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When Are Interns Instead Employees?

Many private employers offer unpaid internship programs. These programs provide students an opportunity to develop skills and gain real world experience while helping employers identify talented potential future employees. This can be a “win, win” situation, but are these unpaid internships lawful? In other words, when are interns “employees” and thus entitled to minimum wage, overtime, and other wage and hour law protections under the Fair Labor Standards Act (“FLSA”)?

The FLSA contains no “internship” exemption from the statute’s broad definition (to “suffer or permit to work”) of employment. Rather, in 1947 the U.S. Supreme Court held that there are instances where an individual who performs work for his own benefit is not the “employee” of the entity that helps or instructs him or her. Walling v. Portland Terminal Co., 330 U.S. 148 (1947). 

Based on that decision, the U.S. Department of Labor (“DOL”) developed a six-part test for determining who is an “employee” under the FLSA and who is instead an intern (or trainee). Under the DOL test, the following criteria are applied to determine whether an employment relationship exists or not: First, the internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment. Second, the internship experience is for the benefit of the intern. Third, the intern does not displace regular employees, but works under close supervision of existing staff. Fourth, 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. Fifth, the intern is not necessarily entitled to a job at the conclusion of the internship. Sixth, the employer and the intern understand that the intern is not entitled to wages for the time spent in the internship. See DOL Wage & Hour Division Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act (April 2010). 

According to DOL, if all of these factors are met, the FLSA’s minimum wage and overtime provisions do not apply to the intern because an employment relationship does not exist. Since the FLSA defines the term “employ” broadly, this exclusion must be construed narrowly. While most of these factors can generally be met, the fourth factor has been a primary area of contention. Unless an intern does nothing more than “shadow” employees there will often by situations where the intern provides some benefit or advantage through his or her efforts during the internship. 

This presents a public policy dilemma. On the one hand, DOL wants to protect interns from being exploited and protect employees from being improperly displaced by interns. On the other hand, if the rules are overly restrictive, employers may be reluctant to provide unpaid internships at all for fear of violating the FLSA. This, in turn, would deprive students of these valuable opportunities.  

Two federal courts recently rejected DOL’s approach in favor of a more relaxed standard of determining when an unpaid internship is lawful. Schumann v. Collier Anesthesia, 2015 WL 5297260 (11th Cir. Sept. 15, 2015); Glatt v. Fox Searchlight Pictures, Inc., 791 F.3d 376 (2d Cir. 2015).  

In Glatt, the Second Circuit rejected DOL’s six-part test, explaining that in creating the test DOL simply tracked the list of factors the Supreme Court set forth in Walling v. Portland Terminal, which involved an entirely different set of facts than are presented in modern internship program situations. As “an agency has no special competence or role in interpreting a judicial decision” and the DOL test is “too rigid for our precedent to withstand” the Second Circuit agreed with the defendants that “the proper question is whether the intern or the employer is the primary beneficiary of the relationship.” 791 F.3d at 383.  The Second Circuit explained that the primary beneficiary test has two main features: First, “it focuses on what the intern receives in return for his work” and, second, it allows courts “the flexibility to examine the economic reality as it exists between the intern and the employer.” Id. at 384. 

The Second Circuit proposed a list of “non-exhaustive” factors to aid courts in answering the question of whether the intern or employer is the “primary beneficiary” of the relationship. No one factor “is dispositive and every factor need not point in the same direction for the court to determine the intern is not an employee entitled to the minimum wage.”  Id.

The seven factors include the extent to which: 1) the intern understands there is no expectation of compensation; 2) the internship provides training similar to what would be received in an educational environment, including clinical and hands-on training; 3) the internship is tied to the intern’s formal education program by integrated coursework and receipt of academic credit; 4) the internship accommodates the intern’s academic commitments by corresponding to the academic calendar; 5) 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 compliments rather than displaces the work of paid employees while providing the intern with significant educational benefits; and 7) the intern understands there is no entitlement to a paid job when the internship ends. Id.

In Schumann, the 11th Circuit also rejected the DOL’s six-part test in favor of the Second Circuit’s more flexible “primary beneficiary” test. In that case, a for-profit college in Florida had a master’s program for students to become certified registered nurse anesthetists. Per Florida law, the students needed a certain number of hours of clinical work as part of their curriculum. The school had students perform their clinical work as unpaid interns at an anesthesia center in which the school had an ownership interest.  The students filed suit under the FLSA contending they provided economic value to the center and often worked without supervision. In it analysis, the 11th Circuit explained that “the mere fact that an anesthesiology practice obtains benefits from offering . . . internships cannot, standing alone, render the student interns ‘employees’ for purposes of the FLSA.” Id. at *9. At the same time, the 11th Circuit recognized “the potential for some employers to maximize their benefits to the unfair advantage and abuse of student interns.” Id. The case was remanded to the district court to proceed based on the analytical approach set forth by the Second Circuit. 

Of course, employers can avoid this entire conundrum simply by paying interns the minimum wage and overtime and otherwise complying with the wage and hour laws. For employers who prefer to provide unpaid internships, however, while the law remains in flux, these two recent decisions suggest a trend toward a more flexible and favorable test for determining when interns are not employees.

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