United States: NY Court Issues Landmark Ruling On The Employment Status Of Unpaid Interns

On July 2, 2015, in Glatt v. Fox Searchlight Pictures, Inc. and a related order, Wang v. The Hearst Corp., the U.S. Court of Appeals for the Second Circuit issued a new test for determining whether interns must be treated and paid just like regular employees. Rejecting the test previously laid out by the U.S. Department of Labor (DOL), the Second Circuit ruled that the answer hinges on whether the employer or the intern is the "primary beneficiary" of the relationship. The Court also cast doubt as to whether wage and hour claims by former interns are appropriate for class and collective action certification.

The DOL's Position

The DOL initially ignited the debate over the use of unpaid interns when, in April 2010, it issued Fact Sheet #71 – modeled in part on a 1947 Supreme Court decision, Walling v. Portland Terminal Co. According to that Fact Sheet, employers must classify and pay interns as if they were employees unless the employer-intern relationship meets every one of the following six criteria: (1) the internship is similar to training given in an educational environment; (2) the internship experience is for the benefit of the intern; (3) the intern does not displace or supplant regular employees, or perform duties traditionally rendered by regular employees; (4) the employer derives no immediate advantage from the intern's activities (ideally, the intern impedes the employer's operations); (5) the intern is not necessarily entitled to a job at the conclusion of the internship; and (6) the employer and the intern understand, preferably in a signed writing, that the intern is not entitled to receive remuneration for his/her work

According to the DOL, if the internship does not satisfy all six of these criteria, the employer must pay its interns and otherwise follow all wage and hour requirements as if the interns were regular employees.

Rush to the Courthouse

In the wake of the DOL's publication of Fact Sheet #71, unpaid interns have inundated federal and state court dockets claiming violations of the FLSA and other applicable minimum wage and overtime laws. The two cases leading to the Second Circuit's decision are discussed below.

The Hearst Decision

In February 2012, less than two years after the DOL distributed Fact Sheet #71, former Harper's Bazaar intern Xuedan Wang slapped Hearst Corporation, Harper's parent, with a lawsuit claiming that she and others were improperly classified as interns insofar as they performed the tasks and had responsibilities of actual employees. On May 8, 2013, however, District Court Judge Harold Baer rejected Wang's request that the Court declare, as a matter of law, the interns should have been treated and paid as employees, finding instead that issues of fact existed that required a jury trial.

In his decision, Judge Baer noted that the DOL's 6-factor test "is not a winner-take-all test, and Hearst has shown with respect to each [intern] that there was some educational training, some benefit to individual interns, some supervision, and some impediment to Hearst's regular operations, etc., which, if viewed in the light most favorable to the non-moving party, as it must be, supports the view that" the interns were properly classified. Nevertheless, the Court failed to articulate a clear-cut standard for determining whether and under what circumstances employers must categorize interns as employees.

The Fox Searchlight Decision

Just weeks later, Judge William H. Pauley III reached a different conclusion. Relying heavily on Fact Sheet #71, the Court ruled that Fox Searchlight Pictures Inc. should have classified and paid a group of former interns who worked on the film "Black Swan" as employees, and green-lit related claims seeking relief as a nationwide class and collective action.

Judge Pauley reasoned that because the interns' work more closely resembled that of a traditional employee, they should be able to seek unpaid wages from their former "employer." He found significant the fact that: (i) Fox derived a benefit from the interns' work – which included preparing and fetching coffee, running various errands, and other menial chores, and (ii) the interns did work that would have otherwise been performed by regular employees.

The Second Circuit's Groundbreaking Decision

Late in 2013, the Second Circuit Court of Appeals – the federal appeals court in New York – accepted tandem interlocutory appeals of the Hearst and Fox Searchlight decisions. Oral argument was held slightly more than a year later, on January 30, 2015. After much anticipation, the Second Circuit on Thursday finally set the contours for when a company must classify and pay interns as employees.

As a preliminary matter, the Court rejected the DOL's 6-factor test, ruling that the agency's test is "too rigid" and that it is not entitled to "special competence or role in interpreting" the Portland Terminal decision. The Court also rejected the plaintiffs' argument that an intern should be treated as an employee whenever the putative employer derives an immediate advantage from the intern's work.

Instead, the Court adopted the "primary beneficiary" test urged by the defendants – i.e., "whether the intern or the employer is the primary beneficiary of the relationship" – to determine an intern's employment status. As the Court explained, "[t]he primary beneficiary test has two 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."

Under this malleable standard, an employment relationship is created when the benefits provided to the intern are greater than the intern's contribution to the employer's operations. This "requires courts to weigh a diverse set of benefits to the intern against an equally diverse set of benefits received by the employer without specifying the relevance of particular facts." To assist with this delicate balancing act, the Second Circuit identified a list of seven non-exhaustive factors that courts should consider in determining whether a worker is an employee or an intern under the "primary beneficiary" test:

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.¹
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.

The Court nevertheless made clear that other relevant evidence may be considered in determining an intern's employment status. And unlike the DOL's all-or-nothing approach, "[n]o 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."

In light of its decision, the Court vacated both Judge Baer's and Judge Pauley's prior rulings and remanded the cases back to the District Courts to determine whether the plaintiff-interns were properly classified as such under the newly-formulated "primary beneficiary" test. The Court then turned to the plaintiffs' bid for class and collective action certification. On this point, the Court held that, under the "primary beneficiary" test, "the question of an intern's employment status is a highly individualized inquiry." Here, because the "common proof" offered by the plaintiffs failed to show that the class members all had the same general experience, the Court vacated the District Court's decision in Glatt to certify a Rule 23 class of interns. The decision also cast serious doubt as to whether lawsuits brought by interns would ever be appropriate for class and collective action treatment.

What Does This Mean for My Company's Internship Program?

In light of the Second Circuit's ruling, it remains to be seen whether the DOL or its New York State counterpart will issue new guidance to align with the Court of Appeals (for its own part, the New York State Department of Labor has previously enumerated 11 factors to determine an intern's employment status). In the meantime, prudent employers should work with counsel to ensure that their internship programs – both in policy and practice – satisfy all applicable judicial and regulatory guidance. If not, the internship programs may need to be re-tooled. Although Thursday's decision was a victory for employers, unpaid internship programs still pose risks – which include not only potential liability for wage and hour violations but also potential tax- and benefits-related sanctions – that must be considered.

Footnote

This article is presented for informational purposes only and is not intended to constitute legal advice.