Second Circuit undercuts Department of Labor unpaid internship test

This month the U.S. Court of Appeals for the Second Circuit (which oversees appeals in New York, Vermont and Connecticut) in Glatt v. Fox Searchlight Pictures, Inc. rejected the nearly forty year old internship test applied by the Department of Labor in favor of a more business friendly test called the primary beneficiary test.

This primary beneficiary test is already applied by some circuits and with this decision the growing split among the circuits will likely result in a Supreme Court decision to determine the appropriate standard in unpaid internship cases.

The primary beneficiary test is not absolute in its employer-friendly status but it makes it substantially easier for employers to prove an unpaid intern is not an employee entitled to minimum wage and overtime protection under the Fair Labor Standards Act and state wage laws. This is an ongoing problem with college students and recent graduates struggling with the prospect of finding work after graduation.

This decision will only make matters worse.

Unpaid internships, unpaid wages and overtime pay

Unpaid internships and other unpaid training programs under an exception in the Fair Labor Standards Act, no matter what test applies, creates an educational opportunity that benefits the trainee or intern rather than the employer. These training programs do not have to produce academic credit or have an association with an educational institution.

They must reflect an educational experience rather than trained to perform a specific tasks at a specific employer.

Unfortunately there is a growing abuse of this exception that violates the FLSA. As more college graduates unload into a job market for which there are not enough jobs, simple supply and demand allowed unscrupulous employers to convert entry level positions into unpaid internships.

Potential employees will need to get job experience any way they can to edge out other job applicants. The available opportunities happen to be unpaid.

Unpaid internships in entertainment

Some industries are much worse about silently mandating workers pledge fealty to the industry by working for free–particularly in the entertainment industry. There is nothing wrong with offering unpaid opportunities to gain experience and additional education; however, these unpaid positions tend to be full of menial tasks that produce no education and no training. It’s just a way of getting (illegal) free labor.

The Second Circuit in Glatt all but admits this is the state of the modern internship. A meaningful signal to employers that a little less obviousness would make this acceptable.

Fifth Circuit unpaid internship test applies in Texas

Fortunately for those of us in Texas, the Fifth Circuit continues to follow the Department of Labor’s internship test. It requires each element of the test met to qualify as an unpaid internship under the FLSA. This test requires:

1. the internship is similar to training given in an educational environment;
2. the internship experience is for the benefit of the intern;
3. the intern does not displace regular employees and works under the close supervision of existing staff;
4. the company derives no immediate advantage from the intern’s activities;
5. the intern is not entitled to a job with the company at the conclusion of the internship; and
6. the company and the intern understand that the internship is unpaid.

You can see from these elements that the focus is entirely upon the the benefit to the intern. Although the employer may obtain ancillary benefits from its internship program the employer cannot obtain a meaningful immediate benefit.

Second Circuit unpaid internship test

Compare the primary beneficiary test as described by the Second Circuit. The court states the factors identified are not exhaustive. They do not need to all flow in favor of one party or the other. However, the court suggests these factors:

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. Extent to which the internship provides training similar to that given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship ties to a formal education program by integrated coursework or receipt of academic credit.
4. 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. 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 lacks entitlement to a paid job at the conclusion of the internship.

It is immediately obvious that this test is more beneficial to employers. It allows some of the factors to weigh in favor of the employer. The employer is free to gain some immediate benefit from the unpaid internship and possibly even a significant benefit.