Second Circuit Issues Test for Determining Legality of Unpaid Internships

The U.S. Court of Appeals for the Second Circuit has issued a test for determining whether a company must compensate an intern as an employee under the Fair Labor Standards Act (FLSA). Employers with unpaid internship programs and those considering hiring unpaid interns should consult with an attorney to determine how to properly structure such programs.

In Glatt v. Fox Searchlight Pictures, three former unpaid interns sued Fox Searchlight Pictures claiming compensation as employees under the FLSA and New York Labor Law (NYLL). The interns had worked in the company’s Manhattan office during the production of the 2010 film “Black Swan,” which later earned $329 million worldwide.

With certain exceptions, the FLSA requires employers to pay employees minimum wage and overtime for hours worked in excess of 40 per week. The NYLL requires the same, but establishes a higher wage rate than the federal minimum for New York State.

One of the unpaid interns, a college graduate, had worked from approximately 9:00 a.m. to 7:00 p.m. five days a week in the company’s accounting department. Another of the interns worked approximately ten-hour days, five days per week, and was assigned such tasks as taking lunch orders, accepting deliveries, and running errands.

The Second Circuit held that the appropriate test to determine whether an unpaid intern must be compensated as an employee is the “primary beneficiary test.” If the intern is the primary beneficiary of the relationship, the internship may legally be unpaid. If the employer is the primary beneficiary, the intern must be compensated as an employee under the FLSA.

The Second Circuit issued a non-exhaustive list of seven factors for courts to consider in applying the primary beneficiary test, but stressed that no one factor is dispositive. These factors include:

1. The extent to which the intern and employer clearly understand there is no expectation of compensation;
2. The extent to which the internship provides training similar to that which would be provided 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 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; and
7. The extent to which the intern and the employer understand the internship is conducted without entitlement to a paid job at the conclusion of the internship.

The primary beneficiary test, according to the Second Circuit, is appropriate because it focuses on what the intern receives in exchange for his work and allows courts “flexibility to examine the economic reality as it exists between the intern and employer.” The test also takes into account the strength of the relationship between the internship and the intern’s formal education.

The primary concern with unpaid internships is exploitation of the intern, as well as displacement of paid employees.

“When properly designed, unpaid internship programs can greatly benefit interns,” wrote Circuit Judge John M. Walker Jr. on behalf of the panel. “However, employers can also exploit unpaid interns by using their free labor without providing them with an appreciable benefit in education or experience.”

Ultimately, the former interns suing Fox Searchlight Pictures found their suit remanded for further proceedings so the primary beneficiary test can be applied.