Does your company use unpaid interns?   If it does, you may be surprised to learn that your company may have to pay them after all.   For years employers relied on the Department of Labor’s  (“DOL”) “Intern Fact Sheet” when categorizing an intern as unpaid or ineligible for compensation under the Fair Labor Standards Act (“FLSA”).  On July 2, the Second Circuit Court of Appeals issued its opinion in Glatt v. Fox Searchlight Pictures, Inc.   In doing so, the Glatt court disregarded the DOL’s six-part test and devised a list of considerations and factors focused on whether the intern or the employer primarily benefited from the internship.   If the employer primarily benefited, then the intern is more properly categorized as an employee under the FLSA and is entitled to compensation.   If the intern benefited more, then per the FLSA, the intern is not an employee.   Regardless of whether the Glatt opinion remains unchanged by the United States Supreme Court, for-profit employers should re-examine their unpaid internship programs.

The Primary Beneficiary Test

College students and recent graduates recognize the benefit of an unpaid internship with their dream employer.   Aside from an opportunity to get a foot in the door, an unpaid internship is a quick way to take what the student has learned in the classroom and apply it in a real-world setting.   Aside from the obvious benefit of unpaid labor provided by unpaid interns, employers receive the benefit of taking the first shot at increasing their talent pool as well as gaining new and fresh ideas.   But not all internships are created equal.   Each industry has its own needs and common practices.    While both the employer and the intern are to receive some benefit from the relationship, employers who only have interns perform menial tasks or “grunt work” could find themselves owing back pay to those interns.  The Glatt court was keenly aware of this natural tension and the need for flexibility from industry to industry.   It was because the DOL test attempted to apply its guidelines uniformly to all workplaces that the Glatt court found it’s guidelines “too ridged for our precedent to withstand….”

The Glatt court explained that the Primary Beneficiary test relies on two “salient features.”   Initially, the test “focuses on what the intern receives in exchange for work.”    Secondly, it allows courts to have the “flexibility to examine the economic reality as it exists between the intern and the employer.”   The Primary Beneficiary test includes the following non-exhaustive considerations:  (1) did the employer and intern both understand that there was no expectation of pay;   (2) does the internship provide training similar to that which is given in an educational environment; (3) is the internship tied to the intern’s formal education; (4) does the internship accommodate the intern’s academic calendar; (5) is the internship limited in duration such that it provides the intern with beneficial learning; (6) does the intern’s work complement, rather than displace, work of paid employees while providing significant educational benefits to the intern; and (7) do both the intern and the employer understand that at the conclusion of the internship, the intern is not entitled to a paid job working for the employer.    The Glatt court further instructed that applying these considerations required “weighing and balancing all of the circumstances,” no one factor was more important than any other factor, and that all of the factors did not have to “point in the same direction” to support a finding that an intern was, per the FLSA, an employee and entitled to minimum wage.

What does this mean for for-profit employers?

For those human resources departments that want a black and white test to determine when an intern should be paid, the primary beneficiary test is as clear as mud.   The Glatt opinion is as non-committal as it can be regarding the precise conditions under which an intern should be a paid employee.   Therein lies its charm and utility.  Because the test is flexible, employers should take the time to consider the reasons behind why they have the program and how it benefits the interns or the employers.   An employer honestly examining its internship program through the lens of the primary beneficiary test should know whether the internship primarily benefits the employer (think grunt work) or the intern (think education).    Employers that intend to keep their internship programs unpaid can revise their internship programs to ensure compliance with the primary beneficiary test.    If after you have applied the primary beneficiary test and it is a close call as to whether the employer or the intern is the primary beneficiary of the program, it is probably wise to have a paid internship program until you have a system in place that provides more of an educational and unique experience to the intern.