A decision last August by the National Labor Relations Board continues to throw into question the tidy arm’s length relationship that private equity shops have maintained with their portfolio companies. Under a worst case scenario, sponsors may find themselves involved in collective bargaining with unions at portfolio companies, liable for any unfair labor practices, and on the hook for pension contributions.
Prior to the NLRB’s 3-2 decision in the Browning-Ferris Industries case, businesses relied on the so-called “joint employer standard” to determine whether employees of a second company worked for them as well when it comes to labor law. Do employees of a temporary staffing agency, for example, also work for the agency’s clients? Do employees of a franchise also work for the franchiser?
Under the old standard the question applied to determine joint employer status was whether the second company directly controlled employees of the first, such as by hiring, firing and setting the terms of the employment. Private equity firms didn’t have to worry about qualifying as a joint employer, except in those instances where they temporarily took the reins of a portfolio company.
However, in announcing its Browning-Ferris Industries decision the NLRB expanded the definition of joint employer. It said that from now on it would consider, among factors, “whether an employer has exercised control over terms and conditions of employment indirectly through an intermediary” and also “whether it has reserved the authority to do so.”
Big deal? For private equity firms, and even creditors, the answer is a big yes. As a general rule buyout firms, in their capacity as owners, do have the right to control the terms of employment for portfolio company employees, even if under most circumstances they leave that control to management. Even creditors may have the right to take control of a company that has become insolvent.
In a webinar hosted by the Association for Corporate Growth earlier this month, speaker Maury Baskin, a shareholder of law firm Littler Mendelson PC, called the Browning-Ferris Industries decision “a very real threat, a very real danger” to private equity firms.
The NLRB has not provided a great deal of guidance and hasn’t yet ruled on any situations involving sponsors. “This is unfortunately going to result in years of litigation,” Baskin added.
Among the potential implications, sponsors designated as joint employers with portfolio companies could be compelled to bargain jointly with unions, may be liable for any actions by portfolio-company management deemed to be unfair labor practices, or may be liable for portfolio-company pension contributions.
That’s not all. Sponsors could find that their portfolio companies are unexpectedly designated as joint employers with some of their business partners.
Yet another possibility: Any collective bargaining agreements involving joint employers, such as sponsor and portfolio company, could complicate efforts to terminate their relationship, such as through a sale.
At the center of the Browning-Ferris Industries case is a recycling company doing business as BFI Newby Island Recyclery. On its own premises in Milpitas, California, it used the services of sorters, screen cleaners and house keepers employed by Leadpoint Business Services. Responding to a union petition to represent the workers, and to bargain with BFI Newby Island Recyclery, a regional director of the NLRB found that Leadpoint Business Services was the sole employer of the workers.
The union appealed, arguing that even if the two companies are not joint employers under the old standard, the NLRB should consider revising the standard. In reversing the decision the NLRB did just that. It explained its decision in part by pointing to the “recent dramatic growth in contingent employment relationships” and the need to keep step with that trend.
During the ACG webinar Michael Layman, vice president of regulatory affairs for the International Franchise Association, observed that unions dislike contingent employment relationships. It is easier for unions to organize workers at a single company where the workers are long-term and fully employed than it is to organize them at multiple franchises or temporary employment agencies, he said.
Relief for sponsors could come in the form of legislation. ACG, the International Franchise Association, and the recently launched Coalition to Save Local Businesses (where Layman is executive director) have teamed up to promote a bill to restore the old joint employer standard. Efforts to attach the legislation to the year-end spending bill failed. But proponents plan to try again. They also plan to continue to push similar legislative efforts in states.
Meantime, attorneys advise sponsors and companies looking to avoid joint employer status to take a close look at the Browning-Ferris Industries case. They should avoid taking steps that led the NLRB to conclude that BFI Newby Island Recyclery was a joint employer, such as when it reserved the right to discontinue the use of a particular worker supplied by Leadpoint Business Services. They should also track the appeal by Browning-Ferris Industries in the U.S. Court of Appeals for the D.C. Circuit along with similar NLRB cases involving CNN (also pending in the D.C. Circuit Court) and McDonald’s.
Action Items: Find out more at savelocalbusinesses.com or contact Amber Landis, VP of public policy at ACG, at 312-957-4272.
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