• The U.S. Department of Labor (DOL) has announced it has abandoned its prior six-part test for distinguishing between interns and employees under the federal Fair Labor Standards Act (FLSA).
  • Going forward, the DOL will follow the seven-factor “primary beneficiary” test adopted by four federal appellate courts to determine whether an intern is entitled to payment under the FLSA’s minimum wage provisions.
  • The primary beneficiary test focuses on “economic realities.” Although it sets a less rigid standard for employers, employers must still be mindful not to treat interns and students in ways that could lead to liability for failing to classify them as employees.

In a brief news release on January 5, 2018, the DOL announced that, to determine whether interns are employees under the FLSA, it will henceforth conform to the “primary beneficiary” test first adopted by the U.S. Court of Appeals for the Second Circuit in its 2015 ruling in Glatt v. Fox Searchlight Pictures Inc., 811 F.3d 528 (2d Cir. 2015). The Second Circuit held that a “primary beneficiary” test should be used to distinguish employees from interns under the FLSA. That test requires courts to analyze the “economic reality” of the intern’s relationship with his or her employer to evaluate whether the internship is primarily for the economic benefit of the employer or primarily for the educational benefit of the intern. If the employer is the primary beneficiary, the intern must be compensated as an employee under at least the minimum wage provisions of the FLSA. If the intern primarily benefits from the relationship, the internship can be unpaid.

The primary beneficiary test is a “flexible test” with seven non-exhaustive factors:

  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.

No single factor is determinative. As noted in the DOL’s updated “Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act” (https://www.dol.gov/whd/regs/compliance/whdfs71.htm), “whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case.”

In its news release, the DOL noted that the Ninth Circuit Court of Appeals recently became the fourth federal appellate court to adopt the flexible Glatt primary beneficiary test. See Benjamin v. B & H Educ. Inc., 877 F.3d 1139 (9th Cir. 2017). The DOL explained that it was adopting the primary beneficiary test to conform to the courts’ holdings and eliminate confusion about the applicable rules in determining whether an intern should be considered a paid employee under the FLSA.

The primary beneficiary test replaces a rigid six-factor test that the DOL adopted in 2010 (the 2010 DOL Rule). Under the 2010 DOL Rule, an intern was considered an employee unless all six of the following criteria were met:

  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.

Even if only one of these factors was not met, the intern was classified as an employee entitled to the minimum wage under the FLSA. By contrast, as the DOL recognized in its January 5 news release, the Glatt primary beneficiary test provides “increased flexibility” compared to the 2010 DOL Rule. Failing to satisfy one of the seven Glatt factors does not necessarily classify an intern as an employee under the FLSA. Rather, all seven factors must be weighed, balanced, and considered under a totality of the circumstances. A court may even consider relevant evidence beyond the seven factors to determine whether an unpaid intern should be properly classified as an employee or an unpaid trainee.

The “primary beneficiary” test applies to internships at for-profit employers. As noted in the DOL Fact Sheet, the FLSA has “an exception for individuals who volunteer their time, freely and without anticipation of compensation, for religious, charitable, civic, or humanitarian purposes to non-profit organizations.” In those contexts, “unpaid internships for public sector and non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible,” even if the employer is the primary beneficiary in the relationship.

Practical Implications for Internships Moving Forward

The DOL’s adoption of the “primary beneficiary” test should make classification determinations for interns under the federal FLSA uniform throughout the country. As the Second Circuit noted in Glatt, which rejected the plaintiffs’ attempts to certify large classes of unpaid interns, the case-specific, fact-intensive nature of the primary beneficiary test makes class actions for unpaid interns more likely to fail on commonality grounds. For example, the factual questions of whether and what type of training the intern received, whether the intern continued to work beyond the primary period of beneficial learning, and whether an internship was tied to an educational program may result in answers that are not uniform across the proposed class.

Although the primary beneficiary test is less rigid than the 2010 DOL Rule, and may result in fewer class actions, employers must still follow a consistent intern-hiring procedure and run internship programs that ensure they are properly classifying their interns as unpaid trainees, rather than paid employees. The risks of misclassification are still high. The FLSA authorizes the DOL and aggrieved employees (e.g., misclassified interns) to bring suit for back pay and liquidated damages. A prevailing plaintiff is also entitled to recover attorneys’ fees. In addition, there can be individual liability for decision-makers responsible for a misclassification.

To minimize these risks, we recommend that employers take the following steps when establishing an unpaid internship:

  • Provide a written offer letter to the intern, stating that (a) the internship is unpaid, and (b) that a job is not guaranteed upon completion of the training or completion of the intern’s schooling. Even where an unpaid internship agreement provides that the intern is not entitled to a job after the internship is over, a company that, in practice, frequently hires interns at the conclusion of an internship may tip the scales towards a finding that the internship was part of the employment relationship.
  • When soliciting candidates for the internship, state that applicants who receive college credit are preferred. If college credit is not available, seek to receive written documentation from the student intern’s school stating that the internship is approved and/or sponsored by the school as educationally relevant.
  • Create a formal internship program which scheduled start and end dates. Schedule presentations in which leaders from different parts of the company speak to student interns about their job duties, implement a mentoring program, and offer generous instruction and constructive feedback on interns’ work product. Where possible, match the duration of the internship to the interns’ academic schedule (g., the summer or semester-length).
  • Emphasize and put into practice the training and close supervisory characteristics for the internship program. The training provided to interns should benefit them beyond the specific context of the internship, so that they will be well-equipped to use their skills in multiple employment settings.
  • Note that the primary beneficiary test applies to federal FLSA claims only. Certain states, such as California, have adopted the 2010 DOL Rule as a matter of state law, and other states may have different rules for determining whether an intern should be classified as a paid employee. Employers must comply with the strictest standard in each jurisdiction in which they have employees.