Customers of Staffing Agencies and Other Service Providers To Face Increased Risk of "Joint Employer" Obligations Under New Labor Board Ruling

Less than two years ago we commented on the inability of the National Labor Relations Board (NLRB or Board) to gather a legally sufficient legal quorum, let alone promote the pro-union agenda that both US business and labor groups expected from an NLRB appointed by President Obama. What a difference a year—and a constitutionally valid 3-2 majority of union-backed appointees—makes.

In Browning-Ferris Industries of California d/b/a BFI Newby Island Recyclery, 362 NLRB No. 186 (Aug. 27, 2015), the NLRB reversed longstanding precedent to broaden the circumstances under which a union can demand joint bargaining with both a staffing agency (or other labor supplier) and the client that contracts for the agency's labor.¹ This is easily the most pro-union decision of the NLRB under President Obama.

As a result, companies who use contractors to perform labor—either core labor, such as agency workers used to supplement regular employees on a factory floor, or ancillary labor, like cafeteria workers on a university campus—will find themselves embroiled in union negotiations. All that is now required is that the client company (that is, the one hiring the labor supplier) has an "indirect" or even "reserved" right to control the essential terms and condition of workers' employment. As discussed below, this is intended to be a very broad test.

In this Advisory, we will briefly discuss the background of the NLRB's Browning-Ferris decision, what the case holds (and what it does not hold), and what industries and staffing practices are likely to be most affected by this expansive new doctrine. We will finally discuss some potential "workarounds" to the Browning-Ferris decision, although continuing NLRB scrutiny will make all but the most detached staffing arrangements vulnerable to joint-employer status. Following convention, we will describe the company that contracts for another company's services as the "client" company, and the company providing that service as the "supplier." Examples of "supplier" companies include temporary and staffing agencies, on-site service vendors providing security, food, or cleaning services, and tech industry "body shops."

Development of the Joint Employer Standard

It all started in the 1960s at four Greyhound Bus terminals in Florida. The Greyhound Corporation contracted with a local company to provide cleaning and maintenance services. The employees were on the payroll of the cleaning company, but the interstate bus company set schedules, specified the number of employees required, and provided most day-to-day supervision of the workers (indeed, the cleaning company did not have permanent on-site supervisors). In addition, Greyhound had the right to reject cleaning company personnel it found inadequate-a right it had in fact exercised. After several rounds of litigation, both the NLRB and the courts agreed that Greyhound and the cleaning company were joint employers and, as such, the union representing the workers could demand joint bargaining with both companies. See Greyhound Corp., 153 NLRB 1488, 1495 (1965), enf'd, 368 F.2d 778 (5th Cir. 1966), related proceeding reported sub nom. Boire v. Greyhound Corp., 376 U.S. 473, 481 (1964), rev'g injunction granted at 205 F.Supp. 686 (S.D. Fla. 1962), aff'd 309 F.2d 397 (5th Cir. 1962).

Despite various union attempts to read Greyhound and the joint-employer doctrine broadly, the NLRB historically required a high degree of shared control by the client and supplier companies before a joint bargaining obligation could be found. Over the years, the NLRB rejected arguments that "limited and routine" oversight of a supplier's workers could create joint employment. Instead, the NLRB found that "direct and immediate" control of the supplier's employees was required. In addition, contractual provisions permitting various forms of control over supplier employees were disregarded unless the evidence showed the client company actually exercised that control. Thus, the Board found that the following arrangements did not create a joint-employer relationship:

• A contract by which local delivery companies delivered express overnight packages to their final destination, even though payments to the local delivery companies were based largely on wage rates, and the express company even imposed a "maximum wage" on the local company.
• A warehouse company's agreement with a staffing agency to provide truckers who would drive routes determined by the warehouse company.
• A building management company's services agreement with a cleaning company, under which the building manager would frequently make direct requests of the cleaning company's employees.
• An outsourcing agreement in which a logistics company provided terminal and delivery services for dangerous chemicals on a cost-plus basis.

As we will see below, all of these cases would almost certainly be decided differently under the new standard announced last week in Browning-Ferris. (Indeed, the cases providing the first three examples were expressly overruled in Browning-Ferris, and the Board discusses the case spawning the fourth example as if it were obviously decided in error.)

