“Primary Beneficiary” is the New Test for Determining Whether an Intern is Exempt from the FLSA in the Second and Eleventh Circuits

This June, the Second Circuit moved away from the Department of Labor’s six-factor test for determining whether an intern can be exempt from FLSA minimum wage and overtime requirements and instead adopted the “primary beneficiary” test.

Glatt v. Fox Searchlight Pictures, Inc., 791 F.3d 376, 381 (2d Cir. 2015) and Wang v. Hearst Corp., Docket No. 13‐4480‐cv (2d Cir. 2015).  Last month, the Eleventh Circuit did the same.  Schumann v. Collier Anesthesia, P.A., D.C. Docket No. 2:12-cv-00347-JES-CM (11th Cir. Sept. 11, 2015). 

Under the new primary beneficiary test, a court determines whether the employer or “intern” primarily benefits from the internship.  If the employer benefits more, then the intern is classified as an “employee” and will be entitled to minimum wage and overtime.  If the intern benefits more, then he or she may be properly classified as an unpaid intern or trainee and will be exempt from minimum wage or overtime requirements. 

The DOL’s prior six-factor test allows an internship to be exempt from the FLSA if all of the following factors are present:

  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 Second and Eleventh Circuits (as discussed below) adopted the primary beneficiary test, which they believed aligned more closely with 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 on the Oscar-winning film Black Swan for either Fox Searchlight or Fox Entertainment Group were improperly classified as “unpaid interns” under the FLSA and the New York Labor Law.  The Second Circuit determined that the DOL factors are outdated -based on a 68-year-old Supreme Court decision - and did not involve the characteristics of a modern internship. Many of today’s internships stem from a requirement for a particular type of educational degree, professional certification, or professional license.  Instead, the Court chose to adopt the “primary beneficiary test.”  The Second Circuit eliminated the DOL’s six-factor test and instead laid out a list of the following seven, non-exhaustive, factors that determine who primarily benefits from the internship:

  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 which 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.

The Second Circuit also vacated the district court’s class certification, because under the new “primary beneficiary test,” plaintiffs could not use common proof to determine whether an intern was properly classified.  Because the seven factors require individualized proof specific to each intern’s experiences, the case could not proceed on a class basis.  The court did not, however, foreclose the possibility that a class may be certified under the new standard.

In Wang, the plaintiffs were unpaid interns who worked at Hearst Corporation at one of the nineteen magazines the company operates in New York.  Like in Glatt, the plaintiffs filed motions for class certification and for partial summary judgment on the claim that they were misclassified as unpaid interns and were entitled to minimum wage and overtime pay.  The district court denied both motions and the plaintiffs appealed.  The Second Circuit vacated the denial of summary judgment and affirmed the denial of the class certification.  The Second Circuit again used the “primary beneficiary” test.  In affirming the denial of class certification, the Second Circuit focused on the individualized inquiry and analysis required by the seven factors announced in Glatt.  In particular, the Court highlighted that a policy of not paying interns alone could not certify the class- the analysis had to be specific, given the individual experienced varied greatly from magazine to magazine.

Just last month, the Eleventh Circuit joined in on the Second Circuit’s analysis and adopted the “primary beneficiary” test.  In Collier, plaintiffs were 25 former student registered anesthetists, required to complete clinical hours at a local anesthesiology practice for their Master’s Degree program and professional license.  The students sued under the FLSA for unpaid wages and overtime, claiming that they were working as employees during their clinical sessions, rather than as interns.  The Eleventh Circuit adopted the Second Circuit’s seven factors for determining whether an individual is an employee or an intern.  The Eleventh Circuit added that the “primary beneficiary” analysis should focus on the benefits to the individual being classified as an intern and whether the employer’s implementation of the internship takes unfair advantage or is abusive toward the individual. 

The decisions in both Circuits emphasized that the primary beneficiary seven factors involve weighing and balancing all the circumstances, including any pertinent factors not included in the seven enumerated factors. 

Important Takeaways

The Second Circuit and Eleventh Circuit decisions in Glatt, Wang and Collier are important for several reasons.

First, the Courts rejected the DOL’s six-factor test as outdated and rigid.  They replaced this test with a broader, non-exhaustive list of factors that appears to be more employer-friendly. Employers must now consider the seven factors enumerated above and any other circumstances that seem pertinent to whether the interns should be paid or unpaid.  Employers can also consider the flexibility of this test when developing internship programs.  The decisions highlight the importance of making sure that an employer’s internship program emphasizes educational development.  This underscores the intention that internships should seek to train and develop new professionals. If the intern receives a significant educational benefit and does not directly replace paid employees, the fact that the employer also receives benefits no longer means that the intern should automatically be treated as an employee.   

Second, for-profit employers must remain cautious in establishing unpaid internship programs, even where they meet the standards set forth in these decisions.  The “primary beneficiary” test is currently only binding in the Second and Eleventh Circuits.  It is also unclear whether a New York state court would similarly apply the “primary beneficiary” test to claims by interns under the NYLL in lieu of the New York Department of Labor’s intern classification test, which is largely based on the rigid six-factor DOL test.  These decisions are also not precedential on the state courts of other states where such cases would be decided under the state law.

Finally, employers should note that the Second Circuit decisions have not ruled out the possibility that interns can bring an action on a class-wide basis.  Although the decisions makes it more difficult for class certification based on the highly individualized analysis required, the courts stated it was still possible for a class to be certified under the appropriate circumstances. 

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