Q&A: U.S. Department of Labor Wage and Hour Division’s Revised Stance on Unpaid Internships
On January 5, 2018, the Wage and Hour Division of the U.S. Department of Labor (WHD) updated its Fact Sheet #71, titled Internship Programs Under the Fair Labor Standards Act (FLSA). With this revised Fact Sheet, the WHD replaced the six-factor test it previously used for evaluating unpaid internships in the private, for-profit sector with a new seven-factor, “primary beneficiary” test.
PennACE reached out to Lisa Schonbeck, a partner in the Employment Practice Group of the Pittsburgh law firm Leech Tishman, for her thoughts on the WHD’s action.*
How has WHD’s stance on unpaid internships changed?
When evaluating whether an internship program properly is established as unpaid, the WHD abandoned its rigid six-factor test and endorsed the “primary beneficiary" test first established by the U.S. District Court for the Second Circuit in the case of Glatt v. Fox Searchlight Pictures, Inc. and later adopted by the Ninth and Eleventh Circuits. This change brings the WHD’s enforcement in line with these recent federal appellate decisions.
What prompted the change?
Prior to January 5, 2018, the WHD followed a six-factor test for determining whether unpaid interns in the for-profit, private sector are interns (and can be unpaid) or employees (entitled to minimum wage and overtime. The six factors were:
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;
The internship experience is for the benefit of the intern;
The intern does not displace regular employees, but works under close supervision of existing staff;
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;
The intern is not necessarily entitled to a job at the conclusion of the internship; and
The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
The WHD rigidly applied the test, requiring that all six factors be met in order for an individual to be an intern and not entitled to the minimum wage and overtime protections of the FLSA. The WHD issued its original Fact Sheet # 71 with this six-factor test in 2010, which prompted a rash of litigation, with employers challenging the DOL’s position on unpaid internships and interns seeking payment of wages for time spent in unpaid internships.
In the ensuing cases, some courts rejected the WHD’s six-factor test altogether, and instead evaluated the totality of the circumstances and the economic realities of the parties’ relationship. In the widely-known 2015 case Glatt v. Fox Searchlight Pictures, Inc. (the Black Swan case), the federal appellate court adopted the “primary beneficiary” test, focusing on what the intern receives in exchange for his or her work and allowing flexibility to examine the economic reality between the intern and employer. In adopting this test, the court established a list of seven non-exhaustive factors that should be considered when evaluating whether an individual is an intern or an employee:
The extent to which the intern and employer understand that there is no expectation of compensation.
The extent to which the internship provides training that would be similar to that in an educational environment (e.g., clinical and other hands-on training).
The extent to which the internship is tied to the intern’s formal education program.
The extent to which the internship accommodates the intern’s academic commitments corresponding to his or her academic calendar.
The extent to which the duration of the internship is limited to a period in which the internship provides intern with beneficial meaning.
The extent to which the intern’s work complements, rather than displaces, work of paid employees.
The extent to which the intern and employer understand there is no job entitlement at the conclusion of the internship.
The Black Swan case has been followed by other federal appellate courts, with one decision issued recently, on December 19, 2017. Given this background and the rejection of the WHD’s original six-factor test by several federal appellate courts, the WHD’s revised Fact Sheet #71 appears to be a response to the developing case law and an effort to align its interpretation with these federal appellate courts.
What does this mean for employers?
Prior to the WHD’s new stance on internships, employers were faced with conflicting rules from the courts and the federal agency charged with enforcing the FLSA. As a result, in an effort to avoid liability, many businesses chose to either eliminate internships altogether, or to pay their interns. The WHD’s decision to adopt the primary beneficiary test alleviates some of the conflict and allows both employers and the WHD’s investigators more flexibility when designing or examining internship programs.
The flexibility of the test lies in the fact that not every factor must be met, and the factors need not be weighted equally in the analysis. Instead, the WHD, as well as most federal courts, will look at the totality of the circumstances and the economic reality of the situation, evaluating the extent to which each factor is met, as opposed to simply ticking the boxes yes or no. If the internship benefits the intern more than the employer, the intern is the primary beneficiary and is not entitled to minimum wage or overtime.
