No Pay Can Be OK – A New Test to Determine the Primary Beneficiary in Unpaid Internships

This summer, two federal appellate courts declined to follow the U.S. Department of Labor’s six factors for determining whether an unpaid intern is an employee under the Fair Labor Standards Act (“FLSA”). In doing so, those courts — the Second Circuit (covering Connecticut, New York, and Vermont) and the Eleventh Circuit (covering Alabama, Florida, and Georgia) — instead adopted a more modern, flexible approach.

In the case before the Second Circuit, Glatt v. Fox Searchlight Pictures, Inc., the plaintiffs were unpaid interns who asserted that they were entitled to minimum wage and overtime pay. The district court concluded that the plaintiffs were improperly classified as unpaid interns and should rather be classified as employees, and granted a motion to certify the class of interns (a discussion of the district court’s decision is available here). The district court based the decision on a Supreme Court precedent from 1947, Walling v. Portland Terminal Co., 330 U.S. 148 (1947), a case dealing with the “trainee exception” to the FLSA for prospective railroad employees. Upon review, the Second Circuit vacated the district court’s order, setting out its own set of factors to be considered in determining whether an unpaid intern is entitled to compensation as an employee under the FLSA. In doing so, the Second Circuit departed from the six-part Department of Labor test based upon Portland Terminal, finding that test too rigid. The Second Circuit adopted a more flexible test looking to see whether the intern or the employer is the primary beneficiary of the relationship.

The Second Circuit indicated that the non-exhaustive factors for determining whether an unpaid intern at a for-profit business should be considered an employee for purposes of the FLSA include:

1. The extent to which the intern and the employer clearly understand that there is 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.

Each of these factors need to be weighed and balanced in light of the circumstances. No one factor is dispositive, and courts are permitted to consider relevant evidence that is not contained in the above factors.

The Second Circuit noted that this flexible test better reflects the role internships play in today’s economy, recognizing that students gain value from practical, real-world experience, while also remaining true to the Portland Terminal inquiry as to whether the intern or the employer is the primary beneficiary of the relationship. The Second Circuit noted that the updated test first looks at what the intern receives for his/her work, and second, that it provides courts flexibility to examine the economic reality between the intern and employer. Also of note is that the Second Circuit emphasized an individualized approach to examine whether an intern qualifies as an employee under the FLSA. This could indicate a limitation on class action suits for unpaid interns moving forward.

A few months after the Second Circuit’s decision in Glatt, the Eleventh Circuit considered a similar issue in Schumann v. Collier Anesthesia, P.A., a case where the plaintiffs were former students attending a master’s degree program to become certified registered nurse anesthetists. As part of obtaining a degree, the students were required to participate in clinical curricula. The plaintiffs sought wages and overtime for their clinical hours. The Eleventh Circuit also found the Department of Labor’s six factors too rigid and adopted the seven non-exhaustive factors that the Second Circuit identified in Glatt. The Eleventh Circuit did not expressly reach the issue of whether students were FLSA employees, and time will tell whether the decision is distinguished as applying primarily to internships for academic credit and/or certification requirements, or whether it will have broader application.

While the decisions from the Second and Eleventh Circuits are positive developments for employers, the landscape regarding unpaid interns and the FLSA is still evolving as case law in this area continues to develop. Many lawsuits have been filed by interns or former interns seeking wages and overtime under the FLSA. Many of these cases have settled in the multi-million dollar range, many other cases remain pending, and it is likely that more cases will be filed. The consensus between the Second and Eleventh Circuits on the departure from the Department of Labor’s six-part test toward a more flexible and updated primary beneficiary test may be persuasive as other circuits consider the issue, but it remains unknown to what extent other courts will agree with these decisions. Because only the Second and Eleventh Circuits have adopted this more flexible approach, the Department of Labor will continue to follow the stricter six-part test for determining whether an unpaid intern qualifies as an employee under the FLSA.