Late last week, the United States Court of Appeals for the Second Circuit rejected the U.S. Department of Labor’s (“DOL”) six-factor test to determine whether an individual qualifies as an intern or an employee for purposes of the Fair Labor Standards Act (“FLSA”).  Instead, the court employed a flexible “primary beneficiary” test to make such determinations in Glatt v. Fox Searchlight Pictures, Inc., a class/collective action case filed against Fox Searchlight Pictures, Inc. and Fox Entertainment Group, Inc.

The court explained that the “primary beneficiary” test has two significant features:  (1) it focuses on what the intern receives for engaging in the internship; and (2) it provides the courts flexibility to examine the “economic reality” between the intern and the employer.  The court provided the following non-exhaustive considerations that should be weighed and balanced by the trial courts when determining if an intern at a for-profit employer is an “employee:”

1. Extent to which there is an expectation of compensation;

2. Extent to which the internship provides training similar to that which would be given in an educational environment;

3. Extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;

4. Extent to which the internship corresponds to an academic calendar;

5. Extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;

6. Extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern; and

7. 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.

History

The FLSA requires employers to pay employees a minimum wage for each hour worked and overtime compensation of time and one-half for all hours worked over forty in a workweek.  These requirements only apply to individuals who fall within the definition of an “employee.”  Thus, in intern cases, the central question is whether the intern is an “employee.”

The Supreme Court has not specifically addressed this question; however, in 1947, the Court did find that unpaid railroad brakemen trainees were not employees.  Walling v. Portland Terminal Company, 330 U.S. 148 (1947).  In Portland Terminal, the Court considered several facts in reaching its conclusion, including whether: (1) the employer received an advantage from the trainees’ work; (2) the trainees displaced workers; (3) the trainees expected compensation or a job after the course; and (4) the training was similar to that provided by schools.

Based in part on this decision, the DOL issued informal guidance regarding trainees in 1967 and issued similar guidance regarding unpaid interns in 2010, setting forth a six-part test.  According to the DOL, all six criteria must be met for the individual to be properly classified as an intern.

National Trend

As previously reported, unpaid interns have increasingly filed lawsuits against for-profit employers that offer internships, claiming the interns were, in fact, employees who were entitled to minimum wage and overtime compensation.  The interns have based their claims on the employer’s inability to meet all six-factors of the DOL’s test.

In Glatt, the district court concluded, contrary to the DOL’s six-factor test, that not all six factors must be met to establish that an intern is not an employee.  Rather, the factors must be balanced.  Nevertheless, the district court ruled in favor of the interns.

The Decision

The court of appeals did not find the DOL’s six-factor test (which is based on Portland Terminal) persuasive.  The court stated that the DOL test is too rigid to apply to all workplaces and agreed with the employers that the proper question was “whether the intern or the employer is the primary beneficiary of the relationship.”  The court also indicated that questions related to the primary beneficiary test may not be satisfied with generalized proof, potentially creating a significant hurdle for employees seeking to certify class/collective actions.

Take-Aways

Although Glatt represents a victory for employers, for-profit employers must still be cautious when engaging unpaid interns and structuring their workplace duties.  Several states have established their own tests for determining whether an intern is an employee under state law.  Further, the interns may still prevail at the district court level if the court determines that the employer, not the intern, was the primary beneficiary of the intern’s work.