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August 11, 2015 – Your business at Risk. Misclassification: Intern or Employee? Second Circuit Court Makes a Pro-Employer Ruling; The Primary Beneficiary Test

Your business at Risk. Misclassification: Intern or Employee? Second Circuit Court Makes a Pro-Employer Ruling; The Primary Beneficiary Test

By: Talin Haroutunian, Esq.
Business Counsel Group, P.C. · www.businesscounselgroup.com
August 11, 2015

Unpaid internships are not an avenue to free labor. Unless you (the business owner) are careful, the risk involved in bringing in an unpaid intern may simply not be worth it.   In an attempt to minimize abuse by employers, the Department of Labor (“DOL”) and the Supreme Court set guidelines regarding use of interns.   Non-compliance with these guidelines can be costly for employers, as it can result in a finding of misclassification of the individual hired, requiring employers to pay thousands (and thousands) in penalties, back wages, missed meal and break periods, etc.  Fortunately, a recent Second Circuit Court decision is making compliance with internship guidelines a little bit easier for businesses.

The DOL rigidly relies on six (6) criteria that make up the test that must be applied when determining whether an internship is a true internship. However, in a recent decision (Glatt v. Fox Searchlight Pictures (Nos. 13-4478-cv, 13-4481-cv)), the Second Circuit Court of Appeals rejected the DOL’s test (derived originally from a 1947 Supreme Court ruling), and instead introduced a pro-employer approach that has flexibility and balancing.  The Second Circuit focused on two points: (i) what the intern receives in exchange for his work; and (ii) what the economic reality is as it exists between intern and employer. Another big take away from the ruling, is its reference of the criteria as non-exhaustive (versus strict).

Specifically, the Second Circuit identified the following considerations, which are to be used as an aid to the courts in answering the primary question: “whether the intern or the employer is the primary beneficiary of the relationship.”

  1. Whether the parties understand that there is no expectation of compensation (in the context of unpaid internships);
  2. Whether the internship provides training similar to that given in an educational environment;
  3. Whether the internship is tied to the intern’s formal education;
  4. Whether the internship is limited to a period where the intern is provided beneficial learning;
  5. Whether the intern’s work complements, rather than displaces, a paid employee’s work; and
  6. Whether the parties understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

In its discussion of the above list, the Court further adds:  “[a]pplying these considerations requires weighing and balancing all of the circumstances.  No one factor is dispositive…[and the] courts may consider relevant evidence beyond the specified factors in appropriate cases.”  Also important to note, the Glatt decision struck a blow to the use of class and collective actions in these matters, arguing that the unique experience of each individual intern may impede the “commonality” factor required to meet class certification.

So where does this leave things?

Well, if you’re Fox Searchlight Pictures, the decision was a tremendous victory.  The company was facing a class action lawsuit for misclassification of its unpaid interns as employees.  The decision reversed the District Court’s finding of class certification, and held (based on this new balancing test) that the interns were not misclassified.

And what does this mean for you?

If you’re an employer residing within the Second Circuit’s jurisdiction (which includes New York), you’re in far better footing than before. Assuming you’ve done your homework, required the intern to sign appropriate documents, and are “training” the intern within the appropriate scope of the internship, then you can rest easy, and most likely have nothing to worry about.

If you’re a California employer, keep your i’s doted and t’s crossed.  The Second Circuit’s decision is persuasive, not mandatory, meaning California courts aren’t required to follow it. Given California’s pro-employee stance, the courts will likely continue to require strict compliance with DOL’s six (6) criteria.  Nonetheless, it’s entirely possible that this Second Circuit decision is a sign of things to come. Until we have a clear California case singing a similar tune, keep your pencil’s extra sharp.

Business Counsel Group is ready to assist in managing compliant internship and employee/employer relationships.  You may reach Talin via email at Talin.Haroutunian@businesscounselgroup.com. 

Copyright © Business Counsel Group, P.C. All rights reserved.  This newsletter is for general informational purposes only and does constitute legal or other professional advice.  No attorney client or other professional relationship is created between you and Business Counsel Group, P.C.  

References:

U.S. Department of Labor Wage and Hour Division (April 2010) Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act

Glatt v Fox Searchlight Pictures, No. 1:11-cv-06784-WHIP, Slip Op. at 26 (S.D.N.Y. June 11, 2013); http://law.justia.com/cases/federal/appellate-courts/ca2/13-4478/13-4478-2015-07-02.html

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