The Warshawsky Law Firm Blog

Monday, August 3, 2015

Second Circuit Adopts Pro-Employer "Primary Beneficiary" Test For Unpaid Internships

In a previous blog post, I discussed whether unpaid internships for private businesses run afoul of federal and state wage laws.  At that time (September 2013), the prevailing view was that such internships were prohibited by the U.S. Department of Labor's six-factor test (DOL Fact Sheet #71). 

The DOL test was applied in the case of Glatt v. Fox Searchlight Pictures, Inc., by the federal district judge who ruled that the plaintiff interns who worked without pay for Fox Searchlight Pictures were "employees" entitled to minimum wage and overtime under federal and state wage laws.  On Appeal, however, this ruling was reversed by the U.S. Court of Appeals for the Second Circuit (which has jurisdiction over federal courts in New York, Connecticut, and Vermont).

In its decision, issued on July 2, 2015, the Second Circuit held that the DOL's six-factor test is not controlling and instead adopted a "primary beneficiary" test that examines, under the totality of the circumstances, "whether the intern or the employer is the primary beneficiary of the relationship."  This test is much more favorable to employers than the DOL's test.  The Second Circuit remanded the case for a new decision by the district judge using this new legal standard.

The Second Circuit explained the "primary beneficiary" test as follows (legal citations omitted):

The primary beneficiary test has two salient features. First, it focuses on what the intern receives in exchange for his work.  Second, it also accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.

Although the flexibility of the primary beneficiary test is primarily a virtue, this virtue is not unalloyed.  The defendants’ conception of the primary beneficiary test requires courts to weigh a diverse set of benefits to the intern against an equally diverse set of benefits received by the employer without specifying the relevance of particular facts.  In somewhat analogous contexts, we have articulated a set of non-exhaustive factors to aid courts in determining whether a worker is an employee for purposes of the FLSA.

In the context of unpaid internships, we think 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.

Applying these considerations requires weighing and balancing all of the circumstances.  No one factor is dispositive and every factor need not point in the same direction for the court to conclude that the intern is not an employee entitled to the minimum wage.  In addition, the factors we specify are non‐exhaustive -- courts may consider relevant evidence beyond the specified factors in appropriate cases.

Even more important for employers than the wording of this new "primary beneficiary" test is the Second Circuit's repeated emphasis that the test requires "a highly individualized inquiry."  This is legal lingo for "cannot be proved through common, generalized, class-wide evidence."  Consequently, although the Second Circuit coyly declined to answer the question in its opinion, this new test probably does not lend itself to collective actions (under the FLSA) and class actions (under state wage laws).  As a result, plaintiffs will have to pursue their claims individually and not as part of larger lawsuits.  While this will protect employers from expensive litigation, it also will disincentivize interns with meritorious but small claims from pursuing compensation in court.

Not surprisingly, the employment defense bar is very happy with the Second Circuit's decision.  For management-side commentary on this decision, see, e.g., here (Orrick), here (Littler), and here (Seyfarth Shaw).

If you or someone you know has worked as an unpaid intern and would like more information about the possibility of obtaining compensation under federal and state wage laws, please contact The Warshawsky Law Firm today.    

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