Late into the evening on Friday, March 8, 2024, after lengthy litigation and two delays of the rule’s effective date, the U.S. District Court for the Eastern District of Texas vacated the National Labor Relation Board’s (“NLRB”) new rule on the standard for determining joint-employer status (the “2024 Rule”). The vacated 2024 Rule, previously scheduled to take effect on March 11, 2024, greatly broadened the definition of “joint employer” under the National Labor Relations Act (“NLRA”) and would have had significant implications for employers and, specifically, government contractors.
What Was the 2024 Rule?
Under the vacated 2024 Rule, two or more entities would have been considered joint employers if the entities shared or codetermined control over at least one of the following seven “essential terms and conditions of employment,” which represent an exhaustive list:
- wages, benefits, and other compensation;
- hours of work and scheduling;
- assignment of duties to be performed;
- supervision of the performance of duties;
- work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline;
- the tenure of employment, including hiring and discharge; and
- working conditions related to the safety and health of employees.
An entity would be deemed to “share or codetermine” control—and thus would be considered a joint employer—if it (i) exercised direct or immediate control over one of these seven essential terms and conditions of another entity’s employees, or (ii) had indirect or reserved authority to exercise control (including control exercised through an intermediary) over of one of these seven essential terms and conditions of another entity’s employees, regardless of whether that control is actually exercised. This was the most impactful change in the 2024 Rule.
What Impact Would the 2024 Rule Have Had on Government Contractors?
In the government contracting industry—where prime-subcontractor agreements, mentor-protégé agreements, joint ventures, teaming agreements, and other forms of multi-entity collaboration are routine—the 2024 Rule would significantly impact government contractors. Considering that agreements between government contractors often contain provisions permitting one entity to exercise some degree of control over the essential terms and conditions of another entity’s employees, the 2024 Rule would have increased the likelihood of contractors facing claims from another entity’s employees. We discussed the impact of the joint rule on government contractors at length in a recent podcast by Berenzweig Leonard Managing Partners Declan Leonard and Seth Berenzweig released in late February.
What Was the Court’s Ruling, and What Happens Now?
In November 2023, the U.S. Chamber of Commerce and other business groups challenged the legality of the 2024 Rule. On March 8, 2024, upon motions for summary judgment from both parties, Judge J. Campbell Barker of the U.S. District Court for the Eastern District of Texas vacated the rule. He held that the NLRB overstepped its bounds with such a broad imposition on businesses.
The NLRB is likely to appeal this decision to the U.S. Court of Appeals for the Fifth Circuit. They could then request a stay of the order pending appeal to allow the new rule to go into effect. While it is unclear whether a stay will be granted, this litigation will continue for the foreseeable future.
What Joint Employer Rule is Currently in Effect?
The prior joint-employer rule, which went into effect on April 27, 2020 (the “2020 Rule”), currently remains in effect. The 2020 Rule sets a higher threshold for joint-employer determinations, providing that an entity will not be considered a joint employer unless it possesses and actually exercises such substantial direct and immediate control over the essential terms and conditions of another entity’s employees. Thus, the mere ability of one entity to exercise control over another’s employees will not trigger joint-employer status.
How Should Contractors React Amidst this Legal Uncertainty?
For now, contractors can take some comfort knowing the existing 2020 Rule and higher threshold remain in effect. However, given the ongoing litigation and the possibility of a stay of the court’s order, contractors should consider the following proactive measures in the event the 2024 Rule is ultimately permitted to go into effect:
- Review all contracts for language that provides for the ability to exercise control over any of the seven essential terms and conditions of employment of the employees of another entity.
- Consider revising the contracts to expressly remove the entity’s ability to exercise control over any of the seven essential terms and conditions of employment.
- Consider adding an indemnification clause into the contract providing that the direct employer of an employee will step in on the other entity’s behalf and compensate it for any damages or costs arising from a claim brought by an employee of the direct employer.
- Consider adding a representation clause in contracts providing that the entity does not have the ability to control any of the seven essential terms and conditions of employment.
- Assess the entity’s operations to determine whether the entity is, in practice, exercising control over the employees of another entity. This may involve training your front-line managers to avoid crossing the line into any of the seven essential terms and conditions in the new rule.
The case name is Chamber of Commerce of the United States of America et al. v. National Labor Relations Board et al., No. 6:23-cv-00553. Berenzweig Leonard will continue to monitor updates and developments related to this ongoing litigation. Please contact us if you have questions or concerns about your company’s potential status as a joint employer.
Charles Bonani is an Associate Attorney at Berenzweig Leonard. He works on a range of matters, including business litigation, government contracts, and employment law. He can be reached at cbonani@berenzweiglaw.com or (571) 615-0430.