01/19/2018

Are Your Unpaid Interns Actually Interns? Six-Factor Test Is Out, and Primary Beneficiary Test Is In

The U.S. Department of Labor (DOL) recently announced that it will adopt a new, more flexible test for distinguishing interns from employees under the Fair Labor Standards Act (FLSA). The DOL is replacing the six-factor test adopted in 2010 with a “primary beneficiary” test favored by a number of U.S. Courts of Appeals. This change is good news for both employers and employees, as it will increase the incentive for employers to provide more internships to enhance students’ preparation for the workforce. 

Background

Generally, interns and students working for “for-profit” employers may not be considered “employees” under the FLSA, in which case the FLSA does not require compensation for their work. In 2010, the DOL rolled out the six-factor test to determine whether an intern or student is, in fact, an employee under the FLSA. Under this test, an individual would be presumed to be an employee, unless all six factors have been met. Significantly, the “immediate advantage” factor was found to be particularly problematic. Under this factor, if the company received an immediate advantage from the individual’s services, the individual was an employee, and therefore entitled to minimum wage, overtime pay, and other protections provided by the FLSA. A number of federal courts have rejected this test for being overly rigid and inconsistent with modern internships.  

For example, in rejecting this all-or-nothing approach, the Second Circuit, in Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528 (2d Cir. 2016), adopted the “primary beneficiary” test, which focuses on whether the intern or the employer is the “primary beneficiary” of the relationship. The court devised a non-exhaustive set of considerations for the primary beneficiary test; no one factor is dispositive and relevant evidence beyond the specified factors may be considered in appropriate cases. Other courts have followed the Second Circuit’s lead, including the Sixth, Eleventh, and most recently the Ninth Circuit’s ruling in Benjamin v. B & H Educ., Inc., 877 F.3d 1139 (9th Cir. 2017).  

Primary Beneficiary Test

Going forward, the DOL is applying the primary beneficiary test, using a list of seven non-exhaustive factors identified by the courts to determine who is receiving primary benefits from the intern relationship. Such factors 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 “primary beneficiary” test is a flexible test, without a single determining factor. Whether an individual is an intern or an employee under the FLSA will necessarily depend on the unique circumstances of each case.  

If analysis of these circumstances reveals that an intern or student is actually an employee, then he or she is entitled to both minimum wage and overtime pay under the FLSA. On the other hand, if the analysis confirms that the intern or student is not an employee, then he or she is entitled to neither.

In connection with this change in enforcement practice, the DOL has issued an updated Fact Sheet on internship programs under the FLSA. The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the Division's investigators with increased flexibility to holistically analyze internships on a case-by-case basis.

Takeaway for Employers

While the DOL’s abandonment of the rigid six-factor intern test is welcome news for employers, this might be a good opportunity for employers to review the structure of their unpaid internship programs and ensure that they have properly classified interns. In addition, employers should look at applicable intern tests in their jurisdictions before immediately discarding the stricter six-factor test.  

For answers concerning classification of workers generally (e.g., exempt/nonexempt employee, intern, independent contractor, volunteer) or classification of interns specifically, please contact Jim Erwin at 207.791.1237 or jerwin@pierceatwood.com or Soyoung Yoon at syoon@pierceatwood.com or 617.488.8129.