Second Circuit Outlines The Way for Employers to Hire Unpaid Interns

On July 2, 2015, in a matter of first impression, the Second Circuit issued a ruling in Glatt v. Fox Searchlight Pictures, Inc., Nos. 13-4478, 13-4481 (2d Cir. July 2, 2015), and provided a new test for whether a worker can be classified as an unpaid intern under the Fair Labor Standards Act (“FLSA”) and the New York Labor Law (“NYLL”). and thus entitled to compensation, including minimum wage and overtime.  The ruling by the Second Circuit rejected both the Department of Labor (“DOL”)’s six-factor test to determine whether or not an intern should be classified as an employee, and the U.S. District Court for the Southern District of New York’s previous reliance on the DOL’s test.

In 2013, the U.S. District Court for the Southern District of New York followed the DOL’s 2010 guidance for whether unpaid interns working in the for-profit private sector should be classified as employees.  The DOL test lays out six factors, including, for example, whether the internship experience is for the benefit of the intern, whether the intern displaces regular employees, and whether the employer derives an immediate advantage from the intern’s work. The DOL test requires that each and every factor must apply in order for a position to be an unpaid internship.  The District Court held that since not all of the DOL’s six factors applied, the plaintiffs in Glatt should have been classified as employees under the FLSA and the NYLL.

The Second Circuit, however, held that a “primary beneficiary test” should be utilized when determining whether or not employers need to pay their interns.  In other words, it must be determined whether the employer, rather than the intern, is the primary beneficiary of the relationship.  The Second Circuit found that the DOL six factor test was “too rigid” and unpersuasive, and was not entitled to deference.

To aid in determining whether the worker or the employer is the primary beneficiary, the Second Circuit articulated a “non-exhaustive” list of seven factors that should be considered and balanced when deciding whether the employer or intern is the primary beneficiary of the relationship:

• The extent to which the intern and the employer clearly understand that there is no expectation of compensation;
• 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 institutes;
• 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; and
• 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 Second Circuit made clear that no one factor is dispositive and that every factor need not point in the same direction to conclude that the intern is not an employee. Thus, Courts are free to look to other factors, and the failure to satisfy any one factor is not dispositive.  While the Second Circuit’s list of factors only adopted three of the DOL’s factors, it retained the DOL’s requirement that the position provide an educational value, suggesting that it is crucial to include an educational aspect in an unpaid internship.  The Second Circuit opined that this new test takes into account the “relationship between the internship and the intern’s formal education…by focusing on the educational aspects of the internship our approach better reflects the role of internships in today’s economy.”

The Glatt decision signals positive news for employers in New York, Connecticut and Vermont when determining whether or not they need to pay interns.  Private sector for-profit companies with internship programs should evaluate their programs to ensure that they are in compliance with all state and federal laws.  As the Second Circuit explained, a bona fide internship must “integrate classroom learning with practical skill development in a real-world setting.” It will be interesting to see whether or not other Circuit Courts find this ruling persuasive.

For more information regarding this decision and to learn how your business can implement best practices when implementing internship programs, please contact John C. Petrella, Director of the firm's Employment Litigation Practice Group at jpeteralla@genovaburns.com or Dina M. Mastellone, Esq., Director of the firm’s Human Resources Practice Group, at dmastellone@genovaburns.com or 973-533-0777.