The U.S. Department of Labor recently announced a significant change in its interpretation of the Fair Labor Standards Act (FLSA) with respect to interns. The FLSA, of course, regulates an employer’s duty to pay minimum wage and overtime compensation to its employees. For years, the DOL has employed a six-factor test to determine whether these requirements apply to interns working for private employers.

In a brief press release issued on January 5, 2018, the DOL acknowledged that several federal appellate courts have rejected its six-factor test in favor of a different framework. The agency notice rejects its prior six-factor test and expressly adopts the “primary beneficiary” test applied by those courts. With the summer intern hiring season approaching, employers should take heed of this more flexible approach and review their programs, as discussed below.

The Debate over How to Classify Interns, Students, and Trainees

Because the FLSA does not include a clear definition of the term “employee,” employers often rely on guidance promulgated by the DOL to determine which workers are protected by the statute.¹ The DOL and employers have long recognized that interns might not qualify as “employees” under the FLSA, depending on the circumstances. In that event, employers would have much more flexibility in whether or how to compensate interns, who frequently work for a relatively short time with an organization to gain practical experience in a field of interest.

Under the Obama administration, the DOL published a fact sheet identifying six criteria to be used in evaluating whether private-sector interns are “employees.” Under that now-scuttled approach, interns would not be deemed “employees” and thus not covered by the FLSA if all of the following six elements were satisfied:

1. The training or internship, even though it includes actual work, is similar to training provided in a vocational or educational environment.
2. The training or internship is primarily for the benefit of the students, trainees, or interns.
3. The students, trainees, or interns do not displace regular employees, but work under their close supervision.
4. The employer derives no immediate advantage from the activities of the students, trainees, or interns, and occasionally its operations may actually be impeded.
5. The students, trainees, or interns are not necessarily entitled to a job at the conclusion of the training period or internship.
6. All parties understand that the trainees or interns are not entitled to wages for the time spent in training or in the internship.

Private employers struggled with this stringent approach. The fourth factor—which essentially required that companies reap no benefit from an intern’s efforts—posed a particular challenge for employers intending to offer meaningful, educational, yet unpaid, internships. Moreover, beginning around 2013, employers were faced with a wave of class and collective actions filed by unpaid interns alleging that they had been misclassified.

Judges, too, grappled with how strictly to interpret this test. Courts varied in their application of the six criteria, including the weight afforded each factor.

The Glatt Decision Sets the Stage

In 2015, the Second Circuit Court of Appeals rejected the DOL’s six-factor test, largely due to its inflexibility.²

The court took up this issue in an interlocutory appeal in Glatt v. Fox Searchlight Pictures, Inc., a case involving unpaid interns in the film industry.³ The plaintiffs and the DOL (as amicus curiae) defended the DOL’s six-factor test, especially the test’s emphasis on whether the employer derived immediate advantage from the interns’ work. The Second Circuit rejected the DOL’s position, however, finding that the six-factor test was too rigid to apply in all workplace scenarios.⁴

Instead, the Second Circuit endorsed the “primary beneficiary” test, which explores the extent to which the employer and the intern benefit from their relationship. This approach “focuses on what the intern receives in exchange for his [or her] work” and grants the courts the flexibility to examine the economic realities as they exist between the parties.⁵ The Second Circuit articulated a non-exhaustive list of seven factors for courts to consider in determining whether the FLSA applies to an intern, 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.⁶

Importantly, the court clarified that no single factor is dispositive of the question and that other factors might be relevant as dictated by the circumstances.

Other appellate courts have followed suit. In Schumann v. Collier Anesthesia, P.A., for example, the Eleventh Circuit specifically adopted the reasoning in Glatt.⁷ The court further cautioned that “the proper resolution of a case may not necessarily be an all-or-nothing determination.”⁸ The Eleventh Circuit envisioned a hypothetical “where a portion of the student’s efforts constitute a bona fide internship that primarily benefits the student” but where the employer also imposes additional conditions on the relationship that undermine that classification. The court surmised that, in such a scenario, an intern could be entitled to compensation under the FLSA for work performed well outside the scope of the internship.⁹

The Ninth Circuit Court of Appeals also recently agreed with Glatt. In Benjamin v. B&H Education, Inc., decided December 19, 2017, the Ninth Circuit stressed that the DOL six-factor formulation is “too rigid to comport with [its] caselaw, which applies a totality of the circumstances approach to determining the employment relationship under the FLSA.”¹⁰

The DOL Shifts Gears

The DOL apparently could no longer ignore the trend of these cases, particularly after the Ninth Circuit’s decision in Benjamin. In its updated fact sheet released this month, the DOL cites to the key cases noted above and adopts the Glatt framework verbatim. Consistent with those authorities, the DOL explicitly states that the primary beneficiary test is flexible “and no single factor is determinative.”¹¹ As the DOL explains in this informal guidance, “whether an intern or a student is an employee under the FLSA necessarily depends on the unique circumstances of each case.”

With the DOL now in step with leading appellate interpretations, it should be easier for all stakeholders—private employers, interns, the DOL, and the courts—to understand when this exemption for interns will apply.

Employer Considerations for Intern Hiring

The DOL’s new stance will also assist employers as they design their internship programs and work towards compliance with wage and hour laws.

Employers that are covered by the FLSA and wish to offer unpaid internships should review the DOL’s position when preparing their programs and hiring interns. Keeping in mind the factors of the primary beneficiary test, employers may wish to schedule internships, for example, so that they correspond with the academic calendar. Internships should be pursued for academic credit, and projects should be planned to coincide with an intern’s class syllabus or other educational benchmarks, wherever possible. Ultimately, employers that intend to claim that their interns are not employees, and are not entitled to compensation as a result, should take steps to ensure that their position is defensible under the primary beneficiary approach. Employers should promptly revisit the structure of any existing intern programs and revise them as needed.

Employers—including those not covered by the FLSA—should also remember that state laws and the guidance of state agencies may also affect their decisions about internship programs.  In addition, some states consider interns to be “employees” for purposes of their antidiscrimination statutes. Approximately eight jurisdictions—including California, the District of Columbia, Illinois, Maryland, and New York—offer some protection for interns from discrimination and/or sexual harassment.

Finally, all employers should be clear about the scope of their internships, including their expectations for the relationship, anticipated duties and hours, compensation, if any, and whether the intern will become entitled to a paid job following the program. Employers should be consistent in applying all policies and procedures to interns, to ensure they are treated fairly during their time with the company.