In light of the frequent and highly-visible wage and hour class action lawsuits brought by interns claiming they were misclassified and thus entitled to wages for their work as employees, CEOs should ensure all direct reports are following the right guidelines to meet the new U.S. Department of Labor (DOL) Unpaid vs. Paid Intern ‘Test’ requirements. Some of the targets of these lawsuits included Fox Searchlight, Hearst Magazines, NBC Universal, Atlantic Records, Warner Music, designer Norma Kamil, Gawker Media, L.L.C., and Charlie Rose. Indeed, in response to these lawsuits, many companies ceased their unpaid internship programs.
In welcome news for companies, the DOL just implemented a significant change in its interpretation of the Fair Labor Standards Act (“FLSA”) with respect to the applicable test to determine internship status. Prior to the change, DOL utilized a six factor test requiring all six factors to be present to properly classify an individual as an intern. Factors are:
- The internship is like training that would be given in an educational environment.
- The internship experience is for the benefit of the intern.
- The intern doesn’t displace regular employees and works under close supervision of existing staff.
- The business doesn’t derive an immediate advantage from the intern’s activities—and on occasion the employer’s operations may be impeded by the intern’s activities.
- The intern isn’t guaranteed a job at the end of the program.
- The business and the intern each understand that the internship is unpaid.
The Fact Sheet makes clear that the test allows courts to examine the “economic reality” of the intern-employer relationship to determine which party is the “primary beneficiary” of the relationship. The current test now examines the following seven factors:
- 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.
- 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.
- The internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- T-he internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
- The intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.
Unlike the prior test, not all factors need to be satisfied. Rather, the test determines specific and unique facts of each case, enabling businesses to better defend classifying an intern.
CEOs need to understand the objective of the internship analysis, which is to ensure that interns are receiving a valuable educational benefit by participating in these programs as opposed to providing a source of free labor, ensuring interns don’t displace the work of paid employees and an understanding that there is no guarantee of employment at the conclusion of the internship program. For example, the DOL doesn’t want businesses to dangle guaranteed employment to an intern in order to persuade him/her to work for free for a period of time. Similarly, a business should ask itself what if it does not use an internship program? If the answer is it would then need to hire additional employees to perform certain tasks, this would continue to be a BIG red flag.
On both a legal and practical perspective as the new test incorporates specific consideration for academic credit and accommodating an intern’s academic calendar, businesses are advised to establish internship programs in partnership with educational establishments such as colleges and universities. The educational establishment would have a vested interest in ensuring that such internship programs provide a known educational benefit to its students which would in turn help ensure such students are not being exploited as free labor. If this is done by offering academic credit and imposing certain educational standards such as program evaluations and/or periodic testing for subject matter knowledge, it would be difficult to argue the intern is not the primary beneficiary of the program.
Only time will tell if companies that ended unpaid internships or others not currently using them will revisit this decision because of DOL’s more flexible analysis, but there is little question that a bona fide internship program can offer invaluable practical experience and terrific contacts for interns.