Big business and Hollywood rack up major win in unpaid intern case: The Second Circuit applies a “primary beneficiary test” for interns, reversing the lower court and rejecting the Department of Labor’s published guidance as outdated

by Veronica Nannis
August 31st, 2015

 

In my October blog post, I discussed the recent rash of class actions by former unpaid interns in New York state against high-profile employers like Saturday Night Live, Conde Nast Publications, Viacom Inc., and many others. While many employers choose to settle rather than risk litigation (like Sirius XM which recently agreed to a settlement to pay $1.3M to some 1,800 former interns),[1] Fox Searchlight Pictures, Inc. continued to litigate its case and gamble a potentially large, and very public, loss. At first it looked bad for Fox and other big employers. On June 11, 2013, the lower court in the Fox case sided with the interns,[2] who argued that they were unlawfully denied payment since they were “employees” under the Fair Labor Standards Act (“FLSA”). Fox appealed, hoping to reverse not only the lower court, but also the tide of unpaid intern class action lawsuits. Fox’s bet seems to have paid off.

In what has to be seen as a big win for employers and a blow to interns, the Second Circuit issued its opinion in Glatt et al. v. Fox Searchlight Pictures, Inc. et al. last month, reversing the lower court and issuing a new test for employment status in that Circuit.[3] In doing so, the appeals court sent the case back to the lower court to apply a new, “primary beneficiary test.” This test minimizes, if not largely rejects, the Department of Labor’s published and widely followed guidance on this topic.

This issue was new for the Second Circuit. It had never before grappled with the question of when an unpaid intern is entitled to compensation as an employee under the FLSA. The Supreme Court has also never squarely delineated the difference between unpaid interns and paid employees under the FLSA and has never issued a cohesive test for determining employment under that statute. However, the parties and the Fox Court all had to reconcile their positions with the only Supreme Court case discussing interns and the FLSA at all – Walling v. Portland Terminal Co., 330 U.S. 148 (1947). Without providing a test, the Portland Terminal Court held that unpaid railroad brakemen trainees should not be treated as employees under the FLSA. This opinion – 68 years ago – is the last time the Supreme Court spoke on this topic.

From the Portland Terminal opinion, the Department of Labor developed its own interpretation and guidance of when an unpaid intern is an employee for FLSA purposes. It published DOL Fact Sheet #71, providing the agency’s guidance on the definition of “employee” under the FLSA. The interns relied heavily on the six factors in the DOL Fact Sheet, but argued that not all need be satisfied. They pushed the Second Circuit to adopt a less rigid test whereby interns would be deemed employees whenever the employer receives an immediate advantage from an intern’s work.[4] The DOL, itself,[5] advocated that its factors lay out the proper test and its agency opinion is worthy of judicial deference.

The court rejected both of these approaches, siding instead with the employers.

It first refused to grant deference to the DOL’s guidance, stating that it was merely the agency’s interpretation of case law, and not of a statute or regulation. “Because the DOL test attempts to fit Portland Terminal’s particular facts to all workplaces, and because the test is too rigid for our precedent to withstand,” the Court said, “we do not find it persuasive, and we will not defer to it.”[6]

It then rejected the tests advanced by both the interns and DOL, instead agreeing with the employers that “the proper question is whether the intern or the employer is the primary beneficiary of the relationship.”[7] This primary beneficiary test, the court explained, has two “salient features.” First, in a nod to Portland Terminal, it “focuses on what the intern receives in exchange for his work.”[8] Second, in an apparent attempt to modernize the analysis, the primary beneficiary test “accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.”[9]

While the primary beneficiary test is necessarily fact specific and has to be taken on a case-by-case basis, the Second Circuit did provide a roadmap of sorts in the form of the following seven, non-exhaustive considerations:

  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.[10]

In explaining its “flexible approach,” the court refused to set hard parameters. It said, “applying these considerations requires 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 factors we specify are non-exhaustive—courts may consider relevant evidence beyond the specified factors in appropriate cases.”[11]

However, despite the court’s insistence that no one factor was dispositive, it is clear that the court afforded great weight to the fact that all of the interns in the Fox case were students. Appearing to want to break from the antiquated test borne by the Portland Terminal paradigm of the 1940’s intern, the Fox Court noted that its new approach “reflects a central feature of the modern internship—the relationship between the internship and the intern’s formal education.”[12] The court contrasted the student interns in the Fox case to the non-student brakeman in Portland Terminal. It said, “by focusing on the educational aspects of the internship, our approach better reflects the role of internships in today’s economy than the DOL factors, which were derived from a 68–year old Supreme Court decision that dealt with a single training course offered to prospective railroad brakemen.”[13] While perhaps not a dispositive factor, the fact that the Fox interns were students was obviously an important one.

This case should be studied by employers and employment lawyers not only in the Second Circuit, but also in Maryland and the rest of the Fourth Circuit in which Maryland resides.[14] In a recent case that did not garner national attention like the Fox case, the federal court in Maryland quietly reiterated that the Fourth Circuit unequivocally applies a “primary beneficiary” test[15] for interns, like that discussed in Fox. This Circuit also refuses to defer to the DOL Fact Sheet, preferring instead to rely on the “clear precedent” and “principles stated in” its own 1964 opinion in Wirtz v. Wardlaw.[16] In the Fourth Circuit, the test focuses on “the nature of the training experience”—what interns do, what they learn, and what guidance they receive.[17]

Observers of the Supreme Court might see it tackle this issue in the not-so-distant future. There are now varying tests out there depending on the circuit,[18] a different test advanced by the Department of Labor, and 68-year-old Supreme Court precedent lacking clarity. This issue might be ripe for resolution by the High Court soon.

Until there is a definitive ruling covering all states, consult with an employment lawyer in your state if you use interns or other non-traditional classes of employees to make sure you are not running afoul of the Fair Labor Standards Act or similar state acts.


[1] This is a proposed settlement that awaits approval by the presiding judge. Vitetta v. Sirius XM Radio Inc., U.S. District Court for the Southern District of New York, No. 14-cv-2926.

[2] Glatt v. Fox Searchlight Pictures Inc., 293 F.R.D. 516, 522 (S.D.N.Y. 2013).

[3] The Second Circuit covers the federal courts in New York, Connecticut and Vermont.

[4] Glatt v. Fox Searchlight Pictures, Inc., No. 13-4478-CV, 2015 WL 4033018, at *5 (2d Cir. July 2, 2015).

[5] The DOL submitted its own briefs to the appellate court as an amicus curiae, or, friend of the court.

[6] Id., 2015 WL 4033018, at *5.

[7] Id., 2015 WL 4033018, at *6.

[8] Id., 2015 WL 4033018, at *6 (citing Portland Terminal, 330 U.S. at 152).

[9] Id., 2015 WL 4033018, at *6.

[10] Id., 2015 WL 4033018, at *6.

[11] Id., 2015 WL 4033018, at *7.

[12] Id., 2015 WL 4033018, at *7.

[13] Id., 2015 WL 4033018, at *7.

[14] The Fourth Circuit encompasses the federal courