DOL, Ninth Circuit Adopt New Test for Unpaid Interns

Monday, February 26, 2018

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Employers with unpaid interns are familiar with the potential perils: Misclassify someone as an unpaid intern when the individual should be a paid employee, and you could face a whole host of issues.

For years, a six-part test adopted by the U.S. Department of Labor (DOL) and followed by the California Division of Labor Standards Enforcement (DLSE) helped California employers determine whether an individual could be treated as an unpaid intern. But that test is on its way out the door.

The DOL has announced that it’s abandoning the six-part test in favor of a new “primary beneficiary” test — a position that’s consistent with decisions from several federal circuit courts, including the Ninth Circuit, that have rejected the old test in favor of this “primary beneficiary” test.

Out with the Old

On January 5, 2018, the DOL issued a press release stating it would no longer follow the six-part test, which required all of the following six factors to be met before an individual could be treated as an unpaid intern under the Fair Labor Standards Act (FLSA):

1. The internship, even though it includes actual operation of the employer’s facilities, is similar to training that would be given in an educational environment;

2. The internship experience is for the intern’s benefit;

3. The intern does not displace regular employees, but works under close supervision of existing staff;

4. The employer that provides the training derives no immediate advantage from the intern’s activities, and on occasion its operations may actually be impeded;

5. The intern is not necessarily entitled to a job at the conclusion of the internship; and

6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If all six factors were met, the individual would not be an employee under the FLSA and would not be subject to federal minimum wage or overtime requirements. In other words, the individual could be treated as an unpaid intern.

California’s DLSE has followed the DOL’s six-part test, both in its Enforcement Manual and opinion letters addressing the issue of unpaid interns. But in recent years, federal courts have been moving away from the six-part test, prompting the DOL to play catch-up and revise its stance.

Courts Shift Away from Six-Part Test

In recent years, several federal courts rejected the six-part test in favor of the “primary beneficiary” test, which is designed to look at the “economic reality” of the intern-employer relationship to determine which party is the relationship’s primary beneficiary — the employer or the individual.

This new test was first adopted by the Second Circuit Court of Appeals in Glatt v. Fox Searchlight Pictures. Inc. 791 F.3d 376 (2d Cir. 2015). Then in December 2017, the Ninth Circuit became the latest federal court to reject the DOL’s six-part test when it ruled that students at a cosmetology school were the “primary beneficiaries” of their relationship with the school and thus were not employees (Benjamin v. B&H Education, Inc., 877 F.3d 1139 (9th Cir. 2017)).

Primary Beneficiary Test Factors

The DOL has chosen to follow these courts’ lead, and in January 2018 released a revised Fact Sheet #71 that explains the "primary beneficiary test."

There are seven factors to consider:

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 similar to that 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 internship’s conclusion.

As the DOL explains in its Fact Sheet, the primary beneficiary test is "a flexible test, and no single factor is determinative . . . whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case."

Applying the Primary Beneficiary Test

In the recent case of Benjamin v. B&H Education, Inc., students enrolled at Marinello Schools of Beauty, a for-profit cosmetology school, sued the school, alleging wage and hour violations.

At Marinello, students received classroom instruction necessary to obtain their cosmetology license. The school also provided students with clinical experience by having the students perform discounted cosmetology services for the public in the school’s salons. The students claimed the school "exploited" them for the unpaid labor they provided in the salons. They argued they were employees under federal, Nevada and California law, and were therefore entitled to wage and hour protections such as minimum wage, overtime, and meal and rest breaks.

In deciding the case, the Ninth Circuit used the primary beneficiary test to determine who was the primary beneficiary of the relationship — the school or the students. The court examined the aforementioned seven factors and found that:

  • The students signed on to the program knowing they wouldn’t be paid and they had no expectation of being paid;
  • The students received hands-on training and academic credit for the hours they worked;
  • The students’ clinical work corresponded to their academic commitments;
  • The school didn’t require the students to participate in the program any longer than the students needed to obtain the hours required for their state exams;
  • The students didn’t displace the work of paid employees; and
  • The students had no expectation of employment after graduating from the school.

Most, if not all, of the factors weighed in favor of the students being the primary beneficiaries of their work. As such, the court held that the students were not employees, under the eiter the FLSA or Nevada law (which follows the FLSA).

The students also alleged that they qualified as employees under California law. However, the court concluded that the California Supreme Court would follow a test such as the "primary beneficiary test" — not the DOL’s six-part test — because "it is better adapted to an occupational training setting than the DOL factors." The court held that under such a test, the students would not be employees subject to California wage and hour law protections.

Best Practices

Employers using or considering the use of unpaid interns should carefully evaluate the work interns will be performing. Employers should take into account the new seven factor test outlined above to determine who will be the primary beneficiary of the intern-employer relationship — and if the employer benefits most from the arrangement, the individual should be treated as an employee.

Also, even if you have properly classified someone as an unpaid intern, remember that interns are entitled to certain protections under California’s Fair Employment and Housing Act, which:

  • Provides protections against harassment to unpaid interns and volunteers;
  • Provides protections against discrimination in an unpaid internship or in another limited duration program that provides unpaid work experience; and

Extends religious belief protections and religious accommodation requirements to anyone in an apprenticeship training program, an unpaid internship or any other program to provide unpaid experience in the workplace or industry.

Category: Advocacy News