Will Sehestedt | TRANSPORTATION INTERMEDIARIES ASSOCIATION
The Trump Administration has placed a premium on encouraging business growth by cutting red tape and eliminating or clarifying burdensome regulations. One of the top regulatory priorities for TIA and other interest groups has been the reversal of a 2015 ruling by the National Labor Relations Board (NLRB) which blurred the lines for employers on the issue of joint employment. The expansive Obama-era ruling potentially creates major headaches for employers with business models that rely on franchising or subcontractors.
Of course, there may be no more fundamental relationships in freight brokerage and logistics than the contractual relationships between 3PLs and shippers, or 3PLs and carriers. Subcontracting is critical to the movement of freight by small and large companies throughout the supply chain. Companies use contracts to secure services in modes that are not a core competency, such as air or ocean freight, or act as subcontractors themselves for the inland legs of international freight movements. Even for purely domestic freight services, or for internal needs like technology assistance or facility maintenance, subcontracting is a critical part of how TIA members serve their customers and grow their businesses.
Classifying workers as independent contractors or employees, or as exempt or non-exempt employees, is a difficult task for small business owners. Misclassification puts employers at risk of long investigations by government agencies, judicial actions, and steep penalties. Avoiding the costs of those investigations and penalties is not cheap – a 2010 Small Business Administration study estimated that small companies bore a regulatory cost of $10,585 per employee, which was 36 percent higher than the cost of regulatory compliance for large businesses.
Regulators applied a “bright line” standard for joint employment prior to the 2015 NLRB Browning Ferris decision. Under this standard, joint employers had to have immediate and direct control over an employee without which the work that defines the relationship could not be completed. A company that was not involved in hiring, firing, or disciplining workers was not a joint employer under that standard. By outsourcing the responsibility over hiring, firing, disciplining, supervising, and directing labor to subcontractors and franchisees, companies could protect themselves from issues with organized labor such as collective bargaining, and benefitted from an ability to focus on a core competency or grow their main business.
With the bright line test in place for joint employment, business models relying on the protections of subcontracting and franchising flourished. The International Franchise Association estimates that there are more than 700,000 franchise businesses operating nationwide. Those businesses account for 7.6 million jobs, a payroll of $269.9 billion, and an overall economic output of $674 billion. Similarly, with the joint employer standards offering protection for logistics companies who have contracts with shippers and carriers, the 3PL industry has grown to $185.7 billion annually.
The Confusion: Reversal, Re-Reversal, and Re-Re-Reversal
In its 2015 Browning Ferris decision, the NLRB reversed its position on the decades-old bright line test. Browning Ferris Industries of California (BFI) owned a facility where it contracted Leadpoint Business Services to hire and fire the workers and to maintain the premises. BFI owned the equipment, set hours of operation on the equipment, and forwarded performance expectations for the facility to Leadpoint-employed supervisors. BFI also employed unionized workers outside the Leadpoint-maintained facility who sorted materials for processing by the Leadpoint-hired workers at the facility. Both BFI and Leadpoint had separate human resources departments, and Leadpoint made all employment-related decisions for the workers at the facility. However, the NLRB found that specific unique facts to the case – particularly that BFI was contractually allowed to impose hiring and drug tests on Leadpoint employees at the facility, and that BFI set general operating hours and specifications on productivity – gave BFI sufficient indirect control of facility workers to be considered a joint employer for purposes of labor organization.
As the strong dissent in Browning-Ferris noted, “The number of contractual relationships now potentially encompassed within the majority’s new standard appears to be virtually unlimited.” The ramifications of moving away from a bright line standard create challenges for small businesses. Business relationships that were previously easily defined could now be subject to legal challenge and additional costs. The importance of franchising and subcontracting to the national business community is difficult to overstate, and as a result, the muddying of the water around joint employment gave employers and business advocacy groups major concern.
Victory in the 2016 Presidential election gave hope to business-friendly interests in the Republican Party that Browning-Ferris could be reversed. Indeed, after his inauguration, President Trump quickly filled the two vacant NLRB Board seats with conservative appointees, giving rise to an expectation of rapid reversal. Eventually, in December 2017, the NLRB reversed Browning Ferris in its decision in Hy-Brand Industrial Contractors, Ltd. And Brandt Construction Co., reinstating the bright line test for joint employer determinations in a 3-2 decision.
In overruling the Browning Ferris standard, the NLRB emphasized that “proof of indirect control, contractually-reserved control that has never been exercised, or control that is limited and routine will not be sufficient to establish a joint-employer relationship.” Trump appointees Marvin Kaplan and William Emanuel joined NLRB Chairman Philip Miscimarra in the majority, and business owners across the country breathed a sigh of relief.
After all of the back-and-forth in 2017, industry is once again subject to the extremely broad joint employer standard. This standard could expose employers to risks of collective bargaining by employees, or of being found a joint employer if they directly or indirectly control work conditions for the employees of another company …
What Are the Next Steps?
Unfortunately for employers everywhere, in February 2018, the NLRB Inspector General and Administration ethics officials determined that William Emanuel should have recused himself from the Hy-Brand decision. The requirement for recusal was based on Emanuel’s past employment by the Littler Mendelson law firm, which represented one of the companies involved in the original Browning Ferris case which had its decision reversed in Hy Brand. Without Emanuel’s vote to sustain the majority decision, the NLRB was forced to throw out its Hy Brand ruling in February 2018, and reinstate the prior, unclear standard for joint employment from the 2015 Browning Ferris case.
After all of the back-and-forth in 2017, industry is once again subject to the extremely broad joint employer standard. This standard could expose employers to risks of collective bargaining by employees, or of being found a joint employer if they directly or indirectly control work conditions for the employees of another company (even if they do not implement that control). An employer that has the right to control terms and conditions of employment for employees of another entity (such as hiring, firing, discipline, supervision) could be found to be a joint employer.
In this environment, TIA members should be aware of their relationships with the employees of their contractual partners. The costs of not just collective bargaining and workplace organizing, but of employee misclassification issues or wage and hour violations, could potentially be disastrous for the thousands of small- and medium- sized companies in the North American 3PL industry.
TIA is closely watching developments related to the joint employment standard. TIA participates actively in the Labor Relations Committee of the U.S. Chamber of Commerce to support the business community on this issue and on related matters of major importance to business owners. For more information on this issue or other congressional and regulatory initiatives, please contact TIA Government Affairs staff at email@example.com or (703) 299-5700.
Will Sehestedt is Director of Government Affairs for the Transportation Intermediaries Association. He may be reached at firstname.lastname@example.org or (703) 299-5713.