The Browning-Ferris Decision and Its Holding

The NLRB's latest statement on the joint-employer doctrine started at a recycling facility in San Jose, California owned by Browning-Ferris International (BFI). The Teamsters union sought to represent a group of workers who worked at the facility but were employed by Leadpoint, a temporary agency. The Leadpoint workers performed various sorting and cleaning tasks. (The NLRB decision is unclear on the degree to which BFI employees also performed these tasks, although it states that BFI had at least one sorting employee at the facility.) The Teamsters' organizing petition asked the NLRB to direct a bargaining relationship with both BFI and Leadpoint as joint employers.

The regional NLRB office in Oakland dismissed the Teamsters' petition. It noted that the Leadpoint workers reported directly to Leadpoint supervisors, that Leadpoint was responsible for hiring, firing, and discipline of employees, and that Leadpoint could set its own benefits and wages (subject, however, to a "maximum wage" imposed by BFI to ensure that Leadpoint employees did not make more than BFI employees performing similar work). Based on the prior 30 years of NLRB case law, it would be difficult to quarrel with the regional office determination.

By a 3-2 majority (split along labor/management lines), the NLRB overruled the determination of its regional office. Instead, the Board determined that joint employment existed because BFI, even if it had insulated itself from meaningful direct interaction with the Leadpoint workers, still had enormous influence over their terms and conditions of employment. In so ruling, the Board expressly overruled numerous contrary cases.

Rendering its decision, the NLRB stated that it would continue to follow the decades-old "common law" test of employee status required under the National Labor Relations Act and Supreme Court case law. Nonetheless, the Board found that the common-law test does not require "direct and immediate" or "actual" control over a supplier's workers for a joint employment relationship to exist. Instead, the Board reasoned that such restrictions are inconsistent with the common-law test, as well as the goal of the National Labor Relations Act to promote meaningful collective bargaining.² The NLRB found the following three factors important to its ruling:

• Hiring. BFI required Leadpoint to follow BFI's employee selection guidelines, including passing a drug test. BFI prohibited Leadpoint from hiring former BFI employees who were ineligible for rehire. And BFI possessed the contractual right to reject Leadpoint employees, and had in fact requested that Leadpoint dismiss two employees in the past (who were then in fact dismissed).
• Supervision. BFI usually relayed directives to Leadpoint's supervisors and leads, who would then transmit them to Leadpoint's workers. The Board found that it did not matter that the directives were transmitted through Leadpoint management, as they were still binding on the workers and had originated with BFI. In addition, BFI specified the number of employees required to work at the facility, what their hours of work were, and whether overtime would be required. There was also evidence of instances where BFI managers directly supervised and/or communicated about work issues with Leadpoint's employees. The Board also noted that BFI was responsible for the speed of the sorting line and safety procedures in the facility.
• Wages. By virtue of a cost-plus contract, BFI exercised significant control over wages, since every wage was effectively subject to BFI approval. The Board found particularly significant that BFI imposed a "maximum wage" on Leadpoint workers (tied to BFI's own wage schedule).

Taken together, the Board concluded, these factors established the need for joint bargaining between the Teamsters and both Leadpoint and BFI. Without BFI at the bargaining table, the NLRB held, Leadpoint would be unable to meaningfully bargain over such issues as wages, discipline, productivity, and safety. Instead, Leadpoint would simply be able to pass off responsibility for these matters to an absent party (BFI). By requiring both "employers" to bargain, the Board reasoned, the pro-bargaining policies of the National Labor Relations Act would be better effectuated.

How Does This Work and Who's Next?

It is not difficult to foresee the headaches that the Browning-Ferris creates. The decisions states that each "joint employer" need only negotiate over the issues that lie within its control. As comforting as that may sound, it does not work so well in practice. In the facts of the Browning-Ferris case, for example, Leadpoint ran its own payroll and set individual worker wages, but BFI allegedly "controlled" wages via its cost-plus contract coupled with approval authority over wage increase and a wage cap. What happens in that scenario if one party but not the other wants to grant a wage increase? Will there be any circumstances under which the client company can terminate its arrangement with the supplier company to find cheaper labor, or will the union recognition obligation effectively chain the client to its unionized supplier?

The Browning-Ferris case also involves the simple scenario of a proposed union bargaining unit that involves only two joint employers. But there may be more than one. For example, imagine that a property services company manages a single-tenant office building. Browning-Ferris certainly creates a risk of joint employment for the property services company and its contracted janitorial company. But what if the tenant is also found to be a "joint employer" because its service requests result in work for the unionized janitors, or because it asks the property manager and/or the cleaning company to dismiss a rude or lazy janitor? As the two dissenting Members of the NLRB warn in their opinion, "no bargaining table is big enough to seat all the entities that will be potential joint employers under the majority's new standards."

