In recent years, numerous cases have been brought by unpaid interns seeking compensation under the Fair Labor Standards Act (FLSA). The plaintiff-interns typically contend they are employees under the FLSA, and not unpaid “trainees” under Walling v. Portland Terminal Co., 330 U.S. 148 (1947). In Walling, the Supreme Court held that “trainees” for a railroad company attending a weeklong training course were not employees under the FLSA because they did not displace regular employees, did not provide any immediate benefit to the company by their presence, and received instruction that only benefited the trainees themselves.

The first district court ruling to hold that unpaid interns are employees under the FLSA occurred in the Glatt v. Fox Searchlight Pictures, Inc. case in June 2013. In that ruling, the district court for the Southern District of New York applied the six criteria from the Department of Labor’s Fact Sheet #71 for whether an internship may be unpaid:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

According to the Fact Sheet, only if all six criteria are met, the intern is not an employee and therefore not entitled to the protections of the FLSA.

The district court in Fox determined that the DOL factors were entitled to deference, reasoning that the factors have support in Walling and are a reasonable application of the FLSA. However, instead of requiring all six criteria to be met, the district court only balanced the factors. Two plaintiffs moved for summary judgment on the issue of whether they were employees under the FLSA. Because they did not receive formal training or education during the internship, only benefited from the inaternship in the way any employee would receive a benefit from employment (whereas Fox benefited from the unpaid labor), displaced regular employees by performing work that would have been handled by a paid employee, and Fox received an immediate advantage from plaintiffs’ work, the district court held that, considering the totality of the circumstances, the two plaintiffs were employees under the FLSA. The court discounted the remaining two factors because there was no evidence of whether the two plaintiffs would receive jobs at the end of their internships and, although they understood they would not be paid, the FLSA does not allow employees to forfeit wages. As a result, the district court granted plaintiffs’ motion for summary judgment on the issue of whether they were employees covered by the FLSA.

The district court in Fox also certified a class on another named plaintiff’s New York Labor Law (NYLL) claim under Federal Rule of Civil Procedure 23, reasoning that all Rule 23 factors had been met, including that predominance existed because there were common questions on liability that could be answered by evidence that interns were recruited during busy periods, displaced regular employees, and Fox employees allegedly thought the internships did not comply with the law. Likewise, the district court conditionally certified a collective under the FLSA because there was “generalized proof that interns were the victims of a common policy to replace paid workers with unpaid interns.”

Shortly before the district court issued its order in Fox, another district court in the Southern District of New York denied both the plaintiffs’ partial motion for summary judgment as to whether the interns were employees under the FLSA and the Rule 23 class certification of a NYLL claim in another intern case—Wang v. The Hearst Corp. In that order, the district court decided there was a genuine issue of material fact regarding which standard should be applied to determine if the interns were employees under the FLSA. Thus, without deciding which test should be applied, the district court denied partial summary judgment. As to class certification, the district court also held that, although it was a close call, plaintiffs failed to meet the commonality prong: “The evidence of a corporate-wide policy of classifying the proposed class members as unpaid interns is insufficient, as that policy alone cannot answer the liability question, which turns on what the interns did and what benefits they received during their internship.” The court opined that there simply was no common proof that the court could rely upon to determine the nature of the interns’ work. The plaintiffs were successful, however, in conditionally certifying a class under the FLSA, which was granted in July 2012.

Just before the holiday weekend, the Second Circuit issued its decisions in both the Fox and Hearst cases—reversing the district court’s decision in Fox entirely and affirming and reversing in part the decision in Hearst. In itsFox decision, the Second Circuit stated that the issue of when an intern should be compensated as an employee under the FLSA is a matter of first impression in the circuit. It then considered the parties’ competing arguments for and against applying the criteria from the DOL Fact Sheet. Ultimately, the Second Circuit declined to give the DOL criteria deference because the criteria are “essentially a distillation of the facts” from Walling and there is nothing special in an agency’s interpretation of a judicial decision. It instead agreed with the defendants and adopted a new “primary beneficiary” test—is the intern or the employer the primary beneficiary of the relationship? The Second Circuit then provided a non-exhaustive list of factors to consider in the internship context:

  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 Second Circuit, in promulgating these factors, made it clear that the primary beneficiary test is meant to be flexible. A court must balance these factors and consider the totality of the circumstances, with no one factor being dispositive of the issue. Neither party necessarily needs to satisfy all of these non-exhaustive factors to prevail. The Second Circuit explained that this test is faithful to the holding in Walling but also accounts for the economic realities of today’s internships. The Second Circuit vacated the district court’s order in Fox granting partial summary judgment to the two plaintiffs and remanded, but did not express an opinion as to whether the interns may be employees under the test.

The Second Circuit also vacated the district court’s order in Fox granting Rule 23 class certification of the NYLL claim. Key to the Second Circuit’s decision was the fact that the common evidence relied upon by the named plaintiff seeking certification (Antalik) would not answer the most important question in the case—whether the interns met the primary beneficiary test to be considered employees under the FLSA. Antalik argued that Fox had a policy of relying upon unpaid interns to replace regular, paid employees, and that such common generalized proof sufficed to warrant class treatment. However, the Second Circuit reasoned that even if Antalik could prove this common policy, it may not establish that each class member was an employee under the FLSA. Like the district court in Hearst, the Second Circuit explained that applying the primary beneficiary test was a highly individualized inquiry such that the common policy identified could not predominate over highly individualized questions relating to each intern’s circumstances. It also observed that variability of internship programs across departments and divisions created further individualized circumstances contributing to the court’s denial of Rule 23 class certification. Importantly, the court noted that while the case did involve certain common issues, the “most important” issue involved the interns’ employee status (or lack thereof), and that the individualized inquiries required to analyze that most important issue therefore predominated over common questions. Based on the same reasoning, the Second Circuit also vacated the order for conditional certification of an FLSA collective, explaining that the proposed collective members are not similarly situated because the court must determine the individual aspects of each internship under the primary beneficiary test and none of the common proof identified would address the individual aspects.

In its Hearst decision, which was captured in a summary order and does not have precedential effect, the Second Circuit vacated the district court’s denial of partial summary judgment on the issue of whether the interns were employees under the FLSA, referencing its adoption of the primary beneficiary test in Fox. Because the Second Circuit adopted the primary beneficiary test, it remanded for further proceedings in light of the new test but again did not express an opinion as to whether the interns may be employees. As to class certification, the Second Circuit affirmed the district court’s order, finding that the district court did not abuse its discretion in denying plaintiffs’ motion for class certification. Again referencing the decision in Fox, the Second Circuit explained that whether an intern is an employee is a highly individualized inquiry such that common questions do not predominate over individual ones.

Notably, in both Fox and Hearst, the Second Circuit stated in a footnote that its decisions did not preclude the plaintiffs from renewing their bids for class and collective certification under the court’s clarified standard, although the court’s emphasis on the interns’ individualized circumstances suggests that they may have an uphill battle. It remains to be seen how the district courts will apply the primary beneficiary test and how employers need to design their internship programs to comply. Although the plaintiffs encountered some difficulty in both the Fox and Hearst cases in attempting to certify their proposed classes, there will likely be continued litigation on the parameters of the primary beneficiary test. Nevertheless, Fox and Hearst do provide employers with very helpful precedent even outside the internship context, given the court’s reaffirmed focus on the importance of analyzing individualized issues in cases involving employment status (which could, for example, include cases involving overtime exemptions under the FLSA or state laws) and its denial of class and collective certification for that reason.