The Second Circuit Court of Appeals recently issued a decision rejecting the 6-factor test developed by the U.S. Department of Labor to determine whether an individual is an employee entitled to wages or a trainee for whom no payment is required.

In Glatt v. Fox Searchlight Pictures, Inc., a group of unpaid interns who worked on the sets of the movies Black Swan and 500 Days of Summer argued that they were employees who should have been paid the minimum wage and overtime under the Fair Labor Standards Act (FLSA).  The district court initially agreed with the plaintiffs based on the DOL’s well known 6-factor test.

The Second Circuit disagreed.  First, the court held that the DOL’s 6-factor test was not entitled to deference because it was based on the DOL’s interpretation of a judicial decision, not a statute.  Then the court held that the court should have applied the “primary beneficiary” test instead of the DOL’s 6-factor analysis.  Under this test, the inquiry should have focused on “whether the intern or the employer is the primary beneficiary of the relationship.”

The court explained that the primary beneficiary test has two components.  First, it focuses on “what the intern receives in exchange for his work” – i.e., the benefit to the trainee.  Second, it focuses on the “economic reality as it exists between the intern and the employee.”  The court further explained that applying the test can be difficult because it “requires courts to weigh a diverse set of benefits to the intern against an equally diverse set of benefits received by the employer without specifying the relevance of particular facts.”  Accordingly, the court identified the following non-exhaustive list of factors to aid courts in applying the primary beneficiary test:

  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 emphasized that the primary beneficiary test was flexible and that the final determination must be based on the totality of the circumstances.

Because the lower court applied the DOL’s 6-factor test instead of the primary beneficiary test, the Second Circuit reversed and remanded the lower court’s decision.  The Second Circuit also held that because individualized questions relating to the plaintiffs predominated over common questions, the lower court erred by certifying the plaintiffs’ proposed Rule 23 class and conditionally certifying the plaintiffs’ proposed FLSA collective action.

Takeaway:  The Second Circuit’s decision in Glatt is good for employers because it rejects the DOL’s rigid 6-factor test in favor of a more flexible standard.  It also suggests that it may be difficult for unpaid interns to obtain class or collective relief given the highly individualized nature of the inquiry.