By: Robert C. Hackney
Should My Company Use Unpaid Interns Now that the Department of Labor Rules have Changed?
The entire concept of using unpaid interns has changed drastically this year. The United States Department of Labor has recently greatly loosened the rules surrounding unpaid interns, and has made the concept viable again, making the option a possibility for many companies.
The basic law is that an employer must pay an employee for their work under the Fair Labor Standards Act (FLSA). If an “intern” is found to not be an employee, an employer (in a for-profit setting) does not need to pay the intern. No employee, no compensation.
Where it got complicated was when the government adopted a “six-factor test” in 2010. This six factor test made it difficult for an employer to classify someone as an intern and not an employee. In addition, to make it more burdensome, ALL six factors had to be complied with for the person to qualify as an intern.
This test, created and announced by the Department of Labor, was contained in something called a “Fact Sheet” issued by the Wage and Hour Division. If even one of the six factors was not met by the employer, then the intern would be classified as an employee, and was entitled to compensation, even if the intern had agreed in writing not to expect any payment whatsoever. The six factor test had a chilling effect on employers. Companies who might normally take on a college student as a favor to family or a business contact to help them get experience, were now placed in the position that the Department of Labor might be coming after them for compensation. The most stringent factor was the one that said that the “internship experience is for the benefit of the intern” which precluded any benefit whatsoever to the employer.
Under the six factor test, large companies who ran large internship programs to identify potential future employees were also faced with the possibility of incurring large amounts of unexpected compensation, fines and legal fees. Consequently, many companies stopped using unpaid interns, which reduced opportunities for inexperienced individuals. On resumes, potential employers want to see experience, and even an unpaid internship can make the difference in someone landing a job or not.
The inflexible nature of the Department of Labor’s six factor test resulted in various appellate courts rejecting the test as unacceptable. The biggest nail in the coffin of the six factor test was a case out of the Second Circuit Court of Appeals known as Glatt v. Fox Searchlight Pictures, Inc. in 2015. The Second Circuit, in rejecting the six factor test, ruled “that whether interns qualify as “employees” under the FLSA depends on whether they or the company that hired them is the “primary beneficiary” of their relationship.” By late 2017, four different Circuit Courts of Appeals had all rejected the six factor test in favor of a “primary beneficiary” test, including the appellate courts that include New York and California, the two largest employment states.
In the Glatt case, the Second Circuit held that when the “tangible and intangible benefits provided to the intern” are less “than the intern’s contribution to the employer’s operation” the intern is really an employee and must be compensated. The Court focused on what is the economic reality of the situation, not just a “check the box” theory of the six factor test.
New Test
In January, 2018, the Department of Labor fell in line with the obvious trend of the courts, and adopted a new test. The new test is frequently referred to as the seven factor “primary beneficiary” test. The Department of Labor issued these under the updated “Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act.” This test is much more flexible than the six factor test, and unlike the six factor test, the employer does not necessarily need to comply with each and every one of the factors. Instead, these are guidelines, and there may be other circumstances that can also be considered, not just the seven factors. This test is more of a “facts and circumstances” test, which relies upon a review of the entire situation, not some hard and fast set of unbending rules. Failure to meet any one particular factor does not mean that the intern is an employee.
The Seven Factors
The seven factors referred to in the Department of Labor’s Fact Sheet are the following:
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.
Class Actions involving Internships
The Glatt case, and others like it, also involved attempts to certify class action status against employers, arguing that an entire class of individuals were all treated the same and should be able to sue as a class. By adopting the primary beneficiary test as opposed to the six factor test, the class action argument was effectively eliminated. Since each case now depends upon the specific facts and circumstances involved with each intern, the ability for a court to lump them all together as a class fails. Each case now involved a highly individualized assessment of the entire relationship of the parties.
Non-Department of Labor issues with Interns
Negligence
Companies also need to realize that there are other legal factors relating to interns that have nothing to do with the U.S. Department of Labor rules on employee vs. intern. For example, if an intern attends a meeting with a customer and drops scalding coffee in the customer’s lap, the company can incur liability for the intern’s negligence. Although he or she may not be an employee for federal law purposes, due to the highly supervised nature of an internship, most court’s will hold that the intern was an employee for liability purposes under tort law.
Workers Compensation
Another area that needs to be reviewed and clarified by a company is whether or not an employee is covered by state workers compensation laws. Most states have held that an unpaid intern is not an employee, but this is an area of the law that is in a state of flux and needs to be monitored. In light of the anticipated growth of unpaid interns with the change in the law, this is an area of concern.
Form I-9
Form I-9 is a federal form and is used for verifying the identity of individuals who are employed in the United States. It also is used to check employment authorization. If you are a U.S. company, you must complete a Form I-9 for each and every individual who is hired, whether they are citizens or not. On an I-9, an individual attests to his or her employment authorization. Along with the I-9, the individual must give the employer a copy of documents which evidence their identity. An employer is required to review these documents and determine for themselves whether or not they appear to be legitimate. With regard to interns, no Form I-9 is required.
Harassment
At this point in time, the case law relating to federal law with regard to sexual harassment has been in favor of employers when an intern has been involved. There are however, state laws regarding discrimination and harassment that may come into play, so an employer still needs to be vigilant with regard to protecting interns from such behavior.
Volunteers v. Interns
So far we have only discussed situations with for-profit companies. What about non-profits or government agencies? Non-profit charitable organizations are exempt from the Fair Labor Standards Act unless they engage in ordinary commercial activities that result in sales of products or services for a fee. Volunteers are individuals who spend time with an organization for “civic, religious, charitable, or humanitarian reasons, without promise, expectation, or receipt of compensation for services rendered.” Volunteers are not subject to the Fair Labor Standards Act. Finally, individuals who give their time to a state or local government agency are also exempt from the Fair Labor Standards Act.