Audit, Compliance and Risk Blog

Since it’s the middle of summer, you may have interns working in your office. If so, are they being paid for their efforts, are they receiving academic credits, or are they working to build their resumes, portfolios and connections? Some employers always pay, some never do, and some are open to negotiations based on the intern and his or her activities.

If you believe your organization is free to choose whether to pay, you may be mistaken. You and your interns may be subject to minimum wage and overtime provisions of the US Fair Labor Standards Act (FLSA) and state labor laws. FLSA is administered nationally by the US Department of Labor's Wage and Hour Division (WHD), which applies regulations and policy guidelines, and sues errant employers in federal court. Aggrieved interns can also sue, claiming they were mis-classified employees now owed back wages. Last month, the federal Second Circuit Court of Appeals issued a decision in a case by interns in the entertainment media that offers potentially expensive reminders of FLSA's requirements – this decision formalizes an approach to review these cases, applies this new approach to reverse the specific holding of the trial court case it reviews (which I blogged about here), and remands the case for further proceedings to apply the new approach.

What’s the Specific Case?

In Glatt v. Fox Searchlight Pictures, Inc., three interns who had worked on the "Black Swan" movie sued claiming Searchlight and its parent corporation Fox Entertainment Group (FEG) had violated FLSA by not classifying and paying them as employees. One was enrolled in a degree-granting college program, the second was enrolled in a non-degree-granting graduate school program, and the third was not in school. They worked varying hours at a variety of administrative tasks ranging from filing to acquiring a non-allergenic pillow for the movie’s director. They initially sought not just pay for themselves but certification of a class action on behalf of other interns in FEG companies – two withdrew their class action efforts before the appeal.

As I described in my earlier blog, the District Court first considered whether FEG and/or Searchlight controlled the interns' workplace activities in ways that would tend to qualify as "employers," and found that they had hiring and firing power, the ability to supervise or control work schedules or conditions, set the rate and method of payment (i.e., zero for interns), and maintained employment records. The District Court then applied WHD guidelines and considered whether the plaintiffs fell under an exemption allowing employers to "hire" unpaid interns who are receiving training for their own educational benefit. The District Court decided, based on the WHD guidelines, that the plaintiffs had been mis-classified as interns, and actually qualified as “employees” who must be paid. The Court granted partial summary judgment to the plaintiffs, and conditionally certified the class action. This decision was widely reported, and produced considerable concerns among employers and practitioners of labor laws.

FEG appealed, and the Second Circuit reversed all the District Court’s determinations. It did so by determining not to rely on WHD’s guidelines, which it characterized not as an expert determination by the agency (to which courts tend to defer), but instead as the agency’s distillation of facts from an earlier Supreme Court (Walling v. Portland Terminal Company (1947)) converted by the agency into generally-applicable criteria. Having set aside those criteria, the Second Circuity reviewed a range of cases and distilled the following non-exhaustive set of criteria:

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. 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.

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.

7. 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.

The Circuit Court emphasized that these considerations should be applied thoughtfully, on a case-by-case basis that incorporates others that might be appropriate under the circumstances. The goal of the analysis in each case should be to determine whether the intern or the employer is the primary beneficiary of the relationship. The Circuit Court vacated the District Court decision and remanded the proceeding for the District Court to make its determination by applying these considerations. The decision also reversed the grant of class action status, finding that the District Court had misapplied the Circuit Court’s prior decisions.

Employers, educational institutions, and would-be interns should all continue to track this litigation, and to review policies regarding “interns” carefully. Parties should also remember that the Second Circuit is one of 13 Circuits, and its decision applies directly only in the states it covers: Connecticut, New York, and Vermont.

Self-Assessment Checklist

Does my organization provide internships?

Does the organization pay interns at least minimum wage and benefits?

• Has the organization evaluated its compensation decisions by applying the approach just adopted by the Second Circuit?

• Has the organization evaluated its compensation decisions by applying the WHD criteria, which may still be applied in other Circuits/states?

Where Can I Go For More Information?

• Glatt v. Fox Searchlight Pictures, Inc. decision 

• WHD Fact Sheet #71 (Internship Programs Under The Fair Labor Standards Act) (2010)

photo credit: USD via photopin (license)