The United States Department of Labor (the “USDOL”) has revised its Fact Sheet #71 guidance on unpaid internship programs at “for-profit” businesses (the “Guidance”). That Guidance is consistent with rulings by a majority of federal appellate courts rejecting the USDOL’s now former six-factor test and endorsing a new analysis centered on whether the intern or the hosting business is the “primary beneficiary” of the internship. Accordingly, businesses should review their internship programs to ensure that the interns are the primary beneficiaries of the experience.
This revised Guidance gives employers somewhat broader protection from coverage under the FLSA; however, it is an incremental change, not a wholesale, blanket approval of all unpaid internships. In addition, for-profit employers need to make sure they are in compliance with applicable state and local laws because those laws may impose additional requirements on internship programs not found in the USDOL’s guidance.
Background and Context
The USDOL’s prior guidance called for the application of a six-factor test derived from Walling v. Portland Terminal Co.,1 a United States Supreme Court opinion from 1947 involving trainees. In recent years, federal appellate courts rejected that test as being “too rigid,”2 and “a poor method for determining employee status in a training or educational setting.”3 Rather, reviewing courts endorsed an analysis of the relationship with an eye to determining who was the “primary beneficiary”4 of the internship experience.
The “Primary Beneficiary” Test
The USDOL’s revised Guidance, consistent with the federal appellate decisions, sets forth seven factors, stating that no single factor is determinative, and that whether an intern is an employee entitled to wages is a “flexible test” that “necessarily depends on the unique circumstances of each case.” The seven, non-exclusive factors to be considered are:
1. The extent to which the intern and the host understand that there is no expectation of compensation in connection with the internship (“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 similar to that provided in an educational environment, including clinical and hands-on training;
3. The extent to which the internship is tied to the intern’s formal education through integrated coursework and the receipt of academic credit;
4. The extent to which the internship corresponds to the academic calendar;
5. The extent to which the internship is limited in duration to the period in which it provides the intern with beneficial learning;
6. The extent to which the internship complements rather than displaces the work of paid employees while providing educational benefits; and
7. The extent to which both parties understand that the internship does not entitle the intern to a paid job upon conclusion of the internship.
The USDOL Guidance is a welcome update because it reduces ambiguity for companies that host interns by harmonizing the USDOL’s position with that of appellate courts in the majority of federal circuits.
Employers must keep in mind that state law and state enforcement agencies may impose more stringent requirements on internship programs than those articulated by the USDOL.
For instance, in July 2016, the New York State Department of Labor issued a fact sheet concerning unpaid internship programs under the New York State Minimum Wage Act. According to that guidance, a program must meet all of the following eleven criteria to be properly classified as an unpaid internship under the Minimum Wage Act:
1. The training, even though it includes actual operation of the employer’s facilities, is similar to training provided in an educational program.
2. The training is for the benefit of the intern.
3. The intern does not displace regular employees, and works under close supervision.
4. The activities of trainees or students do not provide an immediate advantage to the employer. On occasion, operations may actually be impeded.
5. The trainees or students are not necessarily entitled to a job at the conclusion of the training period and are free to take jobs elsewhere in the same field.
6. The trainees or students are notified, in writing, that they will not receive any wages and are not considered employees for minimum wage purposes.
7. Any clinical training is performed under the supervision and direction of people who are knowledgeable and experienced in the activity.
8. The trainees or students do not receive employee benefits.
9. The training is general, and qualifies trainees or students to work in any similar business. It is not designed specifically for a job with the employer that offers the program.
10. The screening process for the internship program is not the same as for employment, and does not appear to be for that purpose. The screening only uses criteria relevant for admission to an independent educational program.
11. Advertisements, postings, or solicitations for the program clearly discuss education or training, rather than employment, although employers may indicate that qualified graduates may be considered for employment.
Interestingly, in 2015, the Second Circuit Court of Appeals applied the FLSA “primary beneficiary” analysis to the New York State Minimum Wage Act; however, that interpretation has yet to be endorsed by New York State courts (although one court observed that, while the issue wasn’t yet before it, “whichever test the court adopts, it will be a test that balances a number of factors and one that takes into consideration both the benefit of the work to the employer and the experiences of the individual intern”).5
The Guidance helpfully re-states, in a footnote, the USDOL’s prior position that “[u]npaid internships for public sector and non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible.” However, here too, hosts of interns in the non-profit sector should also be aware of state-specific guidance. For example, the New York State Department of Labor issued a fact sheet in July 2016 which, while acknowledging that non-profit institutions may engage unpaid interns and volunteers, imposes conditions upon those relationships not found at the federal level.
Practical Advice For-profit businesses in the private sector that have unpaid internship programs will have a little more latitude defending such programs based on the USDOL’s guidance, which abandons its previous position that interns were entitled to wages whenever the business derived any benefit, however minor or incidental, from the internship program. However, businesses still need to ensure that the interns are the primary beneficiaries of the internship programs for purposes of compliance with applicable federal law. And, businesses and not-for-profit organizations alike must comply with state and local laws that impose requirements upon internship programs in excess of federal law.