Consequently, with this new test, unpaid internships may be on the rise.
Should employers do anything differently with regard to internships in light of this change?
Courts and the WHD applying the primary beneficiary test will evaluate the totality of the circumstances of the internship program, and the mere presence or absence of any one factor will not necessarily determine the result. Therefore, any employer that relies on unpaid internships should still scrutinize its internship program to determine whether the intern is truly the primary beneficiary of the internship. The new test recognizes that interns often receive nonmonetary benefits, such as college credit or industry experience, through the internship program, so employers should ensure that interns are actually receiving such a nonmonetary benefit. However, employers should remember that an intern’s receipt of college credit does not automatically mean the internship is properly unpaid, because courts and the WHD will evaluate internships on a case-by-case basis and they are not required to give greater weight to the intern’s receipt of college credit than to other factors in the primary beneficiary test.
Employers should ensure that the intern is not displacing the work of paid employees or primarily performing menial tasks. All documentation related to the internship program, including advertisements, recruiting materials, and offer letters to the interns, should track the language of Fact Sheet #71. Employers should also consider memorializing the terms of the unpaid internship in a written offer letter that incorporates the language of the seven factors, which will establish a clear understanding of the relationship.
What does this mean for students who are seeking internships?
With the increased flexibility afforded by the new test, businesses may be more inclined to offer unpaid internships. As a result, there may be more opportunities available in the near future for students to obtain valuable industry experience in the form of internships. However, the WHD’s adoption of the primary beneficiary test does not change the fact that internships are intended to be for the purpose of educational training. Students who are seeking internships should compare the internship program to the seven factors outlined in the primary beneficiary test to evaluate whether they or the company offering the internship will be the primary beneficiary of the intern’s participation in the program. Students should look for signs that they will be closely supervised, that the internship hours do not interfere with school and class hours, and that they are not performing the same work as the company’s regular employees.
What points should career professionals keep in mind when guiding students who are seeking internships?
Career services professionals should understand that the new primary beneficiary test adopted by the WHD is not a blank check for employers to decline to pay interns. Therefore, career services professionals can and should advocate for interns to be paid where they believe, based on an evaluation of the seven factors above, that the employer would be the primary beneficiary. Just as not all seven factors need to be present in order for the internship to qualify as unpaid, a court or the WHD could determine, in a particular case, that the extent to which any one factor is present is so great that the employer is the primary beneficiary. For example, if an employer is relying on unpaid interns to perform work that it would otherwise have had to hire an employee to perform but could not afford to hire anyone, a court or the WHD may find that the presence of this factor outweighs the fact that the intern is receiving college credit, for which the intern was required to pay tuition to his or her university.
What other points should businesses keep in mind when designing their internship programs?
Although the WHD’s new test is now aligned with recent federal appellate decisions, internship programs may not necessarily qualify as unpaid even though the primary beneficiary test is met, because:
The WHD fact sheet does not have the force of law. Courts may defer to it, but are not obligated to follow it. Some federal appellate courts followed the old six-factor test, and it remains to be seen whether those courts will now adopt the primary beneficiary test.
The courts that have adopted the primary beneficiary test cover a limited number of states within the United States, and therefore these courts’ decisions are not binding on the federal courts in other jurisdictions, which may still choose to apply the old six-factor test.
The FLSA provides a floor, not a ceiling, for compliance. Most states have enacted their own wage and hour laws, and employers are required to comply with both the FLSA and the applicable state law. Where an applicable state (or local) wage and hour law provides greater protections for employees – meaning, in the internship context, that the individual would be an employee entitled to minimum wage and overtime pay – that law controls, and the employer would be required to pay the intern, notwithstanding that the individual would not be an employee under the primary beneficiary test adopted by the WHD.
Lisa Schonbeck is a partner at Leech Tishman in the Employment and Litigation Practice Groups, and has practiced employment law since 2006. This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for advice.
*The WHD administers and enforces the minimum wage, overtime, child labor, and recordkeeping requirements of the FLSA, as well as the Family and Medical Leave Act, and the Migrant and Seasonal Agricultural Worker Protection Act.