Business Should Exercise Caution With Unpaid Internships

The Fair Labor Standards Act ("FLSA") generally establishes mandatory minimum wage and maximum hour requirements for most employees in the United States. Generally, an individual is an employee under the FLSA if an employer permits the individual to work in the interest of the employer.  Until recently, the Department of Labor's test for determining whether an unpaid intern was really an employee who should receive at least minimum wage under the FLSA was quite rigid and difficult to meet.  Businesses planning to implement an unpaid internship program or with an existing internship program should be aware that in January, 2018, the Department of Labor ("DOL") issued a new more flexible test for determining whether an unpaid intern working for a for-profit employer is entitled to minimum wage under the FLSA.

Prior to January, 2018, the test issued by the DOL required all the following for an internship to be unpaid under the FLSA:

  1. The internship 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 doesn't displace regular employees and works under close supervision of existing staff.
  4.  The employer doesn't gain an immediate advantage from the intern's activities—and on occasion the employer's operations may be impeded by the intern's activities.
  5.  The intern isn't guaranteed a job at the end of the program.
  6.  The employer and the intern each understand that the internship is unpaid.

In January, 2018, the DOL issued a new test ("Fact Sheet #71") "to help determine whether interns and students working for for-profit employers are entitled to minimum wage and overtime under the FLSA".  In Fact Sheet #71, it is explained that the courts have used the primary beneficiary test to determine whether an intern is an employee under the FLSA. "In short, this test allows courts to examine the 'economic reality' of the intern-employer relationship to determine which party is the 'primary beneficiary' of the relationship."[2] As set forth on Fact Sheet #71, the courts have employed a seven factor test where no single factor is determinative. Whether an intern is an employee depends on the totality of the circumstances. Fact Sheet #71 identifies the following seven factors:

  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 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.
  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.

In Glatt v. Fox Searchlight Pictures, Inc., the Second Circuit Court of Appeals rejected the old six factor DOL test in favor of the "primary beneficiary" test in which the court set forth the seven factors contained in Fact Sheet #71.  811 F.3d 528 (2d Cir. 2015).  The Second Circuit explained:

The primary beneficiary test has three salient features. First, it focuses on what the intern receives in exchange for his work. Second, it also accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.  Third, it acknowledges that the intern-employer relationship should not be analyzed in the same manner as the standard employer-employee relationship because the intern enters into the relationship with the expectation of receiving educational or vocational benefits that are not necessarily expected with all forms of employment.

The Second Circuit further explained that applying the factors requires weighing and balancing all of the circumstances. "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."  Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528, 536 (2d Cir. 2015).  Furthermore, courts may consider other relevant evidence beyond the specified factors to discern the economic realities of the situation.

Any business considering implementation of an unpaid internship program should develop policies based on the DOL's new directives.  Businesses with an existing unpaid intern program should review policies regarding the unpaid internship program in light of the new test issued by the DOL. Additionally, businesses would be wise to have unpaid interns sign an agreement incorporating the seven factors contained in the DOL's new test.

For more information and assistance in ensuring an unpaid internship program complies with the FLSA, please feel free to contact Dover Dixon Horne, PLLC.

This article was published in HRIS & Payroll Excellence on May 29, 2018, and in HR Legal & Compliance Excellence on May 31, 2018.

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