Misfolded proteins of the endoplasmic reticulum undergo retrotranslocation to enter the cytosol where they are degraded by the proteasome. Retrotranslocation of many substrates requires an ATPase complex consisting of the p97 ATPase and a dimeric cofactor, Ufd1-Npl4. We report that efficient elimination of misfolded ER proteins also involves ataxin-3 (atx3), a p97-associated deubiquitinating enzyme mutated in type-3 spinocerebellar ataxia. Overexpression of an atx3 mutant defective in deubiquitination inhibits the degradation of misfolded ER proteins and triggers ER stress. Misfolded polypeptides stabilized by mutant atx3 are accumulated in part as polyubiquitinated form, suggesting an involvement of its deubiquitinating activity in ER-associated protein degradation regulation. We demonstrate that atx3 transiently associates with the ER membrane via p97 and the recently identified Derlin-VIMP complex, and its release from the membrane appears to be governed by both the p97 ATPase cycle and its own deubiquitinating activity. We present evidence that atx3 may promote p97-associated deubiquitination to facilitate the transfer of polypeptides from p97 to the proteasome.