The dissent also notes that the majority opinion sidesteps the potential for multi-customer bargaining units. Imagine, for example, a food services company that operates cafeterias for five different manufacturers in the same city. Is the union entitled to "joint employer" bargaining with all five local manufacturers, and if so, at one table or at five? Should it make a difference that the union represents workers at all five facilities in one combined bargaining unit or in five separate units? Current NLRB case law states that "multi-employer" bargaining can only take place if all the employers consent, but considering that the "joint employer" concept does not require employer consent at all, these distinctions need to be sorted out. In the meantime, companies and unions alike will struggle with the potential illegality of refusing to engage (or demanding to engage) in bargaining that may or may be consensual and/or multi-party. A related issue is whether the NLRB will lift its current ban on nonconsensual bargaining units that combine supplier company and client company employees, even if limited to the job site. Although not deciding that issue, the Browning-Ferris decision approvingly cites the Clinton-era decision (M. B. Sturgis, Inc., 331 NLRB 1298 (2000), overruled, Oakwood Care Center, 343 NLRB 659 (2004)) that previously allowed the Board to recognize such units.³

These permutations (and many others) will no doubt play out as organized labor seeks to organize "joint employer" workers under the new Browning-Ferris standard. Certain industries and arrangements are particularly likely to serve as proving grounds, indeed some are expressly teed up by the NLRB in its decision:

• Janitorial services, which were at issue in Browning-Ferris
• Other on-site service vendors
• Temporary agencies, which were also at issue in Browning-Ferris
• Staffing agencies for specialized services (such as IT)
• Technology industry "body shops"
• Any type of "cost-plus" services agreement, particularly if the client company has any authority to veto or approve wages paid under the agreement (which would be almost any cost-plus agreement)

One additional target is likely to be the franchise industry. Contrary to much media reporting, the Browning-Ferris decision is not a franchising case and specifically states that it is not deciding whether franchisors are joint employers with their franchisees. (That issue is instead likely to be decided in future cases, including a series of cases currently being heard involving McDonald's response to nationwide fast food worker protests.) The broad standard announced in Browning-Ferris may make it easier for employees of franchisees to assert joint-employment claims, but franchise models often involve less shared control of labor than typical supplier/client relationships.

Complicating all of these scenarios, the process for appealing a NLRB union recognition order is arcane and time-consuming. Thus, a federal court of appeals may ultimately reject or limit the Board's decision, but absent extraordinary circumstances, the Board will continue to follow Browning-Ferris for years (unless a new NLRB reverses the decision first).

Potential Workarounds

The Board in Browning-Ferris states unapologetically that it is promoting a pro-bargaining agenda over client companies' desire to avoid bargaining obligations. As such, client companies should not assume that it will do to redraft their supplier agreements and call it a day. For example, there appear to have been abundant provisions in the BFI/Leadpoint contract stating that Leadpoint was the workers' sole employer and that all personnel decisions were reserved to Leadpoint.

Instead, to avoid joint-employer liability, it may not be enough just to have an arms-length agreement-maybe there needs to be a football field of distance instead. It is possible, for instance, that switching from an express or de facto cost-plus agreement to a contract based on a different unit of measurement may survive scrutiny. For example, a cleaning contract that pays a flat fee by the square foot may show less control than a cost-plus agreement. Or perhaps instead of paying a vendor to operate a cafeteria, a university leases space to a cafeteria company that will have to survive on basic profit-and-loss principles.

But when labor-intensive services are being purchased, there are few good substitutes for cost-plus contracts. And even if a substitute is found, Browning-Ferris still allows the Board to scrutinize it. For example, the Board states that if a service contract is renegotiated after an increase in the applicable minimum wage, then there is evidence of joint-employer status. The perverse lesson is that letting the supplier company lose its shirt is to be preferred over bailing it out when it faces increased labor costs.

Finally, clients of supplier companies may face a choice that employers have faced before under the current NLRB: whether to gamble that the federal courts will ultimately fail to enforce the broader joint-employment standard and/or that the NLRB will eventually retreat on the issue, especially if the next occupant of the White House is less sympathetic to organized labor. Such decisions require careful analysis of the legal risks as well as the reputational and other risks associated with refusing to bargain with a union.