Over the last few years, several federal courts—and, most recently last month, another appellate court—rejected the Obama administration’s mandatory six-prong test for whether someone can properly be classified as an unpaid intern under the Fair Labor Standards Act (FLSA). On January 5, 2018, the Trump administration issued an overhauled Fact Sheet #71, which formerly adopts a more flexible “primary beneficiary/economic reality” test.

We have previously blogged about some of these developments over the years, e.g., “Is the Six-Factor Test Still Good? Eleventh Circuit Endorses Modified Intern Test” (October 1, 2015), “A New Internship Standard—The Second Circuit’s Seven-Factor Test and What it Means for Your Company” (July 13, 2015), and “Work for Free and Maybe Meet a Celebrity? Probably Not a Lawful Internship!” (June 13, 2013), and those articles are hereby amended and supplemented!

Six Required Criteria Versus Seven Considerations To Be Balanced

In April 2010, the U.S. Department of Labor (DOL) issued its Fact Sheet #71 requiring six factors to be met before an unpaid intern could safely be categorized as such and excluded from pay requirements of the FLSA. The DOL emphasized that internships in the “for-profit” private sector “will most often be viewed as employment” unless the purported employer could prove the existence of all six of the following required criteria:

1. “The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
2. The internship experience is for the benefit of the intern;
3. The intern does not displace regular employees, but works under close supervision of existing staff;
4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.”

The Sixth Circuit Court of Appeals in 2011, the Eleventh Circuit in 2015, the Second Circuit in 2016, and the Ninth Circuit at the end of 2017 all rejected this strict test.  But employers could not take comfort in other federal circuits while the 2010 Fact Sheet #71 was still the DOL’s official interpretation of the FLSA and could still be enforced by the DOL (at least outside of the Second, Sixth, Ninth and Eleventh Circuits).

Now, the DOL assisted both interns and for-profit employers when it issued a revised Fact Sheet #71 to essentially comply with the courts’ guidance on this issue.  As a result, the following seven factors should be considered and weighed:

1. “The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.”

However, every factor need not be present. The DOL makes clear “no single factor is determinative” and the ultimate answer depends on the “unique circumstances of each case.” Factors (2) and (4) from the original test are omitted, and new factors (3), (4), and (5) are part of the updated test. The “economic reality” of the intern-employer relationship governs instead. If the intern or student is the “primary beneficiary” of the relationship, then he or she is not entitled to either the minimum wage or overtime pay under the FLSA. Conversely, if the employer is getting the better end of the bargain, it may have to treat the intern or student just as all of its other employees, i.e., minimum wage and overtime pay are required.

Notably, the court decisions mostly list the seven factors as “a non-exhaustive set of considerations.” While the DOL’s revamped fact sheet does not use that same terminology, it refers to the seven factors “as part of the test”—leaving it open-ended to be analyzed on a case-by-case basis. We can expect the courts to further develop this test and entertain additional factors and circumstances argued by both sides in cases to come.

Public Sector and Non-Profit Organizations Given a Hall Pass

As explained in the original Fact Sheet #71, the new guidance makes clear that unpaid internships in the public sector and for non-profit charitable, religious, civic, or humanitarian organizations “are generally permissible.” The vast majority of legal disputes have involved “for-profit private” businesses, so the analysis in that context does not change much. Interestingly, though, the original Fact Sheet #71 claimed that the DOL was “reviewing the need for additional guidance on internships in the public and non-profit sectors,” but that guidance never materialized. The DOL has now struck that language from the new guidance, so the public and non-profit sectors can presumably get a passing grade for their internship and volunteer programs fairly easily going forward.

Key Takeaways for Employers With Internship Programs

The DOL’s new test makes it easier to create unpaid internship programs that are lawful under federal law as long as the answers to the seven questions show that—on balance—the intern or student benefits more from the relationship than the employer does. In order to ace the test, a business will want to attempt to structure its program such that all seven factors lean toward an internship—rather than an employer-employee relationship. Moreover, a passing grade absolutely requires implementation of clear policies, forms, and agreements for the internship program. The new year is a good time for every business to make a resolution to review/audit its existing internship program, or to create a new one from scratch using the new guidelines. While there could be flexibility with a few of the factors (especially when the remaining factors so clearly weigh in favor of the existence of a lawful internship), if some of the factors are missing, the DOL or a court could still find that the relationship is truly an employment relationship.

Employers should keep in mind that this development only affects the analysis under federal law. States (and even some cities and local jurisdictions) can impose stricter requirements on businesses—just like many of them do with regard to minimum wage, overtime compensation, and paid sick time and leave requirements. Employers will want to confirm that their internship programs comply with all applicable state and local requirements. Only then will an employer graduate and gain a certificate of compliance from both a federal and state law perspective!