The Second Circuit Court of Appeals in Glatt et al. v. Fox Searchlight Pictures, Inc. recently rejected the Department of Labor (“DOL”) six factor test for determining whether an individual has been properly classified as an unpaid intern in favor of another test that looks at whether the intern or the employer is the primary beneficiary of the relationship.

The DOL’s six factors are:

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 end 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. Rejecting the DOL test, the court (as discussed below) elected to adopt a test that it believed aligned more closely with common law and the underlying purpose of an unpaid internship.

In Glatt, the Second Circuit reversed a district court decision that held, in part, that three individuals working for either Fox Searchlight or Fox Entertainment Group were improperly classified as “unpaid interns” in accordance with the FLSA and the New York Labor Law (“NYLL”). In doing so, the Second Circuit rejected the district court’s analysis that relied on the DOL test. The six factors came directly from a 1947 Supreme Court decision in which the Supreme Court refused to recognize unpaid railroad brake trainees as employees under FLSA. The Glatt court rejected the DOL test because it relied on what it considered to be an outdated Supreme Court decision that failed to reflect the purpose of the modern internship.

A case of first impression in the Second Circuit, the core issue for the court centered on the circumstances under which employers must classify “unpaid interns” as “employees” entitled to compensation under FLSA. In the end, the court chose to adopt the “primary beneficiary test” urged by the defendants. In adopting the test, the court agreed that the appropriate inquiry was “whether the intern or the employer is the primary beneficiary of the relationship ”. The flexible, non-exhaustive factors set forth by the court to implement the “primary beneficiary test” include:

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 the 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; and
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.

Under this new set of factors, employers will want to consider how they structure unpaid internship programs. Because the Second Circuit’s analysis focused on the purpose of the modern internship – the relationship between the internship and the intern’s formal education, an employer should be vigilant in providing an appreciable educational benefit to its interns. Some considerations an employer should take into account are:

• Be clear when drafting the terms of the internship – express, in writing, that the internship is unpaid and that a job is not promised upon completion of the internship;
• Prescribe a clear set of qualifications that are most relevant to the internship – permitting academic credit in exchange for the internship experience may further clarify the purpose of the internship;
• The substance of the internship should reflect a practical application of the individual’s academic background, rather than menial work that may be interpreted as an employer’s attempt to benefit from free labor, and
• Provide opportunities for interns to add value to paid employees’ work so long as there is a connection between the work and the intern’s formal education.

Unpaid internships have been shown to bestow a mutual benefit upon the intern and the employer. Although there may be circumstances where an unpaid intern should be compensated for his or her work, the Second Circuit’s decision reflects an effort to preserve the distinction between education and employment. Although the Glatt decision is not binding precedent for them, Ohio employers still should review their unpaid internship programs to determine whether their educational purposes need to be strengthened to reflect the interns’ formal education. In instances where the internship adds minimal or no educational value, an individual formerly classified as an “unpaid intern” should now be classified as an “employee,” entitling the individual to compensation under the Fair Labor Standards Act (“FLSA”). Of course, as of this writing, Ohio employers (for whom the Second Circuit decision is not binding precedent) will want to evaluate their internship programs under both the test announced in Glatt as well as the traditional DOL test.

Special thanks to our paid summer associate, Christopher Hawthorne, for his substantial contributions to this post.