United States: Unpaid Intern v. Employee Classification Analysis Must Look At Who Is Primary Beneficiary Of Relationship, Second Circuit Holds

The Second Circuit struck a blow today to individuals pursuing collective/class actions alleging that unpaid interns should be classified as employees. The Court announced an employer-friendly test that asks who benefits more from the internship – if it's the individual, then classification as an employee entitled to minimum wage and overtime is not necessary. The Court also threw out the lower court's certification decision, finding that its new test required a highly-individualized look at each intern's experience. The case is Glatt v. Fox Searchlight Pictures, Inc. Employers will largely welcome the decision, but we caution against claiming total victory just yet. We explain more fully below.

Background

The Fox Searchlight case started in 2011 when two former unpaid interns sued Fox Searchlight (an independent film division of 20th Century Fox) claiming that the company should have classified them and other interns as employees and paid them at least the minimum wage plus overtime. In June 2013, a New York Federal District Court certified a class in connection with the interns' New York Labor Law claims and authorized a collective action in connection with their Fair Labor Standards Act claim. The District Court's willingness to grant certification triggered numerous copycat lawsuits mostly in the retail and media and entertainment industries. Fox Searchlight appealed to the Second Circuit.

The Primary Beneficiary Test Applies

The main issue the Second Circuit grappled with was determining the circumstances in which an employer must classify an individual as an employee rather than an unpaid intern. On one end, plaintiffs urged the Court to adopt a test that would mandate an employee classification if the intern provided the employer with any immediate advantage. At the other end of the spectrum, Fox Searchlight said the Court should adopt a primary beneficiary test, which looks at who benefited more from the internship. The USDOL also jumped into the mix and asked the Court to require that an employer satisfy each of the six factors enumerated in the agency's Intern Fact Sheet before classifying individuals as unpaid interns.

The Second Circuit adopted Fox Searchlight's employer-friendly primary beneficiary test. The Court was persuaded in part by that test's flexibility, including its ability to account for (i) the economic reality that exists between the employer and intern; and (ii) the role of internships in today's economy. The Court set forth several factors a court should apply, including:

  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.

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. . . ." Further, this list is not exhaustive and courts may consider other relevant evidence in appropriate cases. In other words, a court will look at the totality of the circumstances when it analyzes these factors.

Class/Collective Relief Was Inappropriate

After announcing that the primary beneficiary test was the proper approach, the Second Circuit went one step further by vacating the lower court's decision certifying a Rule 23 class and authorizing a collective action. Instead, the Court said, the primary beneficiary test requires the court to undertake a highly individualized analysis of each intern's experience and the "common proof" offered by the plaintiffs did not show that each intern had the same experience.

So What Does This All Mean?

While a major victory for employers, the battle is not over yet. First, the Court left open the possibility that the plaintiffs could prevail on a renewed certification request by offering additional and sufficient common proof. That outcome seems unlikely though, given the different experiences that Fox Searchlight's interns had, but it is a possibility in other cases where the interns share more uniform experiences.

Second, perhaps anticipating an adverse result, plaintiffs' attorneys have already mostly abandoned their pursuit of FLSA and New York Labor Law claims in federal court, opting instead to pursue violations of the New York Labor Law in New York State court only. The New York DOL says that an employer must satisfy each of the 11 factors in its unpaid internship test before classifying an individual as an unpaid intern. They are hoping that a New York State court, which utilizes a different certification standard, would reach a different conclusion than the Second Circuit and endorse the NYS DOL's strict view.

Overall however, we expect the number of unpaid intern class/collective action lawsuits to continue to drop as the Second Circuit's ruling makes it more difficult for interns to prevail both individually and collectively, and because employers have already started to adapt by paying their interns or restructuring their internship programs.

While some employers have eliminated their internship programs altogether, on the whole, we expect internships to remain prevalent in the workplace. In fact, one study shows that more than half of graduating college seniors have held at least one type of internship while they are in their collegiate/formative "beer pong" years. Pro Publica, an investigative journalism non-profit, says that's double the number from just a decade ago and it doesn't even include college graduates, high schoolers or other individuals. Internships also play an important role in the lives of younger workers as they allow students and job seekers the opportunity to build their resumes, grow their networks and gain valuable experience. They also serve as less expensive forms of labor for employers (even when paid). In other words, internship programs aren't going anywhere and employers can now continue to administer them with greater comfort.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Michael S. Arnold
 
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