By Clarice C. Liu, Esq., Published on March 26, 2018

Welcome news for companies hiring interns – the U.S. Department of Labor (DOL) has recently adopted a more flexible approach in determining whether “interns” are considered “employees” under the Fair Labor Standards Act (FLSA). As a practical matter, if an intern is deemed an employee, regulations such as minimum wage and overtime compensation would apply. In the past, the DOL utilized six factors for that analysis – a test which was changed in 2018 in favor of a more flexible “primary beneficiary” test.

Under this more relaxed standard, for-profit employers would now have more flexibility in deciding whether or how to compensate interns. Consistent with the new guidelines, an employer should give careful consideration in the design and implementation of an internship program, which could be rewarding to the company and to the student interns who could further their educational process in the pursuit of their long-term career goals.

The Department of Labor’s Former 6-Factor Test

Previously, the Department of Labor used six factors in determining whether an intern or trainee should be treated as an employee. Derived from the U.S. Supreme Court case of Walling v. Portland Terminal Co. (1947) 330 U.S. 148, the six criteria used by DOL were as follows:

1. The training or internship, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school or educational environment;
2. The training or internship is for the benefit of the trainees, interns, or students;
3. The trainees, interns or students do not displace regular employees, but work under their close observation;
4. The employer derives no immediate advantage from the activities of trainees, interns, or students, and on occasion the employer’s operations may be actually impeded;
5. The trainees, interns or students are not necessarily entitled to a job at the conclusion of the training period or internship; and
6. The employer and the trainees or interns understand that the trainees, interns or students are not entitled to wages for the time spent in training or internship.

The prior six-factor test had a rigorous requirement that all six factors must be met in order for the trainee or intern not to be considered an “employee” for the purpose of the minimum wage and overtime requirements under the federal Fair Labor Standards Act. Often, the most challenging of the six factors was the fourth requirement that the employer cannot derive any “immediate advantage” from the intern’s work. That factor stringently required that companies must derive no benefit at all from an intern’s participation, if the internship is unpaid, even if the intern could receive hands-on working experience that could prove to be invaluable to the individual.

The New “Primary Beneficiary” Test

Since 2015, four federal appellate courts departed from the DOL six-factor tests. The Second Circuit Court of Appeal set a precedent as the first appellate court that rejected the six-factor test in the case of Glatt v. Fox Searchlight Pictures, Inc. (2d Cir. 2015) 811 F.3d 528. Instead, the Second Circuit assessed the extent to which both the employer and the intern benefit from their relationship.

This approach focuses on what the interns receive in exchange for their work and grants the courts the flexibility to examine the economic realities as they exist between the parties. The Second Circuit enumerated a non-exhaustive, seven-factor test which considered whether the employer or the intern was the “primary beneficiary” of the relationship. Those factors 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 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.

A critical change in this approach is that no single factor is dispositive of the determination if an individual is an intern or an employee. Following Glatt v. Fox Searchlight Pictures, Inc., the “primary beneficiary” test was followed by the Eleventh Circuit in Schumann v. Collier Anesthesia (11^th Cir. 2015) 803 F.3d 1199; and the latest Ninth Circuit Court of Appeals opinion in Benjamin v. B&H Education, Inc. (9^th Cir, 2017) 877 F.3d 1139.

In Benjamin, the U.S. Ninth Circuit Court of Appeal held that the students of a school of cosmetology and hair design in California and Nevada were not “employees” of the school, even though they not only practiced skills in the schools’ clinic classroom, but they also performed duties such as cleaning work stations, laundering linens, making appointments, and selling products. The Ninth Circuit joined the Second and the Eleventh Circuits in adopting the “primary beneficiary” test to determine if the students were employees. The Ninth Circuit Court of Appeal held in Benjamin that “Plaintiffs were not employees under federal or state law because Plaintiffs were the primary beneficiaries of the educational program and they had not shown that [the school] subordinated the educational function of its clinics to its own profit-making purposes.” The Court also opined that the DOL six-factor test is “too rigid to comport with [its] caselaw, relationship under the FLSA.”

Weeks after the Ninth Circuit decision of Benjamin v. B&H Education, Inc., the DOL issued a press release which acknowledged the recent appellate court decisions that rejected the six-factor test, and proceeded to also adopt the “primary beneficiary” test applied by those courts. In its updated fact sheet, the DOL cites to the key cases noted above and adopts the formulation by the Second Circuit Court of Appeal in Glatt. The DOL also expressly provides that the primary beneficiary test is flexible and no single factor is determinative. In essence, whether an intern or a student is an employee under the FLSA necessarily depends on the unique circumstances of each case.

With respect to California, in particular, there is no state statute or regulation which expressly exempts persons participating in an internship from the minimum wage and overtime requirements, as explained in the Division of Labor Standards Enforcement (DLSE) Opinion Letter (dated April 7, 2010). The DLSE has historically followed federal interpretations which recognize the special status of trainees and interns who perform some work as part of an educational or vocational program. Similar to the federal exemption from coverage, if there is a sufficient showing that an intern is enrolled in a bona fide internship program, the intern would fall outside the coverage of the California minimum wage and overtime compensation laws.

Practical Considerations.

With the new formulation of the determination of internship, companies considering the hiring of interns should review its policies to comply with the new standards. Pertinent in a review of the policy and strategies in the development of a viable internship program might include:

• Select individuals as interns who are concurrently enrolled in education or vocational programs;
• Develop a partner agreement with an institution of higher learning for student interns to participate in an educational program, preferably with academic credit;
• Formulate the duration of the internship to correspond to the academic calendar;
• Execute clear written internship agreements which set forth the expectations, requirements and a clear scope of the internship program;
• Devise weekly time sheets and status reports describing the type of work done at the company;
• Provide a supervisor who closely monitors and supervises the intern;
• Design the internship program to be a continuation of the learning and development phase of the individual’s academic or vocational education, developing individual discipline, basic job skills, or applied knowledge; and
• Develop practical application of the intern’s classroom instruction to be utilized in the workplace.

In sum, an employer considering the implementation of an internship program should carefully design and apply a comprehensive and consistent strategy that would meet the objective of the company as well as provide a meaningful and productive educational experience to its trainees or interns.

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The information provided in this article is intended for a general discussion of the subject matter and should not be construed as legal advice. For your specific circumstance, or inquiry about the issues addressed in this article or other employment law matters, please contact attorney Clarice Liu at (415) 288-8622 or [email protected].