Last week, the Second Circuit delivered a highly anticipated ruling on whether companies may continue to use unpaid interns. In what represents a clear victory for companies, the Court adopted a flexible “primary beneficiary” test to determine whether workers should be properly classified as interns or employees. The Second Circuit also made clear that the question of an intern’s employment status is a highly individualized inquiry, signaling that intern litigants will find it very difficult to obtain class or collective certification.

The interns in Glatt v. Fox Searchlight Pictures, Inc. had worked for the movie “Black Swan,” performing such tasks as copying documents, assembling furniture and taking out trash. In 2013, the Southern District of New York determined that the two named interns had performed compensable work and held that the company violated federal and state labor laws by treating them as unpaid interns instead of employees. That court also held that a third intern could prosecute her claims as a class and collective action.

The Second Circuit disagreed, vacating both rulings and holding that the lower court applied an incorrect standard in determining that the interns should have been classified as employees. The Second Circuit rejected the interns’ request to find an employer-employee relationship whenever a company receives an “immediate advantage from the interns’ work.” The Court also refused to apply the U.S. Department of Labor’s six-factor test, which was derived from a decades-old Supreme Court ruling concerning unpaid railroad trainees, as “too rigid.”

Favoring a more “flexible” approach, the Second Circuit adopted the “primary beneficiary” test, which focuses on whether the company benefits more from the relationship than the intern. The Second Circuit determined that this test “accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.”

The Second Circuit held that the determination should rest largely on the internship’s educational benefits and set out the following non-exhaustive factors to consider in evaluating whether the relationship reflects a proper internship:

  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 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.
  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.

The Court noted that in applying this test, “[n]o one factor is dispositive and every factor need not point in the same direction for the court to conclude that the intern is not an employee entitled to the minimum wage.” This flexible approach better reflects the modern idea of an internship, which merges formal education with practical skill development.

Significantly, the Second Circuit also restricted the ability of unpaid interns to bring group-wide claims, holding that the question of intern classification is a highly individualized inquiry. The Court held that “[u]nder the primary beneficiary test we have set forth, courts must consider individual aspects of the intern’s experience.” Thus, the Court found that the intern classification issues in that case were not susceptible to class-wide determination under either Rule 23 or even the more lenient standard applied to collective actions under the Fair Labor Standards Act. For similar reasons, the Court also upheld the decision of the Southern District of New York denying class certification in an accompanying intern case, Wang v. Hearst Corp.

Although the Second Circuit’s decision represents a more flexible, individualized approach, the decision should not be read to afford employers carte blanche with respect to internship programs. Based on the opinion’s emphasis on the educational component of valid internships, companies should endeavor to structure their internship programs to reflect a learning experience for the participants. For example, companies should consider partnering with a university that agrees to provide credit or other recognition for students who participate in the internship program. Companies also should ensure that the internship has other indicia of an educational experience by, for example, providing mentors, conducting lectures and allowing interns to participate in industry-related seminars and activities. It also is important that companies establish a time frame before the internship begins and not promise a position after completion of the program. We further advise that interns be required to execute an acknowledgement confirming that the internship is unpaid, with no expectation of future employment, in order to establish a mutual understanding about the expectations interns have about the program.