Cash or Course Credit? Department of Labor Updates Guidelines for Unpaid Internships

The designation between “employee” and “intern” can be a tricky one for employers. Depending on which you’re hiring, you may need to dole out wages and overtime pay. But new changes rolled out by the Department of Labor (DOL) this January could help clarify the dividing line and give employers more flexibility in crafting new positions.

Since 2010, the DOL has touted a six-factor test to determine if workers could be considered employees under the Fair Labor Standards Act (FLSA). However, this month the DOL updated their policies to reflect a more commonly accepted methodology: a “primary beneficiary” test, which, as one might guess, focuses on whether the intern or the employer is the “primary beneficiary” of that relationship.

The former six-factor test was a strict one which required that all factors be met for a position to qualify as an internship; if not, these interns would be considered employees, and therefore entitled to minimum wage and overtime pay. This was widely considered to be a hard standard to meet, and it became a problem for many employers as a result. Several courts adopted the primary beneficiary test as an alternative method, with the Second Circuit leading the way in Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528 (2d Cir. 2016). The Second Circuit was the first to establish the test, and other courts followed in their footsteps over the last several years.

The DOL eventually changed their tune as well, and on January 5^th, 2018, they released a short statement to this end, clarifying that “going forward, the Department will conform to these appellate court rulings by using the same ‘primary beneficiary’ test that these courts use to determine whether interns are employees under the FLSA.” The Department went on to say that it would “update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the Division’s investigators with increased flexibility to holistically analyze internships on a case-by-case basis.”

The newly adopted test is composed of seven factors, which include:

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 that which 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.

The test is designed to be flexible, so no single factor is determinative. The unique circumstances of each individual position should be considered to determine whether it qualifies under the FLSA.

Moving forward, this test should be easier for employers to conform to. Now may be a good opportunity for employers to review their intern positions under these new guidelines and be sure that their hires are properly classified going into the new year.