Second Circuit Strikes Down Ruling that Unpaid Interns Were Entitled to Pay

Diana Uhimov, July 31, 2015

The Second Circuit made two business-friendly rulings on July 2, 2015 in the closely watched proposed class action cases involving interns that claimed they should have been classified as employees.  The Court of Appeals struck down a trial court decision that determined two unpaid interns were employees covered by the Fair Labor Standards Act and New York Labor Law in the wage case, Glatt et al. v. Fox Searchlight Pictures Inc.  It also upheld a ruling that denied certification in another unpaid intern case against the Hearst Corp. The issue before the appeals court was when an unpaid intern would be entitled to wages as an employee under the Fair Labor Standards Act. The court found that unpaid internships are permissible as long as the intern benefited from the learning experience of the job more than the employer benefited financially from the intern’s work.

The named plaintiffs in the Fox suit, Eric Glatt and Alexander Footman, had worked on the set of “Black Swan.” In 2011, they brought an action claiming that Fox was engaging unpaid interns to take advantage of the free labor and keep costs down. The district court’s June 2013 decision in the Fox case found that the interns should have been considered employees under federal law and were entitled to at least the minimum wage, together with other benefits and protections. Its decision relied on a six-part test advocated by the U.S. Department of Labor, which deems an intern to be an employee if their employer gains an “immediate advantage” from their labor. The appeals court, however, rejected the DOL test adopted by the district court in classifying the plaintiffs as employees as “too rigid”.

The three-judge panel in the Fox opinion stated that the DOL—which appeared as amicus curiae in support of the plaintiffs—test is basically an interpretation of the U.S. Supreme Court’s 1947 decision in Walling v. Portland Terminal Co., and that interpreting judicial decisions is not within the scope of the agency’s role. The panel instead ruled that the proper inquiry was whether the intern or the employer was the primary beneficiary of their relationship based on the totality of the circumstances. The court set forth seven non-exhaustive factors to consider when assessing when a worker qualifies as an employee under the FLSA. Those considerations include:

(1) Whether there is a clear understanding that there is no expectation of compensation;

(2) Whether interns receive training similar to what would be received in educational setting;

(3) To what the degree the internship is connected with a formal education program;

(4) How well the internship accommodates the intern’s academic commitments by corresponding to the academic calendar;

(5) The extent to which the length of time of the internship is limited to the period in which the intern is provided with beneficial learning by the internship;

(6) Whether the intern’s work complements, rather than replaces the work of paid employees while providing a significant learning experience to the intern; and

(7) The level of understanding that the internship does not entitle the intern to a paid job when the internship ends.

The Second Circuit noted in its opinion that the rulings do not rule out the possibility that the plaintiffs could succeed in claiming that they were misclassified as interns under the revised standard.  Both cases were remanded back to the district court. On one hand, this outcome will make it more difficult for interns to prove that they should be considered employees. But the decision may be viewed as good for employees inasmuch as it suggests that interns who are not enrolled in an academic program should be considered employees. In addition, employers should reevaluate their unpaid intern policies to avoid assignment to interns of low-level tasks lacking any beneficial training.