The Fair Labor Standards Act (“FLSA”) mandates the payment of minimum wage and overtime to employees in most US workplaces. However, when it comes to unpaid educational internships, the FLSA does not include a helpful definition or standard to determine when an employer is excused from paying wages. In the absence of guidance from Congress, the task has fallen to the Department of Labor (“DOL”) and the courts to determine when interns must be paid.
Until recently, the DOL applied a strict 6-factor test for unpaid internships, including a requirement that the employer derive “no immediate advantage” from these types of internships. While the DOL’s Wage and Hour Division (“WHD”) used that standard when conducting investigations, courts developed a more flexible standard governing private lawsuits. In 2015, the Second Circuit Court of Appeals (which issues opinions binding in New York, Connecticut, and Vermont) fashioned a new “primary beneficiary” test, based on 7 factors:
- 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, suggest that the intern is an employee—and vice versa;
- 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;
- The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar;
- The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;
- The extent to which the intern’s work compliments, rather than displaces, the work of paid employees while providing significant educational benefits to the intern;
- 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.
Unlike the prior DOL test, the primary beneficiary test is flexible, and no one factor is determinative. The Second Circuit has described the ultimate issue as follows: whether the “tangible and intangible benefits provided to the intern are greater than the interns’ contribution to the employer’s operation.”
On January 5, 2018, the WHD issued a news release indicating that it would apply the primary beneficiary test in its role in investigating and enforcing wage and hour law. The DOL fact sheet for internship programs has also been updated to reflect the 7-factor primary beneficiary test.
It remains to be seen how the DOL will apply this test. However, the Second Circuit’s opinions interpreting the primary beneficiary test offer the following takeaways for employers:
– Make expectations clear from the outset.
Employers can meet the first and seventh factors by showing that interns were aware that they would not be paid, and would not be entitled to a paid position at the conclusion of the internship.
– Require participating interns to obtain academic approval in advance from an educational institution.
Requiring advance approval from an accredited institution will make it more likely that the third factor (academic integration) favors the employer.
– Limit the length of internships to the summer, or one academic semester.
Shorter internships are more likely to meet the fifth factor (limited duration).
– Supplement day-to-day work with learning opportunities.
Because the primary beneficiary test is flexible, it allows employers to assign some routine work (such as data entry and mail delivery) to interns, within reason. However, employers should limit routine tasks or “busy work” as much as possible to avoid failing the sixth factor (displacement of paid work). Where more routine tasks are assigned, they should be connected to learning opportunities where possible, and should be supplemented by programs that offer training and exposure within the applicable industry. Employers should also consider documenting the educational and practical portions of their internship programs, and have interns provide written feedback about what experiences they found valuable, in the event their programs are later called into question.
While the primary beneficiary test is more favorable to employers than the prior DOL test, employers with internships still need to carefully structure their programs to ensure that they are providing enough benefits to each intern (in the form of training and real-world industry exposure) to outweigh the benefits they receive in the form of additional productivity. Employers with questions about how to avoid FLSA entanglements with their internship programs should consult an experienced employment attorney.
Ivo Becica focuses his practice on advising employers on how to reduce litigation risk and resolve employee issues, and on defending employers in litigation if necessary. He can be reached at 215-667-6335 or email@example.com