The Department of Labor (“DOL”) announced its adoption of a new test on January 5, 2018, for determining whether interns are employees under the Fair Labor Standards Act (“FLSA”). In recent years, many for-profit employers have been hesitant to hire interns given the lack of clarity surrounding the applicable standard and the potential for enforcement actions or litigation due to risks of misclassifying employees as interns. The DOL’s adoption Friday of the so-called “primary beneficiary” test brings greater clarity and flexibility to the classification of interns and may open the door for the revitalization of diminished internship programs at for-profit organizations.
The FLSA requires for-profit employers to pay employees for their work. “Employee” is a defined term under the FLSA, and interns and students may qualify as employees to whom compensation must be paid under the FLSA.
Previously, in determining whether an intern was properly classified as unpaid, the DOL focused on whether the employer received an “immediate advantage” from the intern’s work. When the DOL determined that the employer received an “immediate advantage,” it concluded that the intern was an employee owed compensation under the FLSA. Courts and employers alike criticized the DOL’s test as too rigid and impractical for the modern internship. Still, risks ran high for employer mistakes, exposing employers to enforcement actions and lawsuits to recover back pay and an additional equal amount as liquidated damages.
With its announcement Friday, the DOL clarified that it would update its enforcement policies to conform with the more flexible primary beneficiary test already adopted by four federal appellate courts. The newly adopted primary beneficiary test eschews the immediate advantage factor in favor of a more nuanced test focusing on the “economic reality” of the intern-employer relationship.
Under the newly adopted primary beneficiary test, the DOL now uses a seven-factor test to determine whether the employer or the intern is the primary beneficiary of the relationship. The test is intended to be flexible and dependent upon the unique circumstances of each case. No one factor is determinative. Indeed, in its statement announcing the adoption of the primary beneficiary test, the DOL noted that the change would “eliminate unnecessary confusion among the regulated community” and provide the Wage and Hour Division with “increased flexibility to holistically analyze internships on a case-by-case basis.”
The seven factors are:
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.
Employers should take steps to ensure their interns meet this test. Each internship should be evaluated on a case-by-case basis. In doing so, employers should carefully consider the structure of their internship programs and those of the schools with which they affiliate any compensation and the methods of payment, and any agreements with the interns or the schools.