Two years ago we warned employers that money not paid to “unpaid interns” might ultimately be paid in litigation under the Fair Labor Standards Act (“FLSA”) and New York’s Labor Law (“NYLL”).1 We now return to the subject because the Court of Appeals for the Second Circuit has rendered its decision on the matter in Glatt v. Fox Searchlight Pictures, Inc.2

In June 2013, Judge William H. Pauley III, in the Southern District of New York, ruled on summary judgment that former unpaid interns of Fox Searchlight Pictures (Searchlight) were actually employees under the FLSA and the NYLL. The District Court also certified a class of interns to bring related state law claims, and conditionally certified a national class of interns under the FLSA against Searchlight’s parent company, Fox Entertainment Group (FEG). 3

In a decision issued July 2, 2015, the Second Circuit reversed. In doing so, the Court set the standards for evaluating whether “an unpaid intern must be deemed an ‘employee’ under the FLSA [and NYLL] and therefore compensated for his work.”4

Siding with the employer-defendants, the Court adopted the “primary beneficiary test.”5 The test requires a court to determine “whether the intern or the employer is the primary beneficiary of the relationship.”6 If the intern is the primary beneficiary, then the so-called “trainee exception” applies, and no wages are required. If not, compensation is due.

THREE DIFFERENT APPROACHES

In reaching its decision, the Second Circuit considered three alternatives, one offered by the plaintiffs (employee), another by the defendants (employer), and a third by the Department of Labor (“DOL”), which had filed an amicus brief.

Plaintiffs took the broadest pro-compensation position. They suggested that the Court adopt a test whereby interns would be considered employees whenever the employer receives an immediate advantage from the interns’ work.

The DOL’s position hewed closer to the District Court’s opinion. They both advocated a test based on the six criteria listed in the DOL’s 2010 fact sheet7  for determining whether a particular unpaid internship is permissible under the FLSA. But where the District Court had considered the DOL’s six factors based on the “totality of the circumstances,”8 the DOL advocated a more restrictive approach, contending that every factor must be present before the employer is not required to pay the worker.

Finally, defendants proposed the “primary beneficiary test,” citing to case law in the Fourth, Sixth, and Eight Circuits, which have all adopted the test in analyzing the FLSA under similar circumstances.9

THE PRIMARY BENEFICIARY TEST PREVAILS

Plaintiffs’ approach received little comment from the Court.

The Court also rejected the DOL’s six-factor test as “too rigid,” noting that the test attempts to fit the particular facts of Portland Terminal, a 20th century case dealing with a training course for prospective railroad brakemen, to the realities of the 21st century economy.10

Instead, the Court adopted the defendants’ more flexible and economically rational test, the “primary beneficiary test,” which asks whether the intern or the employer is the primary beneficiary of the relationship.

KEY FACTORS TO BE CONSIDERED UNDER THE PRIMARY BENEFICIARY TEST

Having established the “primary beneficiary test,” the Court then identified a number of “non- exhaustive” factors that should be considered in weighing the benefits received by the intern versus the benefits to the employer:

  1. The extent to which the intern and employer clearly understand that there is no 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; and
  7. the extent to which the internship is conducted without entitlement to a paid job at the conclusion of the internship.11

THE SECOND CIRCUIT VACATES THE DISTRICT COURT’S CLASS CERTIFICATIONS

The other significant aspect of the Second Circuit’s opinion was to reverse and remand the trial court’s certification of the class.

The District Court had certified the “New York class,” consisting of all individuals who had unpaid internships with the defendants in New York from September 2005 to September 2010. It also conditionally certified a “national class,” consisting of all individuals who had unpaid internships with the defendants nationwide from September 2008 to September 2010. But that certification decision depended on the validity of the District Court’s (now rejected) approach to the wage question, which permitted a generalized determination.

The newly announced “primary beneficiary test,” however, is a “highly individualized inquiry,”12 and is also the predominant issue in the case, which would be difficult to resolve with generalized proof. The Second Circuit thus vacated the class certification order, directing the District Court to reconsider whether, in light of this new test, certification meets the standards of Rule 23 of the Federal Rules of Civil Procedure.

CONCLUSION

Glatt now returns to the District Court for further proceedings. But here is the upshot. First, in the Second Circuit (and the others that have adopted the “primary beneficiary test”) courts will review claims on a case-by-case basis, depending on the facts relevant to the particular unpaid internship and intern. Class certification is therefore unlikely. Second, when structuring an unpaid internship, businesses must carefully review the Second Circuit’s factors listed above, and structure their unpaid internship programs accordingly. In particular, for- profit employers should try to tie the internship to an intern’s formal education program and academic schedule. And they should be clear that interns have no expectation of compensation, and that the internship does not entitle the intern to a paid job at its conclusion.