Just in time for the summer intern season to launch into full swing, the Second Circuit has issued a ruling in Glatt v. Fox Searchlight Pictures, Inc., Nos. 13-4478, 13-4481 (2d Cir. July 2, 2015) which changes the test for whether a worker is properly classified as an unpaid intern or an employee (to whom an employer must pay minimum wage and overtime) under the FLSA.

In 2010, the Department of Labor published guidance on the issue of whether unpaid interns working in the for-profit private sector should be classified as employees. The guidance provides that an employment relationship does not exist (and thus the worker is properly characterized as an unpaid intern) if all of the following factors apply:

  • 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;
  • The internship experience is for the benefit of the intern;
  • The intern does not displace regular employees, but works under close supervision of existing staff;
  • 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;
  • The intern is not necessarily entitled to a job at the conclusion of the internship; and
  • The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

The U.S. District Court for the Southern District of New York’s ruling in Glatt (discussed here) relied on the DOL’s six factor test to hold that the plaintiffs in the case, unpaid interns working for Fox Searchlight on the production of Black Swan, should have been classified as employees under the FLSA.

The Second Circuit, rejecting the DOL test and the District Court’s reliance on it, vacated the District Court decision. The six factors in the DOL test were essentially a distillation of the facts discussed in a 1947 Supreme Court case, Walling v. Portland Terminal Co., 330 U.S. 148 (1947). Because the test was based on Portland Terminal, and agencies have “no special competence or role in interpreting a judicial decision,” the Second Circuit stated that the test was only entitled to deference to the extent it found the test persuasive. Reasoning that the test was too rigid to apply to all workplaces, the Second Circuit concluded that it did not find the DOL test persuasive, and therefore would not defer to it.

Instead, the Second Circuit held that in determining whether a worker is properly classified as an employee or an unpaid intern, “the proper question is whether the intern or the employer is the primary beneficiary of the relationship.” To aid in that analysis, the court articulated a non-exhaustive list of seven factors to be considered:

  • 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.
  • 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.
  • The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  • The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  • The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  • 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.
  • 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.

If you compare the factors identified by the court versus those in the DOL guidance, you’ll notice that the Second Circuit only adopted three of the factors from the DOL’s test.

Aside from the fact that the Second Circuit articulated a different test than the DOL, two differences between the tests are especially significant:

  1. the DOL test required that the unpaid internship satisfy all six factors to be taken out of the employment relationship; by contrast, the Second Circuit test allows for a weighing and balancing of all of the circumstances, and no one factor is dispositive.
  2. the Second Circuit test allows the employer to obtain some benefit from the relationship, whereas the DOL test did not allow the employer to derive any immediate advantage from the intern’s activities.

While this decision applies only to for-profit employers within the Second Circuit, if your company currently uses unpaid interns (or relied on the DOL test to classify interns as employees), now is a good time to reevaluate their unpaid intern/employee status.