The Employer’s Wage and Hour Advisor

Recently, the United States Court of Appeals for the Second Circuit considered this thorny issue in Glatt v. Fox Searchlight Pictures, Inc., Nos. 13-4478-cv, 13-4481-cv (2d Cir. July 2, 2015).   The court’s decision in Glatt concerned three interns who worked in various capacities for Fox corporate or in connection with the production of the film Black Swan. According to the opinion, the interns’ job duties included making, scanning, and filing documents; tracking orders; transporting paperwork and other items between locations; answering phone calls; drafting cover letters; organizing filing cabinets; keeping take-out menus updated; setting up office furniture; arranging lodging for film cast and crew; taking out trash; taking lunch orders; and making coffee.  The interns often worked 10-hour days several days per week.  Because these were unpaid internship opportunities, however, the interns did not receive compensation.  Nor did they obtain any academic credit, although one was supposed to.  

The interns filed a federal lawsuit against Fox in 2012 alleging it had improperly classified them as unpaid “interns” and claiming they actually were “employees” under the federal Fair Labor Standards Act (the FLSA) and New York wage and hour laws.  Among other things, the interns claimed they should have been paid minimum wages and overtime compensation for their work.

The district court ruled in the interns’ favor – finding them to be statutory employees based on its application of a six-part test issued by the U.S. Department of Labor (the DOL).  The six-part test required the company to meet all of following requirements for unpaid interns, but the district court applied it as a balancing test:

1. The training provided was similar to an educational environment;
2. The internship benefited the intern;
3. The interns work under close supervision and do not displace paid employees;
4. The employer derived no immediate advantage from the internship;
5. There was no expectation of a paid job post-internship; and
6. There was no expectation of compensation between the employer and intern.

The district court held that only the last two of the six factors supported finding the interns to be properly classified as unpaid.  Thus, the district court found that the interns were “employees” and entitled to minimum wages and overtime compensation.  The court also certified class and collective actions.

On appeal, the Second Circuit disagreed and reversed the district court’s rulings.  Critically, the Second Circuit refused to give deference to the DOL’s six-factor test; finding, among other things, that the test was “too rigid.”  Instead, the Second Circuit adopted a “primary beneficiary test.”  According to the court, this test best reflects the economic realities of the relationship between intern and employer by considering the “totality of the circumstances.”  The Second Circuit reasoned that this test would achieve two primary goals:  (1) focusing “on what the intern receives in exchange for his work”; and (2) affording the courts “flexibility to examine the economic reality as it exists between the intern and the employer.”

Instead of dogmatic adherence to the DOL’s six required factors, the court considered and balanced seven non-dispositive factors:

1. Whether the employer and the intern understand that there is no expectation of compensation;
2. Whether the internship is akin to training in an educational environment;
3. Whether the internship is tied to the intern’s formal education;
4. Whether the internship accommodates the intern’s academic commitments by corresponding to the academic calendar;
5. Whether the internship only lasts as long as it provides the intern with beneficial learning;
6. Whether the internship complements, rather than displaces, the work of paid employees; and
7. Whether the employer and intern understand that there is no expectation of a paid job at the end of the internship.

The Second Circuit remanded the case back to the district court so that the parties could address this new “primary beneficiary test.”

It remains to be seen what the Second Circuit’s decision will mean for companies hoping to maintain their current unpaid internship programs.  On one hand, private companies in the Second Circuit no longer have to meet all six of the DOL’s factors to maintain an unpaid internship program.  On the other hand, the court provides little practical guidance for determining which of its seven non-exhaustive factors would be the most important in any particular case.  Additionally, until other circuits review the issue, the DOL’s “rigid” six-factor test remains very much at issue and may be controlling. 

Thus, even after the Second Circuit’s ruling in Glatt, maintaining unpaid internship programs remains very problematic for most private employers.  If the intern is gaining experience tied to his or her education at the company’s expense, it may be possible to maintain an unpaid internship program.  However, if the employer financially benefits from the program (especially, where the interns perform functions similar to, or replace, other paid employees), the employer’s program may violate federal or state wage and hour laws.  Because of these risks, it is advisable to have experienced counsel review any unpaid internship program.