Many of us spent summers working as interns, getting access to the industry of our choice, making contacts, learning – and yes running errands and filing and stuffing envelopes and doing other “grunt” work. Most young people value this experience, not for the money, but for the exposure, the contacts and the experience.

The world of internships has not been so rosy over the past several years, as the plaintiffs’ employment bar seized the gauntlet, and launched an avalanche of class actions accusing many employers of unlawfully failing to pay their interns.  Suddenly the young people who once seemed grateful for the experience, and who accepted internships at prestigious companies, suddenly decided that they should have been classified as “employees”  and looked for hefty payouts. Many of these cases have resulted in multi –million dollar settlements. At the forefront of this intern tsunami were two class actions which were both on appeal to the Second Circuit in New York – – Glatt et al. v. Fox Searchlight Pictures Inc., No. 13 – 4478 (2d Cir.) and Wang et al. v. The Hearst Corp., No. 13-4480 (2d Cir.).

In a holiday gift to employers, on July 2 the Second Circuit issued decisions in Glatt and Wang, refusing to certify the classes and finding that the interns were not employees under the law.  These decisions have dealt a significant blow to this budding industry of intern class actions, instead adopting a common sense test for whether interns should be treated as “employees,”  which many plaintiffs lawyers are likely bemoaning. Rejecting the Department of Labor’s (“DOL”) rigid approach to defining an unpaid internship, the Court adopted the more “nuanced” “primary beneficiary” test , which focuses more on whether the intern is receiving some real educational benefit from the experience.  The decisions also provide employers with some valuable guidance as to how they can design and maintain a legal unpaid internship program.

The good news is these decisions should slow the juggernaut of class actions.  The better news is they give employers some real practical guidance as to how they can design an internship program, without a fear that the intern today will become the plaintiff of tomorrow.   We think the best news is for the interns – as now young people who truly crave the experience of an internship are not looking at a future where companies who cannot afford to pay simply throw up their hands and decide that they will not bother to sponsor such programs.  So, putting aside the plaintiffs’ lawyers, there are winners on all sides as the result of these decisions.

Background

The Glatt and Wang cases both arose out of the same basic set of facts, interns who claimed they toiled for many hours over weeks and/or months, and were never paid.  In each instance, the claim was that claims on behalf of all interns for the two companies should be certified as class actions. Interestingly, the two judges at the district court had each reached the opposite conclusions on the claims. First, in May 2013, Judge Harold Baer denied the plaintiff’s motion to certify a class of unpaid interns in the Wang case.  Wang v. Hearst Corp., No. 12 CV 793 (HB) (S.D.N.Y. May 8, 2013).  A month later, in June 2013, District Judge William Pauley in the Glatt case, relying on the DOL’s six-factor test, ruled that Fox Searchlight Pictures violated minimum wage and hour laws by failing to compensate interns for their work on the set of “Black Swan.”  Glatt v. Fox Searchlight Pictures, Inc., No. 11. Civ. 6784 (WHP) (S.D.N.Y. June 11, 2013).  Judge Pauley found that Fox made no effort to educate or train the interns and had them perform routine tasks that would otherwise have been performed by regular employees.

The issue that was presented at the Second Circuit was whether the Court should require employers to satisfy all six of the DOL factors to establish a valid unpaid internship – the approach the plaintiffs’ bar favored.  The defense asked the Court to apply the more flexible “primary beneficiary” test, which looks at all of the facts and determines who benefits most from the internship, the employer or the intern. Those who observed the oral arguments at the Second Circuit reported that several judges were critical of the DOL’s six-factor test, finding it to be overly rigid, and thus seemed to be leaning toward the “primary beneficiary” test, which allows the court to consider the “totality of the circumstance” in deciding whether or not an internship qualified for compensation.

The Decisions 

In keeping with the predictions from oral argument, the Second Circuit rejected the DOL’s six factor test and ruled that the “proper question” to ask in determining whether an intern was an employee is “whether the intern or the employer is the primary beneficiary of the relationship.” It noted that the test had two salient features: what the intern receives in exchange for the work, and the “flexibility to examine the economic reality” of the arrangement. The court instructed that courts would have to “weigh the diverse set of benefits to the intern against an equally diverse set of benefits received by the employer.”

The overall theme of the decisions was that interns need to be educated in order for an internship program to pass muster. The Court explained:  “The purpose of a bona fide internship is to integrate classroom learning with practical skill development in a real-world setting… By focusing on the educational aspects of the internship our approach better reflects the role of internships in today’s economy than the DOL’s six factors.”

The Court then laid out seven “non-exhaustive” factors to consider in evaluating whether an intern should be viewed as an employee.  It seems no coincidence that 4 of those 7 factors focused on the educational aspects of the experience, including:

  • the internship provides training that would be similar to that given in an educational setting;
  • the internship is tied to the intern’s formal educational program by integrated coursework or the intern is receiving educational credit;
  • the internship accommodates the intern’s academic commitments by corresponding with the academic calendar;
  • the internship duration is limited to the period in which the internship provides the intern with beneficial learning.

The Court also made clear that it will be harder to certify a class of interns, holding that the question of intern classification is a “highly specialized inquiry” and that the classification issues in the Fox and Hearst cases were not properly certified as class actions.

The overriding message one gets from these decisions is the Court’s view of the importance of the educational aspect of internships.  As such,  if employers truly teach their interns and provide them with some real training – they should not have to pay them.  In contrast, if the interns are treated as just free labor, and are not getting any real training or are not part of a program where they receive educational credit, then the intern may in reality be an employee.

Employers should not be lulled into thinking that this intern issue is going away.  In fact, due to all of the publicity of these cases, the interns of today are much more attuned to their rights than were those of just a few years ago. These decisions should be a guidepost for employers. Look at your interns and ask yourself the hard question: are they really the “primary beneficiary” of this relationship?  It is not as if they cannot perform any services for the company, but is the program tied to an educational program or institution?  Do you offer the interns the opportunity for course credit? Are you really providing them with training and skills that they can use in their field? Does the work schedule respect their academic schedule? If you can answer yes to these types of questions,  you should be able to establish that it is a bona fide internship.