DOL Adopts Primary Beneficiary Test to Determine Intern Status Under Wage Hour Law

On January 5, 2018, the Department of Labor (DOL) withdrew its six-factor test, established by a 2010 DOL guidance, used to determine whether interns and students are considered employees and, thus, covered by the Fair Labor Standard Act (FLSA), and, in its place, adopted a seven-factor test – listed in Fact Sheet 71 – applied by the Second Circuit in Glatt v. Fox Searchlight Pictures, Inc.

The abandoned six-factor test, issued under the Obama Administration, required that all of the criteria be met in order to find that an intern is not an employee under the FLSA. In 2015, the Second Circuit disregarded the DOL test in the Glatt ruling. In deciding against the unpaid interns at Fox Searchlight, the Second Circuit held that the six-factor test was too rigid. Subsequently, the Second Circuit ruled that in determining whether interns are classified as employees under the FLSA, the “economic reality” between the intern and the employer should be evaluated to determine which party is the “primary beneficiary” of the relationship. The Second Circuit applied a non-exhaustive list of seven factors to use in the “primary beneficiary” test, but cautioned that “[a]pplying these considerations requires weighing and balancing all of the circumstances” and “[n]o one factor is dispositive.” Importantly, the new DOL guidance announcing the adoption of the primary beneficiary test notes that the test is flexible and that the ultimate finding will depend on the unique circumstances of each case.

The factors in DOL Fact Sheet 71 are:

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 DOL’s announcement comes on the heels of the Ninth Circuit’s Benjamin v. B&H Education, Inc. ruling last month, which also adopted the seven-factor primary beneficiary test. In applying the test, the Ninth Circuit found that plaintiffs, a group of cosmetology students, “were the primary beneficiaries of their labors,” because their internship at defendant’s beauty school “provided them with the hands-on training they needed to sit for the state licensing exams.” Along with the Ninth and Second Circuits, the primary beneficiary test also was used by the Sixth and Eleventh Circuits. Despite the DOL’s formal announcement, it remains to be seen whether the changed test will stem any litigation or administrative agency action. Given the uncertainty, employers should consult with counsel prior to making a decision to utilize unpaid interns.

Gibbons Employment & Labor Law Department attorneys regularly advise employers on wage and hour matters.