U.S. Judge Blocks Rule Extending Reach of Labor Law to Franchisers

A federal judge, siding with business lobbying groups, has blocked a rule that would broaden the reach of federal labor law to make big franchisers like McDonald’s responsible for the conditions of workers they have not directly hired.

The judge, J. Campbell Barker of the United States District Court for the Eastern District of Texas, on Friday vacated a rule issued by the National Labor Relations Board determining when a company is a joint employer, making it liable under labor law for the working conditions of those hired by a franchisee or provided by a staffing agency. He said the rule, which was to go into effect Monday, was too broad.

The decision by Judge Barker, a nominee of former President Donald J. Trump, keeps in place a more business-friendly standard for assigning legal liability.

Unions and employees support the rule because it makes it easier to bargain for better conditions, while franchisers say it would disrupt their business model.

The U.S. Chamber of Commerce, which led a group of business groups challenging the rule, applauded the ruling. “It will prevent businesses from facing new liabilities related to workplaces they don’t control, and workers they don’t actually employ,” Suzanne P. Clark, chief executive of the chamber, said in a statement.

The labor board’s chair, Lauren McFerran, who was named by President Biden, said in a statement that the ruling was “a disappointing setback,” but “not the last word” on the joint-employer standard. If the board appeals the ruling, the case would move to the conservative U.S. Court of Appeals for the Fifth Circuit. The labor agency pushed for the case to be moved to Washington, but Judge Barker denied that request.

The rule in dispute, issued in October by the labor board’s Democratic majority, would classify a parent company as a joint employer if it has control — direct or indirect — over even one condition of employment. The current standard, adopted in 2020 when the board was led by Republicans, classifies a company as a joint employer only if it exerts direct control over workers.

Nurses hired by a staffing agency, for example, may work at a hospital that determines their schedules but does not directly establish their pay. If those nurses seek to unionize, they may argue that the hospital indirectly determines their pay based on how much it pays to contract their work. Under the rule issued in October, the hospital would probably be considered a joint employer, but under the current standard, it would have an easier time arguing that the onus falls only on the staffing agency that signs the nurses’ paychecks.

The new rule “would treat virtually every entity that contracts for labor as a joint employer because virtually every contract for third-party labor has terms that impact, at least indirectly, at least one of the specified ‘essential terms and conditions of employment,’” Judge Barker wrote in his decision.

The issue has big implications for companies like McDonald’s, which relies heavily on the franchise model in which most restaurants under its brand are operated by independent owners. Unions and businesses have for years disagreed on whether those chains should be required to come to the bargaining table and be held responsible for labor law violations.

The rule in dispute would expose virtually all franchisers because they are required to maintain certain standards over the operations handled by franchisees, said Jim Paretti, a lawyer at Littler Mendelson. His firm represented Associated Builders and Contractors and the International Franchise Association, two of the trade groups challenging the rule.

“That’s why they see it as an existential threat to the business model,” Mr. Paretti said.