United States: Second Circuit Court Of Appeals Adopts "Primary Beneficiary Test" And Provides Guidance On The Unpaid Intern Question

On July 2, 2015, the Second Circuit Court of Appeals issued significant pro-employer decisions in Glatt v. Fox Searchlight Pictures (Nos. 13-4478-cv, 13-4481-cv) ("Fox") and Wang v. Hearst Corp. (No. 13-4480-cv) ("Hearst") that served as a setback for the plaintiffs in both cases. In both cases, the plaintiffs – unpaid interns who had spent time at Fox Searchlight and Hearst magazines, respectively – alleged that they should have been classified as employees and paid for their time. As a result, they brought claims for, among other things, unpaid wages on a class-wide basis. The district court decisions were split. In Fox, the judge granted summary judgment on the issue that interns were employees and permitted the plaintiffs to proceed on a class and collective basis. To the contrary, in Hearst, the judge denied summary judgment on the same issue and denied the plaintiffs' motion to proceed as a class. On appeal in both cases, the Second Circuit adopted a balancing standard called the "primary beneficiary test" and held that district courts should use this test when analyzing whether an individual should have been classified as an intern or an employee. The Second Circuit also held that the proposed classes of interns in both cases failed to satisfy the requisite standards in order to proceed on a class-wide basis.

District Court Decisions

In Fox, Judge William H. Pauley of the Federal District Court for the Southern District of New York granted the plaintiffs' motion for summary judgment on the issue of whether the interns, many of whom were unpaid interns working on the Oscar-winning film Black Swan, had been misclassified. In reaching this decision, Judge Pauley applied the Department of Labor's ("DOL") six-factor intern/employee test, which considers factors including whether the experience benefits the individual or the company, whether the parties understand that the individual is not entitled to wages, and whether the individual is entitled to a permanent position when the internship ends. Under the DOL test, an employment relationship will be found unless all six factors are met. Judge Pauley, however, weighed the factors as a balancing test, and found that based on the totality of circumstances, the interns "worked as paid employees work," and should have been compensated accordingly.[1] Judge Pauley also granted the plaintiffs' motions for class and collective action certification.

By way of contrast, in Hearst, Judge Harold Baer, Jr. of the Southern District of New York denied the plaintiffs' summary judgment motion on the issue of whether the interns, many of whom were unpaid interns at various Hearst publications, qualified as employees under the DOL's six-factor test. In so holding, Judge Baer reasoned that the plaintiffs had not satisfied the DOL test because there were questions as to whether they could meet some of the six required factors.[2] Judge Baer also denied the plaintiffs' motion for class certification. The Hearst plaintiffs had not moved for conditional certification of their FLSA class.

The Second Circuit Adopts the "Primary Beneficiary Test"

In both Fox and Hearst, the Second Circuit addressed the issue of what test should be used to determine whether an individual should be classified as an intern or employee. To begin, the Second Circuit rejected the DOL's six-factor assessment as "too rigid," noting that the application of such an "all-or-nothing" test was inappropriately trying to fit the facts of a 1947 Supreme Court case[3] to all types of workplaces.

Instead, the Second Circuit held that, under these circumstances, the "primary beneficiary test" was more appropriate. Under this test, the court looks to whether "the tangible and intangible benefits provided to the intern are greater than the intern's contribution to the employer's operation."[4] The "primary beneficiary test" focuses on the educational and academic aspects of internship programs and uses a series of seven nonexclusive factors to determine whether the worker qualifies as an intern such as: (i) whether the parties understand there is no expectation of compensation; (ii) whether the internship provides training similar to that received in an educational environment; (iii) whether the internship is connected to a formal education program or receipt of academic credit; (iv) whether the internship corresponds with the academic calendar, accommodating the student's school commitments; (v) whether the duration of the internship is limited to the period in which the intern is provided with beneficial learning; (vi) whether the intern's work displaces the work of paid employees; and (vii) whether the parties understand there is no entitlement to a paid job at the conclusion of the program. The Second Circuit held that these seven factors are to be balanced, and that no single factor will be dispositive.

In remanding the Fox matter, the Second Circuit held that Judge Pauley had applied the wrong standard when analyzing whether the interns were properly classified. The Second Circuit observed that even though Judge Pauley had applied the DOL test as a "totality of the circumstances" test, the "primary beneficiary test" requires a more "nuanced" analysis – one which would better reflect "the economic realities of the relationship between intern and employer," and which would properly "weigh[] and balance[] all of the circumstances."[5]

The Second Circuit also vacated Judge Baer's decision in Hearst denying the plaintiffs' partial motion for summary judgment. The Second Circuit explained that Judge Baer needed to apply the "primary beneficiary test" to the plaintiffs' motion and then issue his decision.[6]

The Class & Collective Action Certification Motions

The Second Circuit also addressed the district court rulings in Fox and Hearst regarding the plaintiffs' motions for class/collective action certification. In granting the Fox plaintiffs' motion for class certification under Federal Rule of Civil Procedure 23, Judge Pauley had reasoned that common questions "could be answered by evidence tending to show that interns . . . displaced paid employees, and that Fox employees overseeing internships did not believe they complied with the law."[7] The Second Circuit, however, rejected and vacated Judge Pauley's decision, finding that the evidence offered by the plaintiffs could not conclusively answer the question of whether each intern was entitled to compensation and, thus, such evidence was insufficient to justify class certification.

In granting the Fox plaintiffs' motion for conditional certification of their collective action under the FLSA, Judge Pauley relied on the same evidence offered by the plaintiffs in support of their motion for class certification under Rule 23. In reversing Judge Pauley's decision and vacating the District Court's grant of conditional certification, the Second Circuit held that the determination as to whether an intern was misclassified requires a review of the "individual aspects of the intern's experience."[8]

For similar reasons, the Second Circuit in Hearst affirmed Judge Baer's denial of the plaintiffs' motion for class certification under Rule 23, finding that Judge Baer's conclusion that the plaintiffs had failed to establish commonality or predominance was supported by the record.[9]

The Second Circuit's decisions in Fox and Hearst are significant for two reasons. First, the Second Circuit has made it clear that interns who purport to bring claims on a class-wide basis will not automatically be certified as a class. In fact, the unique individual experience of each intern may very well undermine certification of a class of interns that attempts to proceed collectively. Second, the Second Circuit's decision provides employers with clear guidance on how to determine whether an intern was misclassified. Given the Second Circuit's decisions, employers using unpaid interns or considering using unpaid interns should consult with experienced labor and employment counsel to determine whether their internship programs satisfy the "primary beneficiary test" as articulated in Fox and Hearst.

Footnotes

[1] Glatt v. Fox Searchlight Pictures, No. 1:11-cv-06784-WHP, Slip Op. at 26 (S.D.N.Y. June 11, 2013), available here.

[2] Wang v. Hearst Corp., No. 12 CV 793 (HB), Slip Op. at 7 (S.D.N.Y. May 8, 2013), available here.

[3] Walling v. Portland Terminal Co., 330 U.S. 148 (1947).

[4] Glatt v. Fox Searchlight Pictures, Slip Op. at 12 (2d Cir. July 2, 2015), available here.

[5] Id. at 12, 15.

[6] Wang v. Hearst Corp., No. 13-4480-cv, Slip Op. at 3-4 (2d Cir. July 2, 2015), available here.

[7] Glatt, Slip Op. at 18 (2d Cir.).

[8] Id. at 22.

[9] Wang, Slip Op. at 7 (2d Cir.).

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