By FRANKFURT KURNIT

Your summer interns have only just arrived – and, as you may have heard, the law governing classification of interns has changed. On July 2nd, the federal appeals court issued its long-awaited decision in Glatt v. Fox Searchlight Pictures, Inc. Here's what you need to know to evaluate whether your summer internship program is compliant with the new court test and to start your planning for the fall.   

Background
In 2013, federal judge William H. Pauley III ruled in Glatt v. Fox Searchlight Pictures, Inc., that Fox had violated state and federal minimum wage laws by failing to pay interns who worked on the production of its Oscar-winning film Black Swan. Judge Pauley held that the interns should have been treated as employees and paid at least minimum wage, where their job duties consisted of largely menial tasks such as filing and fetching coffee. Judge Pauley also certified a New York "class" of interns for class action purposes, and provisionally agreed to certify a nationwide class of interns. The decision helped launch a wave of lawsuits by former interns against Conde Nast, NBC Universal, Viacom, Warner Music, CBS, and other media companies. While some defendants agreed to settlements totaling millions of dollars, the Hearst Corporation litigated a parallel case to Glatt that resulted in a contrary ruling. At issue in both cases were the broad questions: under what circumstances must an unpaid intern be deemed an "employee" under the Fair Labor Standards Act ("FLSA") and therefore be compensated for her work; and whether groups of unpaid interns shared sufficiently common questions of law and fact to permit the certification of a class or collective action?

The Recent Appeals Court Ruling
On July 2, 2015 the Second Circuit answered these questions and vacated the rulings in the Glatt case. The court declined to defer to the Department of Labor six-factor test or to adopt the interns' proposed test, under which employee status would exist whenever the employer receives an "immediate advantage from the interns' work." Recognizing that "[w]hen properly designed, unpaid internship programs can greatly benefit interns, the Second Circuit attempted to balance the fact that "internships are widely supported by educators"" against the reality that some programs "exploit unpaid interns by using their free labor without providing them with an appreciable benefit in education or experience." To strike this balance, the Second Circuit established a "primary beneficiary" test under which the tangible and intangible benefits provided to the intern must be greater than the intern's contribution to the employer's operation. The Second Circuit also articulated a non-exclusive set of considerations for whether an internship may be on an unpaid basis:

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 what 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.

These considerations require "weighing and balancing all of the circumstances. No one factor is dispositive, and every factor need not point in the same direction for the court to conclude that the intern is not an employee entitled to the minimum wage." In addition, the Second Circuit specified that courts may consider "relevant evidence beyond the specified factors in appropriate cases." 

Class Certification
In an additional critical holding, the Second Circuit vacated the district court's decision certifying a class action under New York law and a collective action under the FLSA, finding issues relating to classification of the interns too individualized to permit certification either under Rule 23 or even the lenient standard applied at the preliminary stage of a collective action under the FLSA.

Conclusion
While individual internship programs must still be evaluated to determine if they meet the newly articulated standards, the recent rulings make certain things more clear:

1.  The Department of Labor six-factor factor test is no longer the relevant inquiry for the legality of an unpaid internship program. Instead, courts must apply a more flexible standard that takes into account the totality of the circumstances.

3.  Courts will focus on the educational aspects of a particular program. According to the Second Circuit, "the purpose of a bona-fide internship is to integrate classroom learning with practical skill development in a real world setting."

4.  Unpaid interns may perform some work so long as the overall program provides greater benefits to the intern than to the company. 

5.  It is unlikely that the wave of class and collective actions will continue in light of the Second Circuit's ruling about the standards for certifying a class of interns.

Finally, we note that the Glatt plaintiffs have not had their final day in court; they have been remanded to the district court for further discovery and an opportunity to establish that even under the new "primary beneficiary" test, their experiences photocopying and carrying coffee were not educational enough to render them "interns" for purposes of overtime classification. It remains to be seen how the district courts will apply this test in the future and whether any particular internship program will be sufficient. In the meantime, employers now have greater flexibility to design a program that can provide true benefits to interns even if incremental benefits may accrue to the company.

If you have questions about the Glatt case or other employment law issues, contact Wendy Stryker at (212) 705-4838 or via email, Gavin McElroy at 212 826 5541 or via email, or any other member of the Frankfurt Kurnit Executive Compensation and Employment Group. 

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