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  • Second Circuit Adopts a New Test to Determine Whether Unpaid Interns Should be Classified as Employees

    Earlier this month, the U.S. Court of Appeals for the Second Circuit (“Second Circuit”) issued a new test for determining whether interns must be classified and paid like “employees,” as that term is defined in the Fair Labor Standards Act (“FLSA”). The court rejected the test established by the U.S. Department of Labor (“DOL”), and it ruled that the proper test is whether the employer or the intern is the “primary beneficiary” of the relationship.

    By way of brief background, in April 2010, the DOL issued Fact Sheet #71, which states that employers must classify and pay interns as if they were “employees” unless the employer-intern relationship meets every one of the following six factors:

    1. the internship is similar to training given in an educational environment;
    2. the internship experience is for the benefit of the intern;
    3. the intern does not displace regular employees, or perform duties traditionally done by regular employees;
    4. the employer derives no immediate advantage from the intern’s activities;
    5. the intern is not necessarily entitled to a job at the conclusion of the internship; and
    6. the employer and the intern understand, preferably in a signed writing, that the intern is not entitled to receive compensation for his/her work.

    In response to Fact Sheet #71, there was an influx of claims in federal and state courts alleging violations of the FLSA and other applicable labor laws. Among these were two cases that led to the Second Circuit’s decision.

    In Wang v. The Hearst Corp., 12-CV-793, a former intern filed a lawsuit against the Hearst Corporation claiming that she and others were improperly classified as interns when they had performed tasks and had responsibilities of actual employees. District Court Judge Harold Baer disagreed with the claims, finding instead that issues of fact existed that required a jury trial. He reasoned that the DOL’s 6-factor test “is not a winner take all test, and Hearst has shown with respect to each [intern] that there was some educational training, some benefit to individual interns, some supervision, and some impediment to Hearst’s regular operations, etc., which, if viewed in the light most favorable to the non-moving party, as it must be, supports the view that” the interns were classified properly.

    Similarly, in Glatt v. Fox Searchlight Pictures, Inc., 11 Civ. 6784, unpaid interns who worked on the film “Black Swan” or in the company’s corporate office alleged that they were misclassified as interns because they worked between 30-50 hours per week doing administrative or manual labor and did not receive academic credit for it. Here, the Southern District of New York (Pauley, J.) ruled that pursuant to Fact Sheet #71, the interns who worked on the film “Black Swan” should have been classified and paid as employees because the work they did more closely resembled that of a traditional employee. Judge Pauley reasoned that Fox received a benefit from the interns’ work, and the interns did work that would have otherwise been performed by regular employees, such as fetching coffee, running errands, and other chores.

    In light of these rulings, the Second Circuit accepted tandem interlocutory appeals of the decisions. Interestingly, the court rejected the DOL’s 6-factor test and the argument that an intern should be treated as an employee whenever the putative employer derives an immediate advantage from the intern’s work. To the contrary, the court adopted the “primary beneficiary” test, which asks “whether the intern or the employer is the primary beneficiary of the relationship” when determining an intern’s classification.

    Pursuant to the Second Circuit’s “primary beneficiary” standard, courts would be tasked with weighing the benefits to the intern against the benefits received by the employer. This can be difficult to balance and in an attempt to mitigate the burden, the Second Circuit set forth a list of seven non-exhaustive factors that courts should consider, among other relevant evidence, when applying the “primary beneficiary” test:

    1. The extent to which the intern and employer clearly understand that there is no expectation of compensation in exchange for the tasks performed.
    2. The extent to which the internship provides training that would similarly be given in an educational setting.
    3. The extent to which the internship is tied to the intern’s academic commitments by corresponding to the academic calendar.
    4. The extent to which the intern’s work complements the work of paid employees while receiving significant educational benefits.
    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 internship is tied to the intern’s formal educational program.
    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.

    Ultimately, the Second Circuit vacated both Judge Baer’s and Judge Pauley’s rulings and remanded the cases to the appropriate district courts for the new “primary beneficiary” test to be applied. Additionally, the Second Circuit found that, under the “primary beneficiary” test, “the question of an intern’s employment status is a highly individualized inquiry,” and therefore, it is unlikely that lawsuits brought by interns would ever be appropriate for class and collective action treatment.

    In sum, employers with unpaid internship programs are advised to pay special attention to these cases. They should review and revise their internship program policies, if necessary, to ensure that they conform to all applicable judicial and regulatory guidance to avoid potential risk which could include liability for wage and hour violations and also tax and benefits related sanctions.  Although these decisions only apply to the Second Circuit at this time (which covers Connecticut, New York, and Vermont), they may be helpful to employers in other jurisdictions in minimizing FLSA liability.

    If you or your institution has any questions or concerns regarding employment related issues, please email Cynthia A. Augello at caugello@cullenanddykman.com or call her at (516) 357-3753.

    A special thank you to Lauren Dwarika, a law clerk at Cullen and Dykman LLP, for her assistance with this blog post.