The National Labor Relations Board (NLRB) has fundamentally altered the workplace landscape for companies that hire contractors to staff their facilities.

The NLRB ruled in a 3-to-2 decision yesterday that a company that hires a contractor to staff its facilities may be considered a joint employer of the workers at that facility, even if the company does not actively supervise them. A union representing those workers would therefore be legally entitled to bargain with the parent company, not just the contractor, under federal labor law.

The ruling, which is likely to be challenged in court, could also expose employers to regulatory and legal liability based upon the actions of contractors.

“The ruling is bad news for employers in many industries who use third-party labor providers. Companies use labor contractors to staff up during busy times or to permit themselves to concentrate on their core business, but the NLRB ruling may change that,” said Gary MacDonald, Executive Vice President of the Employers Resource Group at Associated Industries of Massachusetts.

NLRB Chairman Mark Gaston Pearce was joined by fellow Democrat-appointed members Kent Y. Hirozawa and Lauren McFerran in the majority opinion; Republican members Philip A. Miscimarra and Harry I. Johnson III dissented.

“The majority’s decision will have the effect of disturbing legitimate business relationships and cause businesses to become embroiled in the labor disputes of their commercial partners,” said Rob Fisher, a labor lawyer for the Boston law firm Foley Hoag LLP and chair of the AIM Human Resources Committee.

“What is disingenuous about the decision is the majority’s repeated insistence that it merely restated the existing joint employer test.  As the dissent correctly points out, the majority’s approach removes all limits on the kind or degree of control necessary for joint employer status.  This a major shift in federal labor law.”

The NLRB applied what it called long-established principles to find that two or more entities are joint employers of a single work force if (1) they are both employers within the meaning of the common law;  and (2) they share or codetermine those matters governing the essential terms and conditions of employment. In evaluating whether an employer possesses sufficient control over employees to qualify as a joint employer, the NLRB said it will – among other factors – consider whether an employer has exercised control over terms and conditions of employment indirectly through an intermediary, or whether it has reserved the authority to do so.

The consequences of the ruling could be far reaching. Here are a few examples:

• A contractor that provides laborers to a distribution center is charged by the NLRB with an unfair labor practice. Any judgement could be entered against the distribution center operator as a joint employer.  That judgement could in very rare instrances include a so-called Giselle ruling against the third party requiring them to recognize a union in lieu of a vote.  The distribution center operator could be compelled to continue to use the third party employees even though they now may be no longer cost effective.
• A union organizes a single unit of a franchised fast-food operator.  The parent company could be compelled to negotiate with the union and, by extension, provide financial support if the economic circumstances of the franchisee prohibit funding the new contract. If the corporate parent were to agree to pay higher wages or provide better benefits, it would apply only to that particular restaurant, in the same way that concessions granted to employees in a single unionized portion of a national company that is not franchised apply only to that portion. At the same time, however, the concessions may give unionized employees at other locations practical leverage in their negotiations with the company.

“This change will subject countless entities to unprecedented new joint-bargaining obligations that most do not even know they have, to potential joint liability for unfair labor practices and breaches of collective-bargaining agreements, and to economic protest activity, including what have heretofore been unlawful secondary strikes, boycotts, and picketing,” Miscimarra  and Johnson wrote in their dissent.

Employers believe they should not be required to bargain with employees of their contractors or franchisees, and should not be held liable for labor-law violations involving workers over whom they exert only indirect supervision. The NLRB rejected that logic.

“It is not the goal of joint-employer law to guarantee the freedom of employers to insulate themselves from their legal responsibility to workers, while maintaining control of the workplace,” the labor board majority wrote.

Fisher at Foley Hoag warns that businesses with existing contracts for the supply of workers or subcontracting arrangements should not assume that the decision is stayed pending the outcome of any court challenges.

“The NRLB’s position is usually the opposite, so we can assume that unions will now be asserting the new joint employer test and that the NLRB will be applying it.  I certainly encourage businesses to review their contractual relationships and to identify potential areas of risk.  However, the Board’s apparent emphasis on indirect control as being sufficient to establish joint employer status means that normal contractual demands relating to the timing, manner and quality of performance by a vendor may be enough,” he said.