The NLRB Restores the Narrow Joint-Employer Standard: Strategic Implications for Employers

Introduction

For years, the American business community has operated under a regulatory sword of Damocles. The Biden-era National Labor Relations Board (NLRB) sought to fundamentally redefine the employment relationship, attempting to tether “deep-pocketed” secondary entities to labor liabilities based on nothing more than theoretical, unexercised contractual “reserved control.” Under this standard, the NLRB viewed a franchisor that reserves the contractual right to audit a franchisee’s safety records or mandate specific brand-standard uniforms, for instance, as the “employer” of the franchisee’s entire workforce and thus liable for any actions of the franchisee—all based on a theory of reserved contractual control.

On February 26, 2026, that sword was sheathed when the NLRB formally reinstated the 2020 “direct and immediate control” standard—a restoration of common sense that provides a much-needed shield for franchisors, staffing agencies, and subcontractors. This development brings a measure of welcome stability by ensuring that a company is no longer deemed a “joint employer” simply because it maintains the narrow and limited right to intervene in a third party’s operations. This article explains why.

The Regulatory Pendulum: How We Got Here

The definition of a “joint employer” under the National Labor Relations Act (NLRA) is the primary lever organized labor uses to expand bargaining units. By dragging a secondary entity to the table, unions gain leverage over the entity that actually controls the capital, even if it does not control the day-to-day workforce.

The Biden administration’s 2023 rule was an attempt to maximize this leverage. It proposed that a business could be deemed a joint employer based on “indirect” or “reserved” control over nebulous categories like “work rules” or “health and safety.” For instance, the Biden-era NLRB viewed contract provisions that require a subcontractor or franchisee to comply with wage and hour laws or to report worksite injuries as a form of indirect control that begets joint-employer liability. This standard effectively penalized businesses for maintaining brand standards or safety oversight, sweeping in control that existed only on paper, and only in the narrowest circumstances.

The federal judiciary, however, balked at this overreach. On March 8, 2024, the U.S. District Court for the Eastern District of Texas vacated the 2023 rule, branding it “arbitrary and capricious.” The court correctly identified that the rule failed to distinguish a true employer from a mere contractual partner. With the NLRB declining to appeal, the path was cleared for the formal return of the 2020 standard.

The Reinstated Standard: “Actual Exercise” is the Touchstone

The Board’s February 2026 action replaces the vacated text with the 2020 language, effective immediately. The “new” (restored) standard sets a high bar by design. An entity is a joint employer only if it possesses and actually exercises “substantial direct and immediate control” over essential terms and conditions of employment.

The rule identifies eight specific “essential terms” including wages and benefits, hours of work, hiring and discharge, discipline, supervision, and direction.

Under this standard, the “reserved right” to act is insufficient. For example, entering into a cost-plus contract or imposing general brand standards does not trigger liability. Deciding which specific individual to hire is “direct control”; requesting changes in staffing levels is not. Instructing a worker on how to perform a task may be supervisory; telling them what task to perform generally is not.

Crucially, indirect or reserved control is now relegated to “supplemental evidence.” It cannot, standing alone, sustain a joint-employer finding.

Strategic Implications: Why This Matters For Employers

For companies utilizing franchise networks or staffing agencies, this regulatory shift represents a significantly more favorable—and predictable—landscape. Franchisors can enforce quality control and brand integrity without inadvertently becoming the employer of the franchisee’s workforce; and by raising the threshold from “indirect” to “direct” control, the rule limits exposure to back-pay orders and remedies for labor violations committed by third-party vendors or subcontractors. Most critically, the new rule significantly mitigates the potential for a joint-employer designation, which would otherwise force a company to the bargaining table with a union it did not choose, representing workers it does not directly manage. The 2020 rule significantly mitigates this risk.

What Employers Should Do Now

While the 2020 rule is a victory, it is not a “get out of jail free” card. Prudent employers should take several proactive steps.

Operational Audit: Ensure the “day-to-day reality” matches the contract. If your field managers are routinely disciplining or scheduling a subcontractor’s employees, the 2020 rule will not protect you. You are exercising “direct and immediate control.”

Multi-Agency Awareness: The NLRB is only one player. The EEOC and DOL (under the FLSA) apply different tests. A relationship that passes muster under the NLRA may still trigger joint-employer liability for overtime or discrimination claims. Separate analyses under each area of law would be necessary to create a defensible strategy. However, it bears noting that on the same day the NLRB issued its joint employer rule, the DOL proposed rescinding the 2024 independent contractor rule and replacing it with a standard for employee classification similar to the one it adopted in 2021. The proposal must proceed through the full notice-and-comment rulemaking process, meaning any resulting rule will not take effect in the near term.

Anticipate the Pendulum: A challenge to the 2020 rule remains in the D.C. Circuit. The regulatory environment remains fluid; compliance frameworks must be built for durability, not just the current moment.

Supervisory Training: The frontline is where the risk lives. Supervisors must be trained on the boundaries of permissible interaction with third-party staff to avoid “inadvertent” employer status.

The reinstatement of the 2020 rule provides a vital window of stability. However, thoughtful structuring and ongoing monitoring remain the only true defenses against the shifting tides of federal labor law—at least while separate issues involving the constitutionality of the NLRB remain in litigation.

If you would like more information about how this decision effects your business, or if your business is in the jurisdiction covered by the court’s ruling, please contact Joe Kraska (jkraska@hallboothsmith.com or 501.435.3205), Abtin Mehdizadegan (abtin@hallboothsmith.com or 501.503.4445), or any member of Hall Booth Smith’s Labor and Employment team.

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