NLRB Joint Employer Rule Overturned by NY Appeals Court

In March of 2020, the National Labor Relations Board issued its final guidance on joint-employer relationships. The new rule covers the employee-employer relationships between independent contractors and workplaces. In a move that was largely applauded by businesses, the NLRB set guidelines defining if a worker is (or should be) an employee of the company versus and they are independent contractors. The rule provided clarity on the joint-employer relationship and aligned it, according to the NLRB, with the Fair Labor Standards Act.

The guidance provided much needed clarification, including criteria that businesses must meet to be considered an employer of record. Under the new definition, if the business does not have “substantial direct and immediate control over the essential terms and conditions of another company’s employee,” they are not considered a joint-employer. A company must have, under the rule which reverted the NLRB definition back to its 2015 iteration, authority over:

• Wages
• Benefits
• Hours
• Hiring/firing
• Discipline
• Supervision
• Direction of the employee

Without these significant controls, independent contractors, temps, and other business-to-business providers do not classify as employees of a company. Without the joint-employer relationship, a business is largely exempt from a variety of responsibilities. These responsibilities include payroll taxes, benefits, and exclusions from discrimination and harassment laws.

Under the new definition, if the business does not have “substantial direct and immediate control over the essential terms and conditions of another company’s employee,” they are not considered a joint-employer.

4-point test

Applauded by many businesses, the new rule provided employers a simple, 4-point test to determine whether a worker is correctly classified as an independent contractor. The test includes whether or not a business:

1. Hires or fires the employe
2. Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree
3. Determines the employee’s rate and method of payment, and
4. Maintains the employee’s employment records

The rule further clarified that a single point does not establish joint-employer status and all the factors must be weighed. While businesses claimed the new rule as a win, independent contractors for many national corporations — particularly rideshare and delivery services — disagreed.

Portions of joint-employer rule vacated

In September, however, major portions of the new NLRB rule were struck down by a federal judge in New York state. Finding that the guidance in opposition to the FLSA, the judge issued a 62-page ruling, citing that the NLRB inappropriately limited the definition of “joint employer” to the 4-part test.

Seventeen states and the District of Columbia took part in challenging the NLRB rule in the New York federal courts.

In his opinion, Judge Gregory Woods stated that the rule’s standard requiring a business to actually exercise control over workers was too vague. Therefore, he said it should be only one part of the overall determination of employee status. Seventeen states and the District of Columbia took part in challenging the NLRB rule in the New York federal courts.

The NY court’s ruling generally applies to “vertical joint-employment” relationships. These include, most notably, temp agencies — where the employer who pays the worker is the temporary service even though they have an assignment to work at another company. The court held the 4-point test had limitations in determining whether or not a company had direct and substantial control over an employee of an agency; it suggested previous versions of the FLSA definitions of an employee should apply. For business, the ruling indicates the use of a temporary employment service will not shield the business from its responsibilities under employment legislation.

Currently, the decision likely only applies to businesses under the jurisdiction of the Southern District of New York, but other federal courts may agree with and extend the decision to their areas. It’s presumed that the Department of Labor and businesses will appeal the New York Court’s decision.

And in California …

Effective January 2020, California’s Assembly Bill 5 (AB5) also sought to provide clarity on the joint-employer relationship. It created a 3-prong test to determine whether independent contractor status is valid for workers. AB5 codified a recent California Supreme Court ruling in Dynamex: the ABC test. The test defines independent contractors as workers:

1. Free from the control and direction of a business
2. Who perform tasks outside the usual course of the business, and
3. Who customarily engage in an independently established occupation or business of the same nature as the work they perform

Rideshare and delivery companies responded to AB5 with concerns about their independent contractors. AB2257, recently signed by California Governor Gavin Newsom, adds more clarity to exceptions to the AB5 rule, including a business to business exemption. But national companies, including rideshare providers, are still challenging both AB5 and AB2257. These challenges are an effort to maintain the independent contractor status of their workers.

Proposition 22 

A new ballot measure in California, backed by Uber, Lyft, and other app-based gig companies, was on the ballot for voters in November and passed. Proposition 22 exempts app-based companies, including delivery and rideshare services, from the directives of AB5 and AB2257.

The joint-employer rule is complex and will likely see challenges and revisions for many years to come. For many businesses, independent contractors are a means to get project work done; for others, temporary workers are necessary to fill gaps during employee leaves of absence. The gig-economy, booming pre-coronavirus, is now undergoing scrutiny as new laws are enacted. Across the country and state by state, legislators are looking for common sense regulations to protect workers and business.