On July 2, 2015, the U.S. Court of Appeals for the Second Circuit reversed a federal district court decision that held that unpaid interns should have been classified and paid as employees under both the federal Fair Labor Standards Act (“FLSA”) and the New York State Labor Law. Glatt v. Fox Searchlight Pictures, Inc., Nos. 13-4478-cv, 13-4481-cv (2d Cir. July 2, 2015). The Second Circuit’s decision provides valuable guidance to employers with unpaid interns.

In the case, the Second Circuit noted the U.S. Department of Labor’s (“DOL’s”) 1967 and 2010 informal guidance on “trainees” and “interns” respectively, and specifically the DOL’s six-part test regarding the “intern” exception to the definition of “employee” under the FLSA. The Second Circuit found the factors considered by the DOL to be useful, but expressly declined to defer to the DOL’s guidance requiring that ALL six parts be met to find non-employee status. Further, the Second Circuit stated that, unlike court deferral to an agency’s interpretation of its own statute or regulation, the DOL here was interpreting the Supreme Court’s decision in Walling v. Portland Terminal Co., 330 U.S. 148 (1947) and had no special expertise in interpreting court decisions.

As to the merits of the intern issue, the Second Circuit said that the DOL and the courts should weigh all the factors addressed in Portland Terminal and additional factors and consider the totality of the circumstances. Most importantly, the Second Circuit said, the district courts should focus on whether the company or the intern was the “primary beneficiary” of the relationship. In this regard, the Second Circuit suggested that the following seven non-exclusive factors be considered:

  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 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 Second Circuit expressly stated that in applying these factors, no one factor is determinative and every factor need not point in the same direction. Further, courts may consider other relevant evidence beyond the specified factors in appropriate cases.

The decision provides valuable guidance to employers with unpaid interns. In light of Fox Searchlight, employers everywhere – but particularly those in New York, Connecticut and Vermont (within the jurisdiction of the Second Circuit)– should carefully review their internship programs. Among other things, they should carefully tailor such programs to insure that they are designed and implemented so that the interns are the “primary beneficiaries” of their internships.