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Many businesses work with interns at one point or another, using them for special projects or hiring them on an annual or other regular basis to work side by side with traditional staff members. Often, businesses do not pay their interns, reasoning that it is an educational experience and, in fact, students sometimes get school credit or even compensation from their school for an unpaid internship. In a landmark case this summer, a Federal court for the Second Circuit (which covers New York) clarified the circumstances in which an interns is excluded from basic employee protections, and all businesses should take note of the new rules that apply to unpaid interns.

Generally speaking, with the exception of “professional” and other highly compensated, salaried workers, most employees must be paid at least minimum wage for every hour worked up to 40 hours in a week, and must also be paid overtime for all hours worked beyond 40 in any given week, at a rate of time and a half of their usual hourly rate. These requirements are mandated by both the Federal Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”), and employees cannot waive these statutory rights.

In the past, there has been much disagreement about whether “interns” qualify as “employees”—and thus, whether the FLSA and NYLL even apply to interns. The U.S. Supreme Court, in 1947, held that individuals participating in a training program were not employees and the FLSA did not apply to them because they did not displace regular workers, were not promised employment after the training program, which was similar to training offered by a vocational school, and the employer did not receive any immediate advantage to its business from the work performed by the trainees. (Walling v. Portland Terminal Co., 330 U.S. 148). Based in part on this decision, the U.S. Department of Labor published guidance setting for six criteria which, if all were met, allowed for the trainee/worker to be treated as exempt from FLSA.

However, while the DOL required all six criteria to be met, courts—and specifically, the district court in Glatt v. Fox Searchlight Pictures, Inc., No. 11 Civ 6784 (WHP) (SDNY June 11, 2013)—employed more of a balancing test, evaluating whether most of the factors, on balance, indicated the individual was an employee or an intern/trainee.

On appeal, the Second Circuit declined to adopt either the DOL’s strict six-factor test or the lower court’s balancing test and, instead, adopted its own balancing test which it referred to as the “primary beneficiary test”. The Court wrote, “The primary beneficiary test has two salient features. First, it focuses on what the intern receives in exchange for his work. Second, it also accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.” Glatt v. Fox Searchlight Pictures, Inc., Nos. 13-4478-CV, 13-4481-CV at p. 14 (2d Cir. July 2, 2015) (internal citations omitted).

The Court set forth a list of “non-exhaustive factors” that it said courts (and therefore, employers) should evaluate and consider when determining whether an intern should be considered an employee for purposes of the FLSA (and NYLL), including:

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 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.

The Court noted that “[t]he purpose of a bona-fide internship is to integrate classroom learning with practical skill development in a real-world setting,” and the non-exhaustive list of considerations is thought to reflect that purpose as well as balance it with economic realities of today’s workforce. The overarching concern for employers, based on Glatt, should be to develop an internship program that clearly provides the primary benefit to the student-intern and has the student-intern’s educational and experiential experience at its core.

It is important to note that if an intern is not paid—or is paid less than minimum wage, or is not paid for overtime pursuant to the law—and a court later determines that the intern should have been classified as an employee, a violation of the FLSA and NYLL will likely be found. In that case, courts can award back pay based on what the employee should have been paid, as well as up to 100% of that amount under each of those statutes. In other words, in the worst-case scenario, employers could be forced to pay three times what they should have paid in the first instance. On top of that, in most cases the employer is responsible for paying the employee’s attorneys’ fees, which can be in the tens of thousands for even a simple case. For these reasons, it is essential that employers and interns take a hard look at the Glatt factors and their own internship program to ensure compliance and seek legal guidance, when appropriate. Our attorneys can help you if you have not been properly paid as an intern, or if you are an employer who wants to maintain or develop a strong internship program that will steer clear of any legal liability.

For more information, employees and employers can contact us here.

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