December 03, 2015 Top Story

Court Rejects Department of Labor Intern Test

Court adopts new primary beneficiary test

Theresa A. Vitello

The appellate court in Glatt v. Fox Searchlight Pictures, Inc.rejected the U.S. Department of Labor’s (DOL) six-factor test for determining whether an intern must be paid like an employee. The court in Glatt adopted a standard that examines who is the “primary beneficiary” of an intern’s work arrangement. Section leaders say Glatt provides a roadmap for employers on how to structure a compliant internship program.

The Primary Beneficiary Test 

The plaintiffs, hired as unpaid interns by Fox Searchlight Pictures, brought claims under the Fair Labor Standards Act (FLSA) and New York State Labor Law, claiming that they should be compensated like employees. The district court granted the plaintiffs’ motion for partial summary judgment, finding that the interns had been misclassified under the six-factor test first provided in Walling v. Portland Terminal Co. Further, the district court granted the plaintiffs’ motions for New York class and nationwide collective action certification.

The defendants appealed to the U.S. Court of Appeals for the Second Circuit, certifying the question of under what circumstances unpaid interns must be deemed employees and compensated for their work. After concluding that the DOL’s six-factor analysis derived from Walling had run its course since it was “too rigid” and an unnecessarily “all-or-nothing” test, the Second Circuit rejected the district court’s ruling. Instead, the Second Circuit fashioned the “primary beneficiary” test, which requires reviewing courts to examine whether “the tangible and intangible benefits provided to the intern are greater than the intern’s contribution to the employer’s operation.”

To assist in balancing the interests of the employer and the intern, the Second Circuit set forth a list of seven non-exhaustive factors that courts should consider in determining whether a worker may be classified as an intern rather than an employee. Unlike the DOL’s long-standing six-factor test, this primary beneficiary test “focuses on what the intern receives in exchange for his work,” and “accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.” Most significantly, the new test removes the requirement that the employer derives “no immediate advantage from the activities of the intern” and allows courts to weigh and balance the seven factors as opposed to satisfying an exacting check-list as the Walling Court required.

After articulating the new test, the Second Circuit vacated the district court’s order certifying a Rule 23(b)(3) class of unpaid interns due to a lack of predominance. To establish predominance, issues that are common to the class as a whole must outweigh any individual issues. The appellate court then remanded the case for the trial court to decide whether the employer properly classified the plaintiff-interns under the newly formulated “primary beneficiary” test.

DOL May Wait to Modify its Six-Factor Test

Despite the ruling, Section leaders believe that, at least for the time being, the DOL will not revise its long-standing six-factor checklist. “I doubt the DOL will immediately issue new guidance based on the Second Circuit’s ruling. Instead, I suspect they will take the approach that the Second Circuit is wrong, and will wait for additional cases to emerge to determine if they need to revise their regulations,” says Teresa R. Bult, Nashville, TN, cochair of the ABA Section of Litigation’s Employment & Labor Relations Law Committee. “The DOL is likely to sit tight for now and weigh in later with a more flexible approach. The DOL needs to freshen up its views,” adds Jeffrey D. Gardner, Phoenix, AZ, cochair of Section of Litigation’s Class Actions & Derivative Suits Committee.

Primary Beneficiary Test Provides Refuge for Employers Embattled in the FLSA Storm 

Regardless of whether the DOL is inclined to utilize the Second Circuit’s primary beneficiary test, Section leaders agree that the Glatt decision is a victory for employers. On the class action front, “[the decision] unquestionably gives more authority to employers defending against class certification. The seven-factor test can be so individualized, how can it fit into class certification?” Gardner posits. “[Glatt] doesn’t close the door on wage and hour class actions but it offers a fresh perspective on individualized issues that defense counsel will seize upon,” he adds.

Glatt is also a victory for employers in a broader sense. “The DOL has taken the position for some time that most unpaid internship programs are unlawful, and therefore there was some trepidation by employers that the Second Circuit would follow the DOL’s lead. The fact that the court rejected the DOL’s analysis and, in fact, pointed out that ‘an agency has no special competence or role in interpreting a judicial decision,’ was a victory in and of itself for employers,” says Bult.

Guidance for Employers Structuring Internship Programs

Equally noteworthy, Glatt offers a roadmap for employers on how to structure an FLSA compliant internship program that ensures the intern is the primary beneficiary of the relationship. “There must be a clear understanding that the internship is not paid, that the internship provides training similar to an educational environment . . . and that the work does not displace paid workers,” advises Bult. Gardner advises employers to “focus on both sets of factors [DOL and Glatt] but stress the educational program component.”

Theresa A. Vitello is a contributing editor for Litigation News.

Keywords: internship, FLSA, DOL, intern, primary beneficiary

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