Explaining the Unpaid Internship Enigma

judgeIf an intern is for all intents and purposes a regular employee, then should he or she still be considered an intern?

The U.S. Court of Appeals for the Second Circuit recently attempted to answer this existential question, or at least help clear up the confusion over whether interns should be treated as employees—and paid as such.

On July 2, the aforementioned appeals court—which covers New York, Connecticut and Vermont—ruled in the case of Glatt v. Fox Searchlight Pictures Inc., in which plaintiffs Eric Glatt and Alexander Footman claimed that Fox Searchlight and Fox Entertainment Group violated the Fair Labor Standards Act and New York Labor Law by failing to pay them as employees during their internships, as required by FLSA and NYLL minimum wage and overtime provisions.

In June 2013, Glatt and Footman—who interned on the set of the 2010 Fox Searchlight film Black Swan—were granted partial summary judgment by the U.S. District Court for the Southern District of New York, which found that Glatt and Footman were indeed employees under the Fair Labor Standards Act and New York Labor Law.

In reaching its decision, the court relied on a version of the Labor Department’s six-factor test to conclude the interns had been improperly classified as unpaid interns as opposed to employees. At the time, the DOL filed an amicus brief imploring the appeals court to adhere to the department’s test requirement that each of these factors—the internship is similar to training that would be received in an educational environment and the intern does not displace regular employees, for instance—is met before considering an internship unpaid.

The Second Circuit Appeals Court, however, recently opted to “decline [the] DOL’s invitation,” according to court documents, in which the appeals court described the test as “too rigid for our precedent to withstand.”

Rather, the court agreed with the defendants’ assertion that “the proper question is whether the intern or the employer is the primary beneficiary of the relationship.” To conduct the “primary beneficiary” test, the court focused on two issues—what the intern receives in exchange for his or her work and “the economic reality as it exists between the intern and the employer.”

In sending the case back to district court for further proceedings, the appeals court decision “delineates when and under what circumstances an intern must be treated—and more importantly, paid—like a regular employee,” says Mark Goldstein, a New York-based attorney and member of Reed Smith’s labor and employment group.

By making this distinction, the Second Circuit addressed an issue that “had been a thorn in employers’ sides for the past several years,” says Goldstein.

The test used by the Second Circuit Appeals Court differs from the DOL’s “all-or-nothing” approach, which essentially required that an intern be treated as an employee “every time the employer derived a benefit from the intern’s work,” Goldstein told HRE.

Under this new standard, an intern is not categorized as an employee “simply because he or she performs work for the company, or because the company derives a benefit from the intern’s work, as the DOL had attempted to argue,” he says.

Moreover, the Second Circuit “appears to have made it much more difficult for the plaintiff’s bar to obtain class and collective action certification in lawsuits brought by former interns,” in ruling that the question of an intern’s employment status is a “highly individualized inquiry,” says Goldstein.

“This alone may spell the end of the recent barrage of unpaid intern lawsuits.”

Even in light of the court’s employer-friendly decision, though, now would be a good time to assess internship programs “to ensure that such programs satisfy all applicable judicial and regulatory guidance,” says Goldstein.

“Unpaid internship programs still pose risks—including not only potential liability for wage and hour violations, but also potential tax- and benefits-related penalties—that must be weighed before an internship program is implemented.”