Second Circuit Articulates New Test to Determine Whether Employers Need to Pay Their Interns

Edgar M. Rivera, Esq.

For years, employers, employees, interns, and lawyers have grappled with the following question: when is an unpaid intern entitled to compensation under the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL)? On July 2, 2015, the Second Circuit provided an answer.

Although hired by Fox Searchlight, a subsidiary of Fox Entertainment Group, as unpaid interns, plaintiffs Eric Glatt, Alexander Footman, and Eden Antalik claimed compensation as employees under the FLSA and NYLL. The FLSA and NYLL only protect “individual[s] employed by an employer” but offer little guidance on who an employee is, both essentially defining “employ” as “to suffer or permit to work.”

In 1967, the Department of Labor (DOL) adopted the U.S. Supreme Court’s approach for assessing whether unpaid interns working in the for-profit private sector need to be compensated, which the Court developed in a 1947 case dealing with unpaid railroad brakemen trainee. This approach states that an employment relationship exists upon a finding of all of the following factors:

(1) the internship 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 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 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.

The Southern District Court of New York (SDNY) balanced these factors, determining that the first four factors weighed in favor of finding that plaintiffs were employees and that the last two factors favored finding them to be interns. The SDNY held that they were entitled to compensation, and certified a class and collective action on behalf of similarly situated interns against Fox.

Fox appealed the SDNY’s decision to the Second Circuit, claiming the SDNY has used the wrong test. The plaintiffs and defendants both proposed different tests to the Second Circuit: the plaintiffs urged the court to adopt a test whereby interns will be considered employees whenever the employer receives an immediate advantage from the interns’ work, while the defendants urged the court to adopt a test where an employment relationship is created when the tangible and intangible benefits provided to the intern are greater than the intern’s contribution to the employer’s operation.

The Second Circuit agreed with Fox, holding that the “primary beneficiary” test determines whether an intern is an employee, vacating the district court’s decision. The Second Circuit mentioned seven non-exhaustive factors for the court to weigh when considering whether an intern in an employee:

(1) the extent to which the intern and the employer clearly understand that there is no expectation of compensation;

(2) the extent to which the internship provides training that would be similar to that which would be given in an educational environment;

(3) the extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic calendar;

(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; and

(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 court deciding this issue must weigh and balance all circumstances. The Second Circuit found that this approach reflects the relationship between the internship and the intern’s formal education and by focusing on the educational aspects of the internship, it better reflects the role of internships in today’s economy than the DOL factors derived from a SCOTUS decision that dealt with a prospective railroad brakemen. The Second Circuit remanded the case to the district court to decide in accordance with its decision.

Although we do not know whether the district court will find in favor of the plaintiffs, Fox argued that applying the primary beneficiary test in this case would lead to the conclusion that the plaintiffs were not employees because they — and not Fox — received the primary benefits of their time with the company, referring to intangible benefits such as a resume listing and an understanding of film production work.

The substitution of intangible benefits for payment is extreme. Benefits are wages, healthcare, vacation days, and the like, not a line on a resume or on-the-job experience. This decision gives employers more opportunities to avoid paying their employees, shifting business costs from employers to vulnerable young people and students. Fox Searchlight has annual revenue exceeding $6.5 million and Fox Entertainment exceeding $13 billion—there is no excuse for Fox paying their employees in goodwill rather than wages.

If you are interested in additional coverage of this case, The Harman Firm, LLP wrote the following blogs: SDNY Says to Pay Your Interns if You Aren’t Teaching Them, regarding the Southern District’s decision to certify the class, and Unpaid Interns in the Film Industry Sue FOX, regarding the initial pleadings.

If you believe your employer has required to your provide genetic information, please contact The Harman Firm, LLP.