In a Field Assistance Bulletin issued last week without fanfare, the Wage and Hour Division of the U.S. Department of Labor changed the position it has held for 70 years on the test to be applied in determining whether interns should be classified as "employees" under the Fair Labor Standards Act.

The DOL press release states as follows:

On Dec. 19, 2017, the U.S. Court of Appeals for the Ninth Circuit became the fourth federal appellate court to expressly reject the U.S. Department of Labor's six-part test for determining whether interns and students are employees under the Fair Labor Standards Act (FLSA).

The Department of Labor today clarified that going forward, the Department will conform to these appellate court rulings by using the same "primary beneficiary" test that these courts use to determine whether interns are employees under the FLSA. The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the Division's investigators with increased flexibility to holistically analyze internships on a case-by-case basis.

Background

In 2010, the DOL rolled out a "six-part test" in a Fact Sheet addressing unpaid interns working in the for-profit private sector. In the Fact Sheet the DOL, following a 1947 Supreme Court decision involving railroad yard brakemen, took the position that an employment relationship existed unless all the factors listed in its Fact Sheet were met. In other words, if the relationship failed to satisfy any one of the factors, an employment relationship existed, meaning that the intern was entitled to the minimum wage and, if the intern worked more than 40 hours in a given workweek, to overtime.

After the 2010 Fact Sheet was issued, a number of lawsuits were filed by interns, but the courts were not friendly to these claims. U.S. Courts of Appeal, including those for the Second, Sixth, Ninth, and Eleventh circuits, explicitly declined to defer to the DOL's position. According to these courts, the 2010 Fact Sheet was merely a distillation of a Supreme Court decision rather than an interpretation of an ambiguous statutory term or the DOL's own regulations. The Second Circuit was the first appellate court to list specific factors to be considered in determining whether the intern or the employer was the "primary beneficiary" of the intern relationship. In Glatt v. Fox Searchlight Pictures, Inc., the court adopted a "primary beneficiary test" to (1) focus on what the intern receives in exchange for his work, and (2) give courts flexibility to examine the economic reality as it exists between the intern and the employer.

According to the court,

The purpose of a bona-fide internship is to integrate classroom learning with practical skills development in a real-world setting. . . . By focusing on the educational aspects of the internship, our approach better reflects the role of internships in today's economy than the DOL factors, which derived from a 68-year-old Supreme Court decision that dealt with a single training course offered to prospective railroad brakemen.

The Glatt decision lists seven non-exhaustive factors factors to be weighed in determining whether an unpaid intern is actually an employee:

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.

On December 19, 2017, the Ninth Circuit issued its decision in Benjamin v. B&H Education, Inc., holding that cosmetology students were not "employees" of their schools. In doing so, the Ninth Circuit joined the Second, Sixth and Eleventh circuits in rejecting the DOL test and adopting the "primary beneficiary" test to determine whether students are employees:

The primary beneficiary analysis by our sister circuits in Glatt, Schumann, and Laurelbrook represent applications of the Supreme Court's economic realities test, and the courts evaluated the totality of the circumstances of each case as the Supreme Court has directed. . . . Glatt in particular provides a helpful list of factors for courts to consider in the specific context of student workers. We agree with those decisions that the primary beneficiary test best captures the Supreme Court's economic realities test in the student/employee context and that it is therefore the most appropriate test for deciding whether students should be regarded as employees under the FLSA.

Analysis

To Secretary of Labor Alexander Acosta and his team, the Ninth Circuit decision must have turned the tide. The DOL has not only deleted from its website the 2010 Fact Sheet, but has also replaced it with a new Fact Sheet that includes the seven Glatt factors. The Glatt decision also questioned whether lawsuits by interns would be "suitable" for class or collective action treatment. The DOL's new Fact Sheet appears to indicate that such class or collective treatment may not be appropriate: "Courts have described the `primary beneficiary test' as a flexible test, and no single factor is determinative. Accordingly, whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case." Despite the DOL's new position, employers should always be careful in using unpaid interns. An intern should not be treated as a glorified aide, and should never be substituted for paid employees. As the DOL makes clear, internship experiences still must be predominantly educational in character.