Our Award-Winning New York Employment Law Attorney is often asked to discuss hot topics in the field. Recently, we were asked to discuss the use of unpaid interns by for-profit employers. This is another case where proactive steps can prove to be tremendously valuable for employers because an improperly classified intern can lead to payment of overtime wages, employee benefits, and tax considerations. A brief discussion of general information regarding unpaid internship programs follows. If you have any specific information, feel free to call our office to discuss your specific situation.
In recent years, class action lawsuits have been filed against companies including NBC Universal, Sirius XM, Viacom, The Charlie Rose Show on PBS, Conde Nast, Gawker and Atlantic Records regarding their unpaid internship programs. Many companies opted to settle and some of the cases resulted in multi-million dollar settlements. A few cases have started to make their way through the courts. On July 2, 2015, the Second Circuit issued a decision in Glatt et al. v. Fox Searchlight Pictures, Inc., Nos. 13-4478 & 13‐4481 (2d Cir. 2015), on a case of first impression and provided some insight to employers and interns. The case is discussed briefly below.
The Glatt Case – Background
In 2009 and 2010, Eric Glatt and Alexander Footman, college graduates, were interns on Fox Searchlight Pictures’ production of the motion picture, Black Swan. As interns, Messrs. Glatt and Footman, inter alia, made photocopies, scanned documents, made travel arrangements, made tea, and ran errands including getting director Darren Aronofsky a hypo-allergenic pillow. While plaintiffs’ duties included administrative tasks, they admitted that they gained an understanding of how a production office worked and other tangible benefits. They also stated that they understood their internship would be unpaid when they accepted the roles.
The District Court’s Ruling and the US DOL’s Test
On October 19, 2010, Messrs. Glatt and Footman filed a class action lawsuit in the Southern District of New York seeking unpaid minimum wages and overtime under the Fair Labor Standards Act (“FLSA”) and New York Labor Law for themselves and all other similarly-situated unpaid interns. In short, the plaintiffs claimed, due to their responsibilities and nature of their working relationship, they were improperly classified as interns and should have been treated as employees and thereby entitled to compensation. Earlier in 2010, the United States Department of Labor (“DOL”) had issued a fact sheet providing guidance to for-profit employers on the employee/intern relationship. According to the Intern Fact Sheet, an individual is an intern 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 which 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; and 6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Under the DOL’s test, if one of the above factors was not met, an employment relationship existed. The definition of an employee was broad under this test. The District Court considered the plaintiffs’ working relationship and weighed the factors in the DOL’s test. The District Court did not require all six factors to be present. It found that the first four factors supported a finding of an employee and the last two factors supported a finding of an intern. The Court ruled that the plaintiffs were improperly classified as interns under federal and state law and granted their motion for partial summary judgment. The Defendants filed an interlocutory appeal to the Second Circuit.
Second Circuit’s New Standard
In a case of first impression and a victory for employers, the Second Circuit rejected the DOL’s six-factor test and instead stated the inquiry should focus on whether the company or worker is the primary beneficiary of the working relationship. The Court adopted the “primary beneficiary test” that was proposed by the defendants. The test has two key features – (i) the court should focus on what the intern receives for his or her work; and (ii) the court has some flexibility in its analysis based of the economic realties of today’s marketplace. The flexible, non-exhaustive factors set forth by the Court to implement the “primary beneficiary test” 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 the 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 the conclusion of the internship.
The Court stated that all of these factors and other relevant evidence should be balanced and that no one factor was dispositive. The Court stated that “[t]he purpose of a bona-fide internship is to integrate classroom learning with practical skill development in a real world setting” and the courts should focus “on the educational aspects of the internship in today’s economy than the DOL factors, which were derived from a 68 year-old Supreme Court decision.” Glatt at 16. The Court vacated the District Court’s decision and remanded it for further proceedings to use “primary beneficiary test.” The Court noted that its decision was limited to for-profit employers. Also importantly for employers, the Second Circuit reversed the District Court’s ruling allowing the plaintiffs to proceed as a class because an intern’s employment status is a “highly individualized inquiry” that is not best suited to be decided as a group. As a result, it may be more difficult for interns to bring class claims in the future.
In the wake of the District Court’s decision, some private employers eliminated their internship programs all together. This approach is draconian and deprives interns of an important educational experience in the workplace. As a result of the Second Circuit’s decision, employers in the for-profit sector should re-examine their internship program policies and practices to ensure compliance. Companies should focus on ensuring the educational nature of the internship program and create written acknowledgment forms for the interns regarding the program. Interns should not replace employees or do work expected of employees. The stakes are important because not only can a misclassified intern lead to compensation owed, it can also lead to tax and employee benefit consequences. Finally, companies should be aware that the New York State Department of Labor has its own 11-factor test for interns in the for-profit sector and it has not stated whether it agrees with the Glatt decision. This is certainly an issue to follow for employers and interns as there could be future changes in the law.
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