Recent Court Decisions May Change the Rules for Unpaid Internships

Background

For many years, both for-profit and nonprofit organizations have made extensive use of unpaid interns.  Interns and their hosts alike have benefitted from the relationship: interns gained valuable experience in their fields and developed industry contacts that might lead to future employment, while firms and organizations gained an "extra set of hands" to help perform tasks that they couldn’t (or wouldn’t) pay for.

The U.S. Department of Labor (DOL) however, has frequently expressed concern that unpaid interns were not being treated properly under federal wage and hour laws.  In 1967, it published a six-part test to help determine whether an unpaid intern was exempt from minimum wage and overtime laws or had to be compensated.  If all of these standards were met, the individual would not be subject to the wage and hour laws.  Otherwise, the individual would be treated as an employee and paid at least the minimum wage.

The six-part test lays out the following standards:

• 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;
• The internship experience is for the benefit of the intern;
• The intern does not displace regular employees, but works under close supervision of existing staff;
• 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;
• The intern is not necessarily entitled to a job at the conclusion of the internship; and
• The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

The DOL also noted an exception for individuals who volunteer their time freely and without anticipation of compensation to nonprofit organizations that serve religious, charitable, civic, or humanitarian purposes. Thus, according to the DOL, unpaid internships in the public sector and for nonprofit charitable organizations, where the intern volunteers without expectation of compensation, have been generally permissible.

During the most recent economic downturn, unpaid internships surged in many industries, including entertainment and publishing.  In response, the DOL stepped up its enforcement of the wage and hour laws with respect to unpaid internships, and several interns sued the companies at which they had interned for back pay and overtime.

Recent Developments

One of the most noted cases involved interns that worked on the production of the movie, Black Swan.  In a long-awaited decision, the U.S. Court of Appeals for the Second Circuit ruled that the interns were not employees subject to the wage and hour laws.  In reaching this decision, the court rejected the DOL’s six-part test and adopted a different test, dubbed the "primary beneficiary" test, for determining the interns’ classification.  The test can be summarized as follows: if the employer, rather than the intern, is the primary beneficiary of the relationship, then the intern should be considered an employee and compensated as such.   If the intern is the primary beneficiary of the internship, the intern is not covered by the wage and hour laws.

The Second Circuit stated that the DOL test was "too rigid" and said that relationship between the employer and the intern should be evaluated based on the following factors:

• 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;
• The extent to which the internship provides training that would be similar to that provided in an educational environment, including the clinical and other hands-on training provided by educational institutions;
• The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;
• The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar;
• The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;
• 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
• 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.

Both the court’s test and the DOL’s test share many common elements.  Both state that the intern cannot expect any compensation for the work, including an expectation of future employment.  Moreover, both tests provide that the intern cannot displace a regular employee.  The focus of both tests is that the purpose of the internship must be to provide educational experience for the intern.

However, it is on the last factor that the two tests diverge.  The DOL test makes clear that the company cannot derive any immediate benefit from the internship.  The DOL states that the company’s operations may "on occasion... actually be impeded" by the intern.   However, the court of appeals was less concerned with the benefit to the company, provided that the primary benefit was for the intern.  As a result, the court examined much more closely the educational benefit to the intern, focusing on such factors as:

• The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit; and
• The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar and is limited to the period in which the intern receives beneficial learning.

The court also emphasized that applying the primary benefit test requires weighing and balancing all of the factors.  Unlike the DOL’s test, all of the factors do not need to point in the same direction for a court to determine that an intern is not an employee.  The court also stressed that the seven factors listed above were not an exhaustive list of considerations – courts may consider other relevant evidence.

Conclusion

The court’s ruling applies to businesses operating in New York, Connecticut and Vermont, and does not apply to business operating in the D.C. area.  However, it is the second federal appellate decision that has rejected the DOL’s standards, and there is a significant possibility that other courts, including those in D.C., will refuse to follow the DOL’s test.  Therefore, an employer cannot fully rely on that test.

Although the court expressly limited its analysis to internships at for-profit employers, the ruling is still important for nonprofit organizations.  The test established by the Second Circuit is more employer-friendly, and should give companies greater flexibility and confidence when developing and implementing unpaid internship programs.  It is crucial, however that the internship program emphasize educational development – all but two of the factors involve the internship supplementing, complementing, or accommodating the intern’s academic commitments.  As the court explained, "[t]he purpose of a bona-fide internship is to integrate classroom learning with practical skill development in a real world setting."  In order to ensure that an intern is not misclassified, nonprofits should take care to keep a tight focus on the educational aspects of the internship program, and to the extent possible, work with the intern’s educational institution to sponsor or endorse the internship.