The Second Circuit Adopts Favorable “Primary Beneficiary” Test In Determining Whether Internships Can Be Unpaid

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Employers have recently faced increased lawsuits from unpaid interns claiming that they have been misclassified and should have been paid as “employees.”   On July 2, 2015, the Second Circuit Court of Appeals adopted an employer-friendly test in determining whether an intern qualifies as an employee for purposes of minimum wage and overtime requirements under the Fair Labor Standards Act (FLSA) and New York law.  In two decisions issued the same day, Glatt v. Fox Searchlight Pictures, Inc. and Wang v. The Hearst Corporation, the Second Circuit rejected a six-part test adopted by the United States Department of Labor (“DOL”), focusing instead on whether the intern or employer was the “primary beneficiary” of the relationship.  This test values and weighs the educational aspects gained from the internship opportunity against the economic benefit to the employer.

The class action lawsuits in Glatt and Wang were filed by former unpaid interns at Fox Searchlight/Fox Entertainment Group and Hearst magazines, respectively, who contended that they should have been classified as employees and were not paid minimum wage and overtime in violation of the FLSA and New York Labor Law (NYLL).

The Second Circuit considered the application of the six-factor test issued by the DOL in 2010 to determine whether an intern was an employee under the FLSA.  Under the DOL’s test, an intern would be found to have been in an employment relationship unless all six factors were met.  Among these factors, were fairly difficult requirements, including that the employer who provided the training derive “no immediate advantage from the activities of the intern” and that an intern not “displace regular employees.” The Second Circuit noted that this test was “too rigid” and did not reflect the value of internship opportunities in today’s economic environment.

In both cases, the Second Circuit found that the “primary beneficiary” test was the appropriate standard to determine whether an intern was an employee.  Under this test, the court considers whether the tangible and intangible benefits provided to the intern are greater than the intern’s contribution to the employer.  The Second Circuit further held that the proposed class of interns in both cases failed to satisfy the requirements for proceeding on a class-wide basis.

The Second Circuit identified the following seven, non-exhaustive factors to consider in determining whether an intern was an employee under the FLSA and NYLL:

  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 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.

Under these non-exhaustive factors, no one factor is dispositive and not every factor must be resolved in favor of the employer. The Second Circuit noted that this test better reflected the place of unpaid internships as a central feature of modern education and better “reflect(ed) the role of internship in today’s economy than the DOL factors.” The test emphasizes the educational and academic aspects of the internship position.

Employers in the Second Circuit are encouraged to examine their internship positions in light of the factors enumerated in Glatt, and should ensure that the educational aspects of the internship position are well-defined.  Employers should be able to articulate the educational benefits to the intern that will be derived from the experience and how those educational benefits outweigh the benefits to the employer.

Furthermore, the Second Circuit’s ruling should make future intern class action lawsuits more difficult.  The Second Circuit’s approach requires a highly individualized analysis of the internship to determine the educational attributes of the position.  In vacating the district court’s grant of conditional class certification in Glatt, the Second Circuit explained that the determination of whether an intern qualified as an employee requires assessment of the “individual aspects of the intern’s experience,” and that the issues requiring individualized proof predominated over those that could be answered through generalized proof.  The Second Circuit’s adoption of the “primary beneficiary” test represents a clear victory for employers.

Daniel C. Zamora, Attorney at Law  |  Weintraub Tobin