maintains employee work history records. The NLRB and the courts, stated the DOL, must take into account these factors when making a determination even though a potential joint employer would not have to meet all four criteria. The rule, which went into effect on March 1, applies only to the Fair Labor Standards Act and not to other legislation such as the National Labor Relations Act, the Occupational Safety and Health Act, and state wage and hour laws.

Trump administration officials expressed the belief that the DOL regulation would clear away the confusion surrounding the issue. In a January 12, 2020 guest column for the Wall Street Journal, Labor Secretary Eugene Scalia and Acting White House Chief of Staff Mick Mulvaney explained: “The new rule…gives companies in traditional contracting and franchising relationships confidence that they can demand certain basic standards from suppliers or franchisees – like effective anti-harassment policies and compliance with employment laws – without themselves being deemed the employer of the other company’s workers. That will help companies promote fair working conditions without facing unwarranted regulatory costs.” The International Franchise Association likewise praised the rule as “a return to a simple, clear, and thoughtful joint employer standard.” According to a IFA study released in January 2019, the Obama-era standard has triggered numerous unjustified lawsuits against “vertical” employers, destroyed between 194,000 to 376,000 jobs a year, and cost the U.S. economy between $17.3 billion to $33.3 billion a year.

Labor officials, by contrast, were highly displeased. In April, the general counsel for each of the AFL-CIO and the Service Employees International Union, in a letter to NLRB Chairman John Ring, urged postponement of the rule. Officials across nearly a dozen and a half states, virtually all of them non-Right to Work, also were exercised. On February 26, 2020, their attorneys general, led by New York State’s Letitia James, filed suit in Manhattan federal court to enjoin enforcement. “The final rule,” stated the complaint, “would upend this legal landscape by providing a de facto exemption from joint employment liability for businesses that outsource certain employment responsibilities to third parties.” In a rather incendiary statement, James asserted, “The new rule, which would result in lower wages and additional wage theft targeting lower- and middle-income workers, demonstrates that the Trump administration does not care about the hardworking individuals that help this country run.” The Washington, D.C.-based Economic Policy Institute, a Left-leaning think tank, estimated in late 2018 that the Department of Labor regulation, then in its proposal stage, would cost workers about $1.3 billion each year in wages.

For now, the unions and allied state governments have prevailed. On September 8, U.S. District Judge Gregory Woods, an Obama appointee, in New York v. Scalia, struck down the “vertical” employer provisions of the DOL rule. In his 62-page decision, Woods concluded that the new regulation exceeded Fair Labor Standards Act statutory authority and mistakenly used separate tests to determine if a business entity qualifies as a joint employer. The DOL’s four-part test spelled out in January, Woods emphasized, was “impermissibly narrow.” He also declared the rule “arbitrary and capricious” because it contained unexplained inconsistencies, conflicted with the definition of joint employment under the Migrant and Seasonal Agricultural Workers Protection Act, and did not consider its cost impact on employees.

What will be the Trump administration’s next move? The Labor Department reportedly is considering an appeal. But winning may take mounds of paperwork. “If the Department departs from its prior interpretation, it must explain why,” Judge Woods wrote. “And it must make more than a perfunctory attempt to consider important costs, including costs to workers, and explain why the benefits of the new rule outweigh the costs. Because the Final Rule does none of these things, it is legally infirm.” Such a directive appears a case of loading the dice. Cost-benefit analysis, by its nature, is laden with subjective judgment. Any future alternative that the DOL puts forth to a court can be rejected for virtually any reason. This raises the larger issue: Why should business enterprises be forced to negotiate over workplace terms and conditions which they did not establish and don’t enforce? Franchising and contracting (including subcontracting) provide real opportunities for flexibility and business ownership in our economy. Organized labor and its allies are making clear that they have no use for such things.