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In January 2018, the United States Department of Labor (“USDOL”) relaxed the standard governing unpaid internships and published updated guidelines under the Fair Labor Standards Act (“FLSA”). This article examines the new guidelines and what they mean for employers.
The FLSA requires “for-profit” employers to compensate employees for all work performed. However, interns/students may not be considered “employees” under the FLSA if employers can satisfy the requisite test to determine that the individual is an unpaid intern. The new guidelines provide general information to aid in the determination of whether interns/students working at “for-profit” employers are entitled to FLSA minimum wages and overtime pay.
The Rise and Fall of the Six-Factor Test
Unpaid internships rapidly increased during the recent recession. However, USDOL enforcement and private litigation also grew as a result. In 2010, the USDOL adopted a rigorous six-factor test, which required employers to satisfy all of the factors in order to maintain an unpaid internship. In essence, the test required that the internship mirror the type of instruction received in a classroom setting. Further, it required that employers receive no immediate advantage from the intern’s activities. The takeaway was that if employers received an economic benefit from an intern’s work, he/she was deemed an employee and entitled to FLSA protections.
The adoption of this test increased the number of lawsuits, specifically in the Southern and Eastern Districts of New York. Despite the test’s initial success, a critical decision from the Second Circuit in 2015 became a turning point. In Glatt v. Searchlight Picture, Searchlight rejected the DOL’s six-factor test and argued that courts should examine the internship relationship as a whole and determine the “primary beneficiary.” As a result, the court created its own seven-factor test designed to answer that question. Following this decision, other courts followed the Second Circuit’s lead.
On December 19, 2017, the U.S. Court of Appeals for the Ninth Circuit became the fourth federal appellate court to expressly reject the USDOL’s six-factor test. Following this decision, the USDOL eliminated the test and replaced it with the “primary beneficiary” test established by the Glatt court.
The “Primary Beneficiary” Test
The new guidelines set forth the seven-factor test established in Glatt, which is more flexible and employer-friendly. To determine whether an intern/student is an employee under the FLSA, courts examine the “economic reality” of the intern-employer relationship to establish which party is the “primary beneficiary” of the relationship. The courts look at the extent to which:
(1) Both the employer and intern clearly understand that there is no expectation of compensation;
(2) The internship provides training similar to what would be given in an educational environment;
(3) The internship is tied to the intern’s formal education program;
(4) The internship accommodates the intern’s academic commitments;
(5) The internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;
(6) The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits; and
(7) The parties understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.
Courts have described this test as a flexible test in which no single factor is determinative. Therefore, whether the intern/student is an employee under the FLSA depends on the facts of each case. If an analysis of the factors reveal that an intern/student is actually an employee, he/she is entitled to minimum wage and overtime pay under the FLSA. To the contrary, if the analysis confirms that the intern/student is not an employee, he/she is not entitled to the FLSA requirements.
Upshots for Employers
Professionals in the labor and employment field speculate that there will be an influx of unpaid interns because employers had previously scaled back due to the uncertainties and aggressive nature of the USDOL. As a result of the new lenient standard, many organizations will be more confident that they can satisfy the primary beneficiary test. To the contrary, some think that the new guidelines will not have much of an impact since many employers will continue to recruit under the prior rule. Additionally, employers may be hesitant to rush into the new rules.
We recommend that employers check state and local laws for additional requirements. Employers should make it clear that the internship will be unpaid. Employers are encouraged to create rules in connection with internships and be able to demonstrate that the job is more valuable to the intern. It is good practice to set forth the rules in recruiting procedures: what the program is, and what it does and does not do. Interpreting these new rules is difficult, and we recommend consulting with counsel before instituting an unpaid internship program.