On January 5, 2018, the U.S. Department of Labor (“DOL”) clarified its position regarding paid and unpaid internships. They will now use the “primary beneficiary” test for determining “whether interns are employees” under the Fair Labor Standards Act (“FLSA”). (link to DOL news release here.) The agency has issued a revised Fact Sheet called “Internship Programs under the Fair Labor Standards Act.” (found here.).This is a modest change, but should be welcomed by businesses that are debating whether and how to establish internship programs. The debate stems, in part, from conflicting interpretations about how the FLSA’s minimum wage and overtime provisions apply to interns. In 2010, DOL issued a Fact Sheet stating, in effect, that interns were presumed to be employees entitled to minimum wage and overtime, unless six specific factors were present. In the wake of DOL’s 2010 Fact Sheet, a spate of lawsuits proliferated over whether interns in the for-profit sector were owed back wages. In these cases, interns have sought to be paid past wages, relying, in part, on DOL’s six-factor test to assert that they are entitled to back pay.

Courts, however, have not embraced the DOL’s six-factor test. In 2016, the Second Circuit Court of Appeals found the DOL test to be “too rigid.” Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528, 536 (2d Cir. 2016). Instead, the Second Circuit utilized a more flexible, balancing approach, focusing upon which party – the intern or the business – is the “primary beneficiary” of the relationship. Id. Other courts have followed suit, including, most recently, the Ninth Circuit Court of Appeals. In December, the Ninth Circuit decided that cosmetology students who performed services in school-owned salons were not employees entitled to be paid wages under the FLSA. See here.

The Ninth Circuit applied the Second Circuit’s primary beneficiary analysis, which consists of a set of seven, non-exhaustive factors to weigh and balance in making the determination. Those 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.

See Glatt, 811 F.3d at 536-37.

The DOL’s action on January 5th made clear that the agency, like the courts, would apply the primary beneficiary analysis. As a result, Employers, can have more confidence that, for FLSA purposes, internship programs will be reviewed under a single standard rather than having to contend with DOL’s prior, somewhat rigid approach.

This change is positive news for employers, to be sure; but employers should proceed with caution in implementing or expanding unpaid internship programs. Specifically, employers must ensure that the programs are truly designed to primarily benefit the interns.