Texas District Court Invalidates the NLRB’s Joint Employer Rule

By: Danielle Shapiro

Seyfarth Synopsis: Last Friday, March 8, 2024, the United States District Court for the Eastern District of Texas struck down the National Labor Relations Board’s (“NLRB”) 2023 Joint Employer rule (“2023 Rule”) finding that it was both unlawfully broad and arbitrary and capricious.

Background

The 2023 Rule contains the following relevant provisions:

• Subsection (a) provides that an “employer” is one who has an employment relationship with their employees under common-law agency principles.
• Subsection (b) states that two things are required to be a “joint employer”: (1) being an employer under the common-law test (along with one other employer) and (2) “sharing or codetermining matters governing [the employees’] essential terms and conditions of employment.”
• Subsection (c) clarifies that “sharing or codetermining” includes both actual control and possession or unexercised control over the employment terms.
• Subsection (d) then lists seven broad categories that constitute “essential terms and conditions of employment”— wages, scheduling, assignment of duties, supervision, work rules and discipline, hiring/firing, and working conditions related to the safety and health of employees.
• Finally, Subsection (e) details that “[p]ossessing the authority to control one or more essential terms and conditions” and “[e]xercising the power to control indirectly one or more essential terms and conditions” is sufficient to establish joint employer status.

The Court’s Analysis

The parties first disagreed over how the 2023 Rule operates in practice— while the Board argued that the regulatory framework implies the joint-employer inquiry has two steps (see Subsection (b)), the plaintiffs maintained that the inquiry is singular because the second test is always met when the first test is satisfied. When pressed by the court, the Board could not provide an example of any entity that would satisfy the first step, but not the second. For this reason, the court sided with plaintiffs on the first interpretive issued posed.

The parties then debated the proper interpretation of Subsection (e). The Board maintained that this Subsection was intended only to apply to the second step of the joint-employer inquiry, such that it “merely confirms that reserved or indirect control over an essential term is sufficient to satisfy this step.” The Court, in agreement with the plaintiffs, quickly dismissed the Board’s interpretation, holding that Subsections (e)(1) and (2) can be satisfied independently and thus joint-employer status can attach without the need to demonstrate an employment relationship under the common law of agency.

Newsworthy Findings

Notably, the court also held that the 2023 Rule is unlawfully broad. Specifically, Subsections (d) and (e) are drafted so broadly that every entity that contracts for labor would be deemed a joint employer. This is because the rule, as written, finds the existence of a joint employment relationship so long as the entity exercised or even has the power to exercise control over at least one essential term. The court astutely points out that this would render every single contract for third-party labor a joint employment relationship because every labor contract has terms that impact at least one of the “essential terms and conditions of employment” addressed in Subsections (d) and (e).

Finally, the court, finding that the Board did not address the “disruptive impact” of the 2023 Rule, deemed the Board’s actions arbitrary and capricious. The court chastised the Board for failing to serve the intention behind policymaking in the first place: to provide a definite, readily available standard to assist employers and reduce litigation. On this basis, the Court vacated the 2023 Rule.

Now What?

After invalidating the 2023 Rule, the court was left to determine whether the Board’s rescission of the 2020 Rule, in advance of the 2023 Rule, should still stand. The court ultimately determined that the Board’s initial justification for rescinding the 2020 Rule was also arbitrary and capricious. For this reason, the rescission was unjustified and the 2020 Rule remains.

So, today, the law stands as it has for the last couple of years: only exercise of substantial direct and immediate control over one or more essential terms or conditions of employment warrants finding the existence of a joint-employment relationship.

Note: This opinion also contains an interesting discussion about jurisdictional issues related to challenging the Board’s rulemaking under the National Labor Relations Act for all of the administrative law fans out there.