NLRB Ruling Expands Contractors’ Liability for the Actions of Subcontractors

September 23, 2015

In an August 27, 2015 split decision, the National Labor Relations Board (“NLRB”) announced a new standard for determining when businesses will be considered to be “joint employers,” significantly expanding the scope of joint employer liability. Under this dramatic shift away from 30 years of NLRB precedent, prime contractors will be more readily held liable for their subcontractors’ labor law violations and they may be obligated to bargain with unions seeking to represent subcontractors’ employees.

The NLRB’s decision in BFI Newby Island Recyclery, 326 NLRB No. 186 (2015), involved a waste management company, Browning-Ferris Industries of California, and the staffing agency it used to obtain workers for some of its operations in a recycling facility, Leadpoint Business Services. Browning-Ferris and Leadpoint Business Services operated under a temporary labor services agreement which stated that Leadpoint was the sole employer of the employees supplied to Browning-Ferris and that nothing from the parties’ arrangement created an employment relationship between Browning-Ferris and the employees that Leadpoint supplied.

The union argued that Browning-Ferris was a joint employment because it shared or codetermined essential terms and conditions of employment, including “employment qualifications, work hours, breaks, productivity standards, staffing levels, work rules and performance…dismissal, and wages.” In support of this point, the union highlighted that the wages of the Leadpoint employees were capped under the agreement between the employers and that, although each company had its own on-site supervisors and maintained separate human resources departments, Browning-Ferris exerted influence over Leadpoint’s disciplinary actions on more than one occasion.

The NLRB agreed with the union’s argument, finding that direct and immediate exercise of control over employees is not required to establish a joint employer relationship. Instead, a joint employer relationship may now be found if an employer exercises either direct or indirect control over some of the essential terms and conditions of employment. Moreover, joint employer status may be established even if the putative employer only possesses potential control over some of the essential terms and conditions of employment and has never actually exercised that control.

This standard reverses long held precedent that the determination of joint employer status focused on the actual exercise of control over employees, requiring that a joint employer’s exercise of control be “direct and immediate” rather than “limited and routine.” Such direct and immediate control typically meant that power over the essential terms and conditions of employment (i.e., wages, hours, hiring, firing, discipline, and direction of work) had to exist and be exercised by a putative employer before a finding of joint employer status was possible.

This new standard for evaluating joint employer status has broad implications for both prime contractors and subcontractors alike because, as the dissenting members of the NLRB pointed out in a scathing dissent, the majority’s decision “leaves employees, unions, and employers in a position where there can be no certainty or predictability regarding the identity of the ‘employer.’” Under BFI Newby Island Recyclery, a prime contractor now faces potential joint employer status with its subcontractors by, among other things:

  • Directing the number of workers to be supplied;
  • Managing scheduling, seniority, and/or overtime;
  • Assigning work; and/or
  • Determining the manner and method of work performance.

A prime contractor engaging in such actions, or simply reserving the authority to do so, now faces potential liability for labor law violations committed by subcontractors. It may also be more difficult to defeat union petitions for representation on a theory of joint employer status, meaning that prime contractors may be tangled in negotiations with unions representing subcontractor employees, adding compliance and other associated costs to already strained margins.

Subcontractors also have cause to be concerned as prime contractors may attempt to exert more control over subcontractor activity to ensure that subcontractors’ operations conform to the prime contractor’s policies and operations. Alternatively, rather than facing unknown liability, many prime contractors may feel compelled to simply perform much of the work that previously would have been subcontracted out.

The NLRB’s decision provides little guidance as to what types of arrangements between businesses will not be subject to joint employer liability and such parameters will likely not be known until further cases are litigated in years to come. In the interim, contractors should be prepared to carefully evaluate their sub and prime contractor arrangements for the risk of joint employer liability and put processes and policies in place to defend against any potential claims.

About the Author: Corey Argust is an associate with PilieroMazza in the Labor and Employment, Litigation, and Government Contracts groups. He may be reached at cargust@pilieromazza.com.

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