The U.S. Department of Labor has endorsed a seven-factor test for determining whether an intern is considered an employee under the Fair Labor Standards Act.
In a brief news release on January 5, 2018, the DOL announced that, to determine whether interns are employees under the FLSA, it will henceforth conform to the “primary beneficiary” test first adopted by the U.S. Court of Appeals for the Second Circuit in its 2015 ruling in Glatt v. Fox Searchlight Pictures Inc., 811 F.3d 528 (2d Cir. 2015). The Second Circuit held that a “primary beneficiary” test should be used to distinguish employees from interns under the FLSA. That test requires courts to analyze the “economic reality” of the intern’s relationship with his or her employer to evaluate whether the internship is primarily for the economic benefit of the employer or primarily for the educational benefit of the intern. If the employer is the primary beneficiary, the intern must be compensated as an employee under at least the minimum wage provisions of the FLSA. If the intern primarily benefits from the relationship, the internship can be unpaid.
The primary beneficiary test is a “flexible test” with seven non-exhaustive factors:
No single factor is determinative. As noted in the DOL’s updated “Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act” (https://www.dol.gov/whd/regs/compliance/whdfs71.htm), “whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case.”
In its news release, the DOL noted that the Ninth Circuit Court of Appeals recently became the fourth federal appellate court to adopt the flexible Glatt primary beneficiary test. See Benjamin v. B & H Educ. Inc., 877 F.3d 1139 (9th Cir. 2017). The DOL explained that it was adopting the primary beneficiary test to conform to the courts’ holdings and eliminate confusion about the applicable rules in determining whether an intern should be considered a paid employee under the FLSA.
The primary beneficiary test replaces a rigid six-factor test that the DOL adopted in 2010 (the 2010 DOL Rule). Under the 2010 DOL Rule, an intern was considered an employee unless all six of the following criteria were met:
Even if only one of these factors was not met, the intern was classified as an employee entitled to the minimum wage under the FLSA. By contrast, as the DOL recognized in its January 5 news release, the Glatt primary beneficiary test provides “increased flexibility” compared to the 2010 DOL Rule. Failing to satisfy one of the seven Glatt factors does not necessarily classify an intern as an employee under the FLSA. Rather, all seven factors must be weighed, balanced, and considered under a totality of the circumstances. A court may even consider relevant evidence beyond the seven factors to determine whether an unpaid intern should be properly classified as an employee or an unpaid trainee.
The “primary beneficiary” test applies to internships at for-profit employers. As noted in the DOL Fact Sheet, the FLSA has “an exception for individuals who volunteer their time, freely and without anticipation of compensation, for religious, charitable, civic, or humanitarian purposes to non-profit organizations.” In those contexts, “unpaid internships for public sector and non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible,” even if the employer is the primary beneficiary in the relationship.
Practical Implications for Internships Moving Forward
The DOL’s adoption of the “primary beneficiary” test should make classification determinations for interns under the federal FLSA uniform throughout the country. As the Second Circuit noted in Glatt, which rejected the plaintiffs’ attempts to certify large classes of unpaid interns, the case-specific, fact-intensive nature of the primary beneficiary test makes class actions for unpaid interns more likely to fail on commonality grounds. For example, the factual questions of whether and what type of training the intern received, whether the intern continued to work beyond the primary period of beneficial learning, and whether an internship was tied to an educational program may result in answers that are not uniform across the proposed class.
Although the primary beneficiary test is less rigid than the 2010 DOL Rule, and may result in fewer class actions, employers must still follow a consistent intern-hiring procedure and run internship programs that ensure they are properly classifying their interns as unpaid trainees, rather than paid employees. The risks of misclassification are still high. The FLSA authorizes the DOL and aggrieved employees (e.g., misclassified interns) to bring suit for back pay and liquidated damages. A prevailing plaintiff is also entitled to recover attorneys’ fees. In addition, there can be individual liability for decision-makers responsible for a misclassification.
To minimize these risks, we recommend that employers take the following steps when establishing an unpaid internship: