Finally resolving conflicts concerning the standard  to be used in determining when an unpaid intern should be properly classified as an employee, on July 2, 2015 the Second Circuit Courts of Appeals decided Glatt v. Fox Searchlight Pictures, No. 13-4478-cv, 2015 WL 4033018 (2d Cir. July 2, 2015). In addition to providing much-needed  clarity to lower courts and employers in the circuit, the Glatt decision is being widely heralded as an employer-friendly result.

In Glatt, two former production interns on the “Black Swan” film sued Fox claiming that they should have been classified as “employees” under the Fair Labor Standards Act (“FLSA”) and the New York Labor Law (“NYLL”) and were thus entitled to be paid the minimum wage  plus overtime. The District Court agreed with the plaintiffs and found that they were indeed “employees” under the FLSA and the NYLL and were entitled to be paid.

The Second Circuit reversed the lower court’s finding and rejected its use of the Department of  Labor’s (“DOL”) test, which requires the existence of six factors in order to find that an individual qualifies as a bona fide intern — the standard advocated by the plaintiffs. Under the DOL’s test, an intern is to be considered an employee when the employer obtains an immediate advantage from the intern’s work. In contrast, the Second Circuit adopted a test establishing that “the proper question is whether the intern or the employer is the primary beneficiary of the relationship.” This “primary beneficiary” test was proposed by Fox and adopted by the court because “it focuses on what the intern receives in exchange for his work” and “accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.” Moreover, the court noted, this test “reflects a central feature of the modern internship — the relationship between the internship and the intern’s formal education.”

The primary beneficiary test is far more flexible and involves “weighing and balancing” seven nondispositive factors listed below, as well as any other factors considered to be relevant by a court, to determine whether an unpaid intern properly should be classified as an employee under the FLSA:

  1. The extent to which the intern and 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 thus remanded the case to the District Court to apply the primary beneficiary test.

In addition to establishing the primary beneficiary test, the Second Circuit in Glatt also vacated and remanded the District Court’s decision to certify a Rule 23 class and a FLSA collective action. While the court left open the possibility that a new motion to certify based on the primary beneficiary standard might be granted, it suggested that such an outcome was unlikely because “the question of an intern’s employment status [under the primary beneficiary test] is a highly individualized inquiry” and noted that “courts must consider individual aspects of each intern’s experience.”

Guidance for Employers

In Glatt, the Second Circuit first and foremost established new law and provided much-needed guidance to lower courts and employers in the Second Circuit regarding the viability of unpaid internships. The primary beneficiary test provides a more flexible standard than the DOL’s pre- existing six-factor test and makes clear that the focus when assessing an employer’s internship program should be the extent to which it provides educational development to the individual at issue. Moreover, Glatt seems to virtually foreclose certifications of Rule 23 class and/or FLSA collective actions brought by unpaid interns. In recent years, there has been a spate of class and collective actions filed by unpaid interns, and the filing of such claims is expected to abate.

Glatt, however, is not without its limitations, and employers must still proceed cautiously with regard to unpaid internship programs. First, Glatt is not a panacea; in order to meet the primary beneficiary test, an employer must clearly demonstrate that its internship program provides concrete educational benefits, which may be difficult to show with respect to some internship programs. Many internship programs that escaped challenge when the law in this area was murky must now be recalibrated to meet the standards set forth in Glatt. Second, although the Second Circuit’s ruling covered the plaintiffs’ NYLL claims, it is unclear whether New York state courts will adopt its holding in ruling on cases brought under the NYLL; indeed, the New York State Department of Labor has published a fact sheet titled “Wage Requirements for Interns in For-Profit Businesses” that relies heavily on the DOL six- factor test and is much more difficult to satisfy than the primary beneficiary test. And third, Glatt applies only in the Second Circuit. Employers that operate intern programs extending outside the Second Circuit may find that their programs are subject to differing standards of review in different locations.