Decision: In two recent cases, Glatt v. Fox Searchlight Pictures andWang v. The Hearst Corporation, the US Court of Appeals for the Second Circuit held that unpaid interns are, in many instances, not employees covered by the Fair Labor Standards Act or by New York Labor Law. In so ruling, the Second Circuit declined to adopt the Department of Labor’s rigid six-part test to determine whether interns should be considered employees, and instead adopted the “primary beneficiary test,” which requires courts to assess whether the intern or the employer is the primary beneficiary of the relationship. In adopting this more nuanced test, the Second Circuit instructed that a court must first focus on what the intern receives in exchange for the work, and second on the economic reality between the intern and the employer.

The Second Circuit set forth seven non-exhaustive factors. In resolving the inquiry, courts have to “weigh and balance” the extent to which: (1) the intern and employer clearly understand that there is no expectation of compensation; (2) the internship provides training similar to an educational environment; (3) the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit; (4) the internship accommodates the intern’s academic commitments by corresponding to the academic calendar; (5) the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning; (6) the intern’s work complements, rather than displaces the work of paid employees while providing significant educational benefits to the intern; and (7) the understanding of the intern and the employer that the internship is conducted without entitlement to a paid job at the conclusion of the internship. The court also held that the fact that an employer sometimes uses unpaid interns in place of paid employees, though relevant, was not sufficient to answer the question of whether the intern was an employee entitled to compensation. Under the new test, no single factor is dispositive.

Impact: The standard adopted by the Second Circuit will likely make it more attractive for employers to engage unpaid interns and more difficult for unpaid interns to establish employment status in the Second Circuit. The decision provides valuable guidance to employers with unpaid interns. While the Second Circuit rejected the DOL’s test, the decision still reinforces the need for employers to carefully tailor their internship programs and insure that they are designed and implemented with an educational benefit and so that the intern—not the company—is the “primary beneficiary” of the internship.