Internships have become a rite of passage in the United States for many aspiring workers. There are published estimates indicating that that "70 to 75 percent of students at four year [colleges] undertake at least one internship." See Ross Perlin, Intern Nation: How to Learn Nothing and Learn Little in the Brave New Economy (Verso 2012) at 26.
Many of those internships are unpaid (Id. at 27), which raises a substantial legal question about--and the specter of substantial lability for--failing to treat "interns" as employees. To further complicate the matter, the legal test for determining just who qualifies as a true intern, and who must be treated as an employee entitled to wages and benefits, has not always been clear.
Indeed, the law regarding unpaid internships is in conflict at the federal appellate court level. In contrast, the State of California has established a relatively clear set of guidelines to follow to ascertain when an "intern" must be paid the minimum wage and provided with employment benefits. In most cases, however, employers must comply with both state and federal law.
Nine years after the Fair Labor Standards Act (FLSA, 29 U.S.C. §§ 201, et seq.) was enacted by Congress, the Supreme Court issued a brief decision carving an exception to the protections embedded in what was then a relatively new law. The Court decided that persons who were given training by a railroad company before they were eligible to be hired were not 'employees' under the FLSA during the course of that training. For that reason, the railroad was not required to pay the trainees the minimum wage set out by the FLSA during the approximately week-long training. See Walling v. Portland Terminal Co., 330 U.S. 148, 152-153 (1947).
Over the years since the Portland Terminal decision was handed down, the DOL has articulated six key factors that must be met in order to avoid having a "trainee" classified as employee. The factors are:
1.The internship, even though it includes actual operation of the facilities of the employer, 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 that provides the training 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.
See Wage & Hour Div., Fact Sheet #71, Internship Programs Under the Fair Labor Standards Act (April 2010), available at http://www.dol.gov/whd/regs/compliance/whdfs71.htm (hereafter "DOL Fact Sheet").
Although this seems reasonably straightforward, federal appellate courts have not been consistent in interpreting and applying Portland Terminal or the DOL factors.
Some courts have eschewed the six-factor test altogether. See, e.g., McLaughlin v. Ensley, 877 F.2d 1207, 1209-10, n.2 (4th Cir. 1989) (applying a "primary beneficiary" test); Solis v. Laurelbrook Sanitarium and School, Inc., 642 F.3d 518, 525 (6th Cir. 2011) (applying a "totality-of-the-circumstances approach" and "primary beneficiary" test). Other courts have applied the test exactly as written by the DOL. See Atkins v. General Motors Corp., 701 F.2d 1124, 1128 (5th Cir. 1983) (stating the six factor test "is entitled to substantial deference by this court"). Still other courts have noted the usefulness of the test, but refused to apply it strictly. See Reich v. Parker Fire Protection Dist., 992 F.2d 1023, 1026 (10th Cir. 1993) (using a balancing of the six factors).
Recent Second Circuit Decisions
The Second Circuit recently became entangled in two important intern disputes that were decided by that court in tandem. The cases are Glatt v. Fox Searchlight Pictures, Inc., 791 F.3d 376 (2d Cir. 2015) and Wang v. Hearst Corp., 617 F.App'x. 35 (2d Cir. 2015).
In Glatt, three interns sued Fox Searchlight and Fox Entertainment for failure to pay the minimum wage and overtime. The interns complained that they performed menial tasks such as filing, making copies, keeping take out menus up-to-date, setting up office furniture, and running errands. The district court used the six factor test under the "balancing approach" to arrive at its decision to grant summary judgment for the plaintiffs. The Second Circuit reversed and in so doing rejected the DOL's six factor test "because the test is too rigid." In its place, the court articulated a "primary beneficiary" test based on its own, non-exhaustive, list of factors. The court said that in the context of unpaid internships, a non-exhaustive set of considerations should include:
•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.
•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.
•The extent to which the internship is tied to the intern's formal education program by integrated coursework or the receipt of academic credit.
•The extent to which the internship accommodates the intern's academic commitments by corresponding to the academic calendar.
•The extent to which the internship's duration is limited to the period in which the internship provides the intern with beneficial learning.
•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.
• 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. See Glatt, 791 F.3d at 383-384.
In Wang, the district court denied summary judgment while adhering to the six factor test. The Second Circuit reversed, ordering the lower court to apply the test articulated in the Glatt case.
It should also be noted that in both Wang and Glatt, the Second Circuit found the inquiry about intern status to be "highly individualized" and, on the record presented, refused to certify a class action on the issue. The cases were remanded for further proceedings. See Glatt, 791 F.3d at 386; Wang, 617 F.App'x at 37. The Glatt court acknowledged the possibility that a class action, or a collective action under the FLSA, might be appropriate, and left that issue for the trial courd to reconsider under a proper proof standard. See Glatt, 791 F.3d at 387 n. 5 & 388 n. 7.
Each of the circuits that has squarely addressed the issue has arrived at its conclusion by way of its individual interpretation of Portland Terminal and the DOL guidelines. On the surface, there appears to be agreement between the Second, Fourth, and Sixth Circuits that a "primary beneficiary" test should be applied. But, a closer look at the cases reveals that each circuit has announced its own, slightly different, version of that test. Compare Glatt, 791 F.3d 376 (utilizing seven non-exclusive factors stated above) with McLaughlin v. Ensley, 877 F.2d 1207, 1209 (4th Cir. 1989) (articulating the primary beneficiary test as "when the employer received no immediate advantage from the trainees' services, that is, when the principal purpose of the seemingly employment relationship was to benefit the person in the employee status" without reference to factors)(internal quotations omitted); see also Solis v. Laurelbrook Sanitarium and School, Inc., 642 F.3d 518, 529 (6th Cir. 2011)(citing a non-exhaustive list of factors to "be considered insofar as they shed light on which party primarily benefits from the relationship.")
Meanwhile, in California....
California law been evolving with respect to interns but it seems to have coalesced into a single standard that mirrors the DOL approach. But it hasn't happened without a few twists and turns. For example, in 2008, the state's Department of Labor Standards Enforcement (DLSE), relying on earlier pronouncements, published an 11-factor test to determine whether an intern was subject to the minimum wage. The DLSE's 2008 standard incorporated the six federal factors stated by the DOL and added five additional considerations. However, two years later, the DLSE repudiated that approach, admitting that "the 5 additional factors do not appear to be based upon any source statute or regulation...." See DLSE Opinion Letter 2010.04.07 (available at https://www.dir.ca.gov/dlse/opinions/2010-04-07.pdf) at p. 4 (hereafter "DLSE 2010 Opinion Letter). Thus, despite the fact that only one federal circuit court has adopted the DOl's six factor test in its "all or nothing form" (see Atkins v. General Motors Corp., supra, 701 F.2d at 1128), a California employer who wants to steer clear of wage/hour liability should be sure that any unpaid intern meets all six factors enunciated by the DOL. Each factor is discussed in detail below.
Factor 1: Training Similar to That Provided at a Vocational School
Training should be closely tied to the intern's educational goals. This factor is more easily met if the employer's facilities provide resources not necessarily available to the intern outside of an industrial or professional setting. For example, the trainees in Portland Terminal learned to operate trains in the rail yard. Portland Terminal Co., 330 U.S. at 149. The DSLE's Opinion Letter cited above found this factor to be satisfied when "an intern's use of the employer's computers, network systems, and tools to perform tasks" was "directly related to training and the educational and vocational objectives of the program."
It is easy to see how employers fail to comply with this factor when they have interns performing tasks like photocopying and running miscellaneous errands. It is difficult to argue that such mundane tasks are related to educational goals or similar training provided in a vocational school.
Factors 2 and 4: The Training Is For the Benefit of the Interns and the Employer Derives No Immediate Advantage From the Activities of the Interns
These two factors are the core of the primary beneficiary test. See Solis, 642 F.3d at 526. They can be analyzed together because they really are two sides of the same coin. First and foremost, the interns must benefit from the training being offered. In Portland Terminal the benefit was that the trainees became qualified to become railroad brakemen. In more recent cases, courts have required that the benefit be closely tied to the intern's education. The DLSE found this factor met when "[t]he internship training activities and additional other services provided by the program during the internship appear[ed] to be directly tied to the core components of the educational objectives" of the interns. See DSLE 2010 Opinion Letter at p. 9. The argument is even more credible if the intern receives school credit for time spent in the internship.
Even so, it is not enough that the intern "benefit" from the training. Even the interns in Glatt benefited from their internship because they received practical, real world experience in an area of their career interest. Therefore, in addition to the intern benefiting from the internship, the company must also show that it received no immediate advantage from the intern's work. When an intern performs necessary work that an employer would otherwise have to pay an employee to perform, the employer necessarily receives an immediate benefit from the intern's services. See DOL Fact Sheet; DLSE 2010 Opinion Letter at page 12. Thus, while it is acceptable that "[t]he performance of the described tasks performed by interns at the placement sites has some benefit to the placement business," it is necessary that "any such limited benefit is counter-balanced by impediments to the employer's operations in both time and economic costs in teaching the intern the activities, reviewing any work performed as well as immediate economic costs to the business in participating in the program." DLSE 2010 Opinion Letter at p. 12.
Factor 3: The Interns Do Not Displace Regular Employees, But Work Under Their Close Observation
The DLSE has clarified that contrary to its prior interpretation(s), this factor is not a "but-for" requirement. See DLSE 2010 Opinion Letter at p. 9. Consequently, "if the educational goals or objectives of an internship program include exposure to real world working environments, occasional or incidental other work by the intern should not defeat the exemption so long as such work does not unreasonably replace or impede the educational objectives for the intern and effectively displace regular workers." DLSE 2010 Opinion Letter at p. 10 (emphasis added).
This interpretation would not allow an employer to routinely use unpaid interns for clerical or administrative work, as the interns in Glatt alleged was the case. "[T]he actual role of the trainee must be one which necessarily requires close supervision rather than performing substantial independent work which can be performed by regular workers." Id. An internship program where the interns perform work on their own with little or no supervision will likely run afoul of this requirement.
Factors 5 and 6: The Intern Is Not Entitled To A Job, and the Parties Understand That The Intern IS Not Entitled To Wages
Factors five and six are relatively straightforward and easy to meet. Both can and should be clarified in a written agreement between the intern, the employer, and the educational institution. See DLSE 2010 Opinion Letter pp. 14-15. Of particular note is the observation that it is inappropriate to use an unpaid internship "as a trial period for individuals seeking employment at the conclusion of the internship period." DOL Fact Sheet. The fact that some interns may later be hired does not necessarily defeat the arrangement as long as the agreement between the parties is clear that the intern is not automatically entitled to a job upon completion of the program--and the practice is clear that not all interns are hired. DLSE Opinion Letter, supra, at p. 15. Finally, while the understanding between the employer and the intern that there will be no payment of wages is not dispositive with respect to intern status, it is nevertheless evidence that the person understood the nature of the relationship when it was entered into. See Id. at p. 15 n.16.
While the federal trend has been to avoid strict reliance on the DOL's six-factor test, and while the various appellate circuits exhibit independent approaches to the intern standard, here in California the DLSE has made the rules much easier to apply by expressly adopting a strict interpretation of the DOL's standard. California employers who may be interested in establishing an internship program should focus on meeting all six of the DOL factors in order to avoid liability for failing to treat an intern as an employee.
Alan S. Levins is a partner and Katherine M. Kimsey an associate at Littler Mendelson in San Francisco, where they both represent employers in a wide variety of legal matters.