In Glatt v. Fox Searchlight Pictures, Inc., 791 F.3d 376 (2d Cir. 2015), the Second Circuit held that to determine whether an unpaid intern is an employee under the Fair Labor Standards Act of 1938 (“FLSA“), courts should conduct a fact-intensive inquiry under a non-exhaustive set of seven factors that focuses on the educational aspects of the internship. The Second Circuit based its factors on the Supreme Court’s decision in Walling v. Portland Terminal Co., 330 U.S. 148 (1947), in which the Supreme Court recognized that unpaid railroad brakemen trainees should not be treated as employees and were beyond the reach of the FLSA’s minimum wage provision. The Second Circuit stated that while internship programs can greatly benefit interns, employers can also exploit unpaid interns by using their free labor without providing them with an appreciable benefit in education or experience. The court stated that, therefore, there are circumstances in which unpaid interns are not employees under the FLSA and other circumstances in which unpaid interns are employees under the FLSA. The court added that the flexible seven-factor test takes this into account and attempts to determine the “primary beneficiary” of the program.

Notably, the Second Circuit declined to strictly follow the U.S. Department of Labor Fact Sheet for Internship Programs Under The Fair Labor Standards Act, under which the U.S. DOL required employers to satisfy six criteria before an unpaid intern would fall outside of the minimum wage and overtime pay requirements of the FLSA. The Second Circuit held that the six-factor U.S. DOL test was not subject to deference because it was essentially just a distillation of the Supreme Court’s holding in Portland Terminal, and an agency has no special competence or role in interpreting a judicial decision. (Subsequent to the Glatt decision, the U.S. DOL has updated its Fact Sheet for Internship Programs to more closely follow the “primary beneficiary test” set forth in Glatt and subsequent court decisions such as Benjamin v. B & H Educ., Inc., 877 F.3d 1139 (9th Cir. 2017) and in Schumann v. Collier Anesthesia, P.A., 803 F. 3d 1199 (11th Cir. 2015)).

In light of the Glatt decision, employers that provide unpaid internship programs should review the new seven-factor test to ensure their programs do not just capitalize on unpaid interns, but also provide benefits to the interns to avoid liability for unpaid minimum wages and overtime pay under the FLSA.

Background of the Fox Searchlight Dispute
Fox Searchlight (“Fox“) hired unpaid interns for several months during 2009 and 2010. The unpaid interns sued Fox for unpaid minimum wages and overtime pay, arguing they were employees under the FLSA. The district court concluded that the interns had been improperly classified as unpaid interns rather than employees. Fox appealed.

The parties disagreed as to how the Second Circuit should determine when an unpaid intern is an employee under the FLSA. The plaintiffs argued that whenever the employer receives an immediate advantage from the interns’ work, an unpaid intern is actually an employee under the FLSA. The plaintiffs contended that focusing on any immediate advantage that accrues to the employer is appropriate because, according to the plaintiffs, the Supreme Court rested its holding in Portland Terminal on the finding that the brakemen trainees provided no immediate advantage to the employer.

Fox argued that the court should adopt a primary beneficiary test under which an employment relationship is created when the tangible and intangible benefits provided to the intern are greater than the intern’s contribution to the employer’s operation. Fox contended that this test reflects the economic realities of the relationship between intern and employer and that such a test is consistent with how individuals are classified as employees in other contexts.

U.S. DOL, in supporting the plaintiffs, defended its six-factor test and its requirement that every factor be present before the employer can escape its obligation to pay the worker. The DOL argued that its views on employee status are entitled to deference because it is the agency charged with administering the FLSA and that the court should use the six-factor test because the factors come directly from the Supreme Court’s decision in Portland Terminal.

Second Circuit Rejects DOL’s Test and Adopts Flexible Seven-Factor “Primary Beneficiary” Test to Determine Whether an Unpaid Intern is an Employee under the FLSA
The Second Circuit declined the DOL’s invitation to defer to its rigid six-factor test, which was compiled from Portland Terminal, since “an agency has no special competence or role in interpreting a judicial decision.” The court explained that because the DOL test attempts to fit Portland Terminal’s particular facts to all workplaces, and because the test is too rigid, it would not defer to the DOL’s test.

The Second Circuit noted that it had articulated a set of non-exhaustive factors to aid courts in determining whether a worker is an employee for purposes of the FLSA in previous cases. It stated that in the context of unpaid internships, a non-exhaustive set of considerations should include:

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.

The court further explained that applying these considerations requires weighing and balancing all of the circumstances and that no one factor is dispositive. The court also emphasized that the factors are non-exhaustive, meaning courts may consider relevant evidence beyond the specified factors in appropriate cases. The court explained that this flexible approach is faithful to Portland Terminal since nothing in the Supreme Court’s decision suggests that any particular fact was essential to its conclusion or that the facts would have the same relevance in every workplace.

In further support of its use of these factors, the court also noted that its approach reflects a central feature of the modern internship – the relationship between the internship and the intern’s formal education. The court explained that by focusing on the educational aspects of the internship, its approach better reflects the role of internships in today’s economy than the DOL factors, which were derived from a sixty-year old Supreme Court decision that dealt with a single training course offered to prospective railroad brakemen.

Lesson from Glatt for Employers Who Offer Internship Programs
While the Second Circuit’s decision in Glatt is good news for employers that sponsor unpaid internship programs, it applies only to employers covered by the Second Circuit Court of Appeals. Employers in Minnesota are governed by the Eighth Circuit Court of Appeals (which is the federal appellate court having jurisdiction over the federal district courts in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota). Until the Eighth Circuit weighs in on the issue, employers in Minnesota should attempt to follow as many factors as possible under the U.S. DOL six-factor test and the Second Circuit’s flexible seven-factor test when developing unpaid internship programs.

For more information on the FLSA and to obtain advice on how to develop lawful internship programs, contact one of the Minnesota wage and hour law attorneys of Trepanier MacGillis Battina P.A.
____________
About the Author: 
Minnesota wage and hour attorney Craig W. Trepanier represents employers and employees in matters involving wage and hour regulations, overtime pay, unpaid internship programs, and misclassifications under the FLSA and Minnesota Fair Labor Standards Act (MFLSA). Craig may be reached at 612.455.0502 or craig@trepanierlaw.com. Trepanier MacGillis Battina P.A. is a Minnesota wage and hour law firm located in Minneapolis, Minnesota.
____________
Related Topics:
Unpaid Internships Pose Legal Traps for Employers 
The Legal Difference Between a Minnesota Employee and Independent Contractor
Clarifying an Employment Agreement