Second Circuit Crafts New Test For Unpaid Intern Claims

The Second Circuit provides employers greater freedom to implement unpaid internship programs and a stronger defense for class-action lawsuits brought by interns. But stronger protections for interns may remain in other jurisdictions and under state employment laws.

OVERVIEW
On July 2, 2014, the U.S. Court of Appeals for the Second Circuit handed down a long-anticipated decision that establishes a new standard for assessing whether interns should be classified as “employees” eligible for minimum and overtime wage. Assessing two related cases, Glatt, et al. v. Fox Searchlight Pictures, Inc., et al. and Wang, et al., v. The Hearst Corp., the Second Circuit adopted a “primary beneficiary” test and identified seven nonexclusive factors relevant to the classification of unpaid interns. In doing so, the court declined to adopt an exclusive six-factor test urged by the US Department of Labor’s (DOL) and held that “courts may consider relevant evidence beyond [their own] specified factors[.]” The Second Circuit also held that the question of an intern’s employment status is a “highly individualized inquiry,” making it more difficult for future interns who may seek to bring class-action claims against companies. Nevertheless, the decision should not be read to authorize employers carte blanche to structure their internship programs however they wish. Nor should it be read as a death knell to unpaid intern claims or intern class actions under state law or in other jurisdictions.

BACKGROUND
The Second Circuit’s decision marks the culmination of a rash of intern litigation in the U.S. District Court for the Southern District of New York and beyond. In the Glatt case, the district court had granted summary judgment in favor of the plaintiff interns and approval of class certification on June 11, 2013. By contrast, the Wang court denied the interns’ motions for summary judgment and class certification. In the two years since those decisions, a large number of intern class-action lawsuits have been filed, with mixed results. The rulings in favor of the interns and uncertainty regarding the legality of unpaid interns caused companies reevaluate their internship programs. Some companies, such as Conde Nast, even suspended their internship programs. The Second Circuit provides employers operating within its boundaries a clearer framework for the implementation of unpaid internship programs and strong precedent to defend potential or current class-action clams. But it arguably does so at the expense of interns.

INTERN CLASSICIATION IN THE SECOND CIRCUIT IN A POST-GLATT WORLD
In Glatt, the Second Circuit rejected the DOL’s test found that the DOL test, claiming that it was unpersuasive and overly rigid. The Second Circuit determined that an analysis of intern status should focus on the question of whether an intern or an employer is the “primary beneficiary” of the relationship. The court explained that this primary beneficiary test is inherently flexible because it focuses on the economic reality of the employer-intern relationship and the benefits the intern receives in exchange for his or her participation in the internship program. The court identified the following seven, non-exclusive factors to aid courts in determining whether an intern is an employee under the New York Labor Law (NYLL) and federal Fair Labor Standards Act (FLSA):

  1. The extent to which the intern and employer clearly agree that there is no expectation of compensation. Promises of compensation, express or implied, suggest the intern is an employee and entitled to such compensation.
  2. The extent to which the internship provides training similar to the training provided in an educational environment, including clinical and practical training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program via receipt of academic credit for the internship or because the training receive integrates into the intern’s formal coursework.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic year. This factor arguably counsels against summer jobs qualifying as unpaid internships.
  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. Thus, an understanding that the internship is to be ‘trial period’ counsels against the viability of it being unpaid.

The Second Circuit’s decision is most notable for its insistence that the company may benefit from the intern’s work without needing to pay the intern. Many interpretations of the DOL test concluded that there can be no immediate benefit to the company from the intern relationship. The decision suggests an internship in the Second Circuit may be unpaid if an intern receives an educational benefit and doesn’t serve as a direct replacement for paid employees even if the employer is also receiving a benefit from the relationship. The decision has received a great deal of criticism. For example, Suffolk University law professor David Yamada, who wrote the first law review article on unpaid internships back in 2002 opined: “All the factors they drew up were really without legal authority…They apparently decided to invent something new here, which is surprising at the appellate level.” says Yamada.

CLASS CERTIFICATION IN A POST-GLATT WORLD
The Second Circuit also dealt a blow to intern rights by refusing to certify the Fox interns as a class. The Second Circuit declared that “an intern’s employment status is a highly individualized inquiry” not conducive to class-action treatment. The court noted that even if a plaintiff could establish that its employer had a policy of replacing paid employees with unpaid interns, that fact alone would not mean that each intern in the putative class would prevail under the primary beneficiary test. The decision makes little sense as it stands to reason the job experience is the same or similar for all interns performing the same tasks. The Second Circuit’s directive that a trial court must conduct an individualized fact-specific inquiry could make it more difficult for future cases brought by interns to proceed on a class basis, but the court did make it clear that it is possible for a class to be certified under the appropriate circumstances. In doing so, the Second Court left the door open for interns to bring wage and hour representative on a representative basis.

IMPLICATIONS FOR WORKERS AND EMPLOYERS
Employers may consider expanding the scope of existing internship programs or implementing a new unpaid internship program. Any such expansion should be approached cautiously and employers should carefully assess all relevant law. Despite the Second Circuit’s guidance, engaging unpaid interns remains risky. This is particularly true for employers operating outside the Second Circuit where the Second Circuit’s test does not have the force of law. Additionally, at least one state has written the U.S. Department of Labor’s test that the Second Circuit rejected into law. In passing anti-discrimination protections for interns, the Connecticut legislature defined an intern as an “individual who performs work for an employer for the purposes of training,” if and only if:

  • the employer is not committed to hire the individual performing the work at the conclusion of the
    training period;
  • the employer and the individual performing the work agree that the individual performing the work
    is not entitled to wages for the work performed;
  • the work performed: (a) supplements training given in an educational environment that may
    enhance the future employability of the individual; (b) provides experience for the
    benefit of the individual; (c) individual does not displace any current employee of the employer; (d)
    is performed under the supervision of the employer or an employee of the employer; and (e)
    provides no immediate advantage to the employer providing the training and may
    occasionally impede the operations of the employer.

Thus, in Connecticut, wage and hour protections afforded under state statute may apply to interns when no such rights attach under the FLSA. The same may be true in other states. Workers should consult competent counsel if they think their employer has treated them improperly.

CONTACTS
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact Justin Brooks at jbrooks@gbblegal.com.

GBB’s experienced team of attorneys can assist employees who wish to vindicate their rights and provide counseling to companies seeking to comply with employment laws.