As is par for the course with the start of a new presidential administration, many changes to employment laws are anticipated, with several already underway. The most recent of which is the test used to determine whether interns must be classified as employees for purposes of the Federal Labor Standards Act. The question of when a person stops being an intern and starts being an actual employee has long been a gray area. On January 5, 2018, the U.S. Department of Labor (DOL) announced in a press release it was rescinding its previous six-part test used to determine whether interns at for-profit companies are employees and thus subject to federal minimum wage and overtime laws. Instead, the DOL will now use the so-called “primary beneficiary” test favored by several appeals courts.
The DOL’s Obama-era guidance was outlined in a 2010 Fact Sheet and provided that interns were presumed to be employees unless six specific factors were present, including that the internship did not displace regular employees and the employer derived no immediate advantage from the activities of the intern. The DOL’s six-part test inspired a wave of lawsuits brought by interns seeking back pay from their employers.
A number of federal appellate courts, however, rejected the DOL’s six-part test. The Second Circuit, in Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528, 536 (2d Cir. 2016), found the test was “too rigid,” and instead applied the more flexible primary beneficiary test. The primary beneficiary test examines the economic realities of the intern-employer relationship on a case-by-case basis to determine which party receives the greater benefit from the internship. If the employer is the primary beneficiary, the intern is considered an “employee” and is, therefore, subject to federal minimum wage and overtime laws. Other appellate courts followed suit, and the DOL, like several courts, will apply the primary beneficiary analysis moving forward.
The DOL also issued a revised Fact Sheet outlining the new approach. In examining the economic realities concerning whether the intern or employer is the primary beneficiary, the following non-exhaustive factors are considered:
- 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.
- 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.
- The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- 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.
- 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.
Courts have struggled with the appropriate standard for determining interns’ employment status in recent years, with interns in various industries alleging companies violated wage and hour laws. The change is good news for employers, because it clarifies the standard and discards the rigid approach of the DOL’s old six-part test. An employer using paid interns as a result of the previous six-part test may be able to convert those interns to unpaid interns under the new test. However, the employer should proceed with caution before taking this course of action, and consult its legal counsel to ensure that the program is designed to primarily benefit the intern in light of the above factors.