A New Internship Standard—The Second Circuit’s Seven-Factor Test and What it Means for Your Company

On July 2, 2015, the Second Circuit Court of Appeals issued a decision regarding the employment status of unpaid interns that should prove helpful to employers. In Glatt v. Fox Searchlight Pictures, Inc., Nos. 13-4478 and 13-4481, the Second Circuit overturned a decision by the U.S. District Court for the Southern District of New York, which had granted partial summary judgment holding that two unpaid interns were employees subject to the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL). The lower court also granted class and conditional collective action certification of putative classes of unpaid interns.

The Primary Beneficiary Test

The Second Circuit, agreeing with the employer, set forth what it believed to be the proper test for determining whether an unpaid intern is an employee under the FLSA (and NYLL, which mirrors the FLSA’s definition of “employee”): “whether the intern or the employer is the primary beneficiary of the relationship.” The Second Circuit rejected the interns’ argument that unpaid interns are employees “whenever the employer receives an immediate advantage from the interns’ work.” The Second Circuit also rejected the U.S. Department of Labor’s (DOL) invitation to defer to the DOL’s six-factor test which had emanated from a 1947 Supreme Court decision, Walling v. Portland Terminal, 330 U.S. 148, involving railroad trainees.

The Second Circuit identified two advantages to the “primary beneficiary” test: “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.” The Second Circuit found that the “primary beneficiary” test, “[b]y focusing on the educational aspects of the internship . . . better reflects the role of internships in today’s economy,” as opposed to the DOL’s test, which was based on the economic reality of railroad brakemen working in the 1940’s.

The Second Circuit set forth a list of non-exhaustive considerations that courts should analyze to determine whether the intern or the employer is the “primary beneficiary” of the internship. According to the court, the “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 Second Circuit emphasized that “[a]pplying these considerations requires weighing and balancing all of the circumstances,” and that no one factor is dispositive of the analysis. Courts are also free to analyze additional evidence and factors as appropriate on a case-by-case basis. Ultimately, the Second Circuit’s list of seven factors are merely meant to aid courts in analyzing the essential “primary beneficiary” question.

Because the district court focused solely on the six-factor DOL test in its analysis, the Second Circuit vacated the district court’s grant of partial summary judgment in favor of the interns on the issue of whether two of the interns were employees under the FLSA and NYLL. In addition, the Second Circuit vacated the district court’s certification of a NYLL class and a conditional certification of a nationwide FLSA collective action class. Although the interns provided proof that the employer had a common policy of replacing paid employees with interns, such evidence of a common policy,

will not help to answer whether a given internship was tied to an education program, whether and what type of training the intern received, whether the intern continued to work beyond the primary period of learning, or the many other questions that are relevant to each class member’s case. 

However, the Second Circuit stated that new motions for class and conditional collective certification could potentially succeed after the district court heard new evidence relevant to the Second Circuit’s newly articulated standard and seven factors.

Also of note is that the Second Circuit, in tandem with its decision in Glatt, issued a Summary Order on July 2 in Wang v. The Hearst Corp., No. 13-4480, which was argued together with Glatt before the Second Circuit in January. The Second Circuit’s decision affirmed, in accordance with Glatt, the Wang district court’s denial of class certification. However, in a footnote, the Second Circuit stated—just like it had in Glatt— that a new motion for certification may succeed after the district court hears further evidence relevant to the Second Circuit’s newly-articulated standard and seven factors.

In addition, the Second Circuit vacated the Wang district court’s denial of the interns’ partial summary judgment motion, reasoning that, “[a]lthough the district court applied a totality of the circumstances test, it understandably did not consider all of the factors we proposed in Glatt.” As a result, the Second Circuit simply instructed the Wang district court, on remand, to decide the employee issue de novo based on the Second Circuit’s newly-articulated standard and seven factors.

Key Takeaways

The takeaways from the Glatt and Wang cases are twofold. First, the Second Circuit’s “primary beneficiary” test is a less rigid and more employer-friendly test than either the DOL’s six-factor test or the interns’ proposed “immediate advantage” test. The Second Circuit made it clear that even if certain of the seven factors weigh in favor of employee status, an employer is not foreclosed from showing that under the economic reality of the internship, the individual is not an employee.

Moreover, although the Second Circuit’s seven factors are similar to the DOL’s six-factor test, some of the stringent requirements of the DOL test have been softened in the Second Circuit’s articulation of its seven factors. In addition, the Second Circuit gave weight to the extent to which the internship is intertwined with the intern’s academic program—a consideration that is not part of the DOL’s six-factor test. This focus should especially help employers whose interns tend to be in school and receiving academic credit for their internships.

Second, the Second Circuit’s “primary beneficiary” test may make it more difficult for plaintiffs to gain class certification, either in a Rule 23 class action or an FLSA collective action. In Glatt, the Second Circuit, in what is sure to be language cited extensively by defense attorneys, stated that “the question of an intern’s employment status is a highly individualized inquiry.” However, the Second Circuit, in both Glatt and Wang, went out of its way to note that class certification may be granted once evidence regarding the “primary beneficiary” test is heard by the respective district courts. Ultimately, the extent to which these decisions stem the rising tide of intern class and collective actions remains to be seen, and nothing will be known for sure until more district courts begin to analyze whether the “primary beneficiary” test can be decided on a class-wide basis.