Class Dismissed? Second Circuit Overrules DOL’s Unpaid Intern Factors and Adopts Primary Beneficiary Test

Background

The plaintiffs worked as unpaid interns either on the Fox Searchlight-distributed film Black Swan or at the Fox corporate offices in New York City. They contended that the defendants, Fox Searchlight and Fox Entertainment Group, violated the Fair Labor Standards Act (FLSA) and New York Labor (NYLL) by failing to pay them as employees during their internships as required by the FLSA’s and NYLL’s minimum wage and overtime provisions.

The three named plaintiffs worked in the accounting, production, and publicity departments, performing primarily administrative duties. None of them received academic credit for their internship, although one was supposed to have. On June 11, 2013, the district court concluded that two of the plaintiffs had been improperly classified as unpaid interns rather than employees and granted their partial motion for summary judgment. The district court also granted the third plaintiff’s motions to certify the class of New York interns and to conditionally certify the nationwide FLSA collective.

The Unpaid Intern Issue

On appeal, the Second Circuit noted that the Supreme Court has yet to address the difference between unpaid interns and paid employees under the FLSA. In 1947, however, the Court recognized that unpaid railroad brakemen trainees should not be treated as employees, and thus that they were beyond the reach of the FLSA’s minimum wage provision. See Walling v. Portland Terminal Co., 330 U.S. 148 (1947). The Court adduced several facts. First, the brakemen-trainees at issue did not displace any regular employees, and their work did not expedite the employer’s business. Second, the brakemen-trainees did not expect to receive any compensation and would not necessarily be hired upon successful completion of the course. Third, the training course was similar to one offered by a vocational school. Finally, the employer received no immediate advantage from the work done by the trainees.

In 1967, the US Department of Labor (DOL) issued informal guidance on trainees as part of its Field Operations Handbook. The guidance enumerated six criteria and stated that the trainee is not an employee only if all of the criteria were met. In 2010, the DOL published similar guidance for unpaid interns working in the for-profit private sector. This Intern Fact Sheet provides that an employment relationship does not exist if all of the following factors apply:

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
2. The internship experience is for the benefit of the intern;
3. The intern does not displace regular employees, but works under close supervision of existing staff;
4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

The district court evaluated the first two plaintiffs’ intern relationship using a version of the DOL’s six-factor test. However, the district court, unlike the DOL, did not explicitly require that all six factors be present to establish that the intern is not an employee and instead balanced the factors. The district court found that the first four factors weighed in favor of finding that the plaintiffs were employees and the last two factors favored finding them to be trainees. As a result, the district court concluded that the plaintiffs had been improperly classified as unpaid interns and granted their motion for partial summary judgment.

The Second Circuit declined the DOL’s invitation to defer to the test laid out in the Intern Fact Sheet, which is essentially a distillation of the facts discussed in Portland Terminal. According to the Court, unlike an agency’s interpretation of ambiguous statutory terms or its own regulations, “an agency has no special competence or role in interpreting a judicial decision.” The Court concluded that “[b]ecause the DOL test attempts to fit Portland Terminal’s particular facts to all workplaces, and because the test is too rigid for our precedent to withstand … we do not find it persuasive, and we will not defer to it.”

Instead, the Court agreed with defendants that the proper question is “whether the intern or the employer is the primary beneficiary of the relationship. The 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.”  (citations omitted).

The Court then articulated a set of non-exhaustive factors to be used in determining whether an unpaid intern is properly classified:

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.