By Judith E. Kramer, Fortney & Scott, LLC

In recent years, a number of unpaid interns have filed suit under the Fair Labor Standards Act (FLSA), arguing that under the U.S. Department of Labor's (DOL) guidance, they must be treated as employees entitled to the minimum wage and overtime protections of the statute. The U.S. 2nd Circuit Court of Appeals recently disagreed with the DOL's guidance and handed a victory to Fox Searchlight Pictures.

Background

The case involved unpaid interns who worked either on the Fox Searchlight-distributed film Black Swan or at the Fox corporate offices in New York City. They contended that Fox Searchlight and Fox Entertainment Group violated the FLSA and New York law by failing to pay them as employees during their internships as required by the federal and state minimum wage and overtime provisions.

Court's decision

The central issue before the court of appeals was whether the interns should be deemed "employees" for purposes of the FLSA (New York law essentially applies the same standards as the FLSA). As the court noted, "The FLSA unhelpfully defines 'employee' as an 'individual employed by an employer.'" However, the DOL, as the agency charged with enforcing the FLSA, has issued informal guidance. In its "Intern Fact Sheet," the agency provides that an employment relationship does not exist if all of the following factors apply:

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment.
2. The internship experience is for the benefit of the intern.
3. The intern does not displace regular employees but works under close supervision of existing staff.
4. The employer that provides the training derives no immediate advantage from the activities of the intern, and on occasion its operations may actually be impeded.
5. The intern is not necessarily entitled to a job at the conclusion of the internship.
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

The court of appeals recognized the competing interests involved, noting:

When properly designed, unpaid internship programs can greatly benefit interns. For this reason, internships are widely supported by educators and by employers looking to hire well-trained recent graduates. However, employers can also exploit unpaid interns by using their free labor without providing them with an appreciable benefit in education or experience. Recognizing this concern, all parties agree that there are circumstances in which someone who is labeled an unpaid intern is actually an employee entitled to compensation under the FLSA. All parties also agree that there are circumstances in which unpaid interns are not employees under the FLSA. They do not agree on what those circumstances are or what standard we should use to identify them.

The court of appeals held that the DOL's test—requiring that all six factors be present for a worker to be properly classified as an intern—was too rigid. Instead, the court said the proper question is "whether the intern or the employer is the primary beneficiary of the relationship."

The court held that the primary beneficiary test has two salient features. First, it focuses on what the intern receives in exchange for her work (highlighting the trainee's interests). Second, it affords courts the flexibility to examine the economic reality as it exists between the intern and the employer. The court then articulated a nonexhaustive set of considerations for deciding whether an intern is an employee:

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 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; and
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at its conclusion.

The court cautioned, "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." The court sent the case back to the trial court to apply the enumerated factors—and potentially others—in deciding whether the interns were entitled to be paid. Glatt v. Fox Searchlight Pictures, Inc.

Bottom line

It remains to be seen whether the trial court will ultimately rule that the interns were employees—and therefore entitled to compensation—under the factors listed by the court of appeals.

Judith E. Kramer is an attorney with Fortney & Scott, LLC, in Washington, D.C. You can reach her at jkramer@fortneyscott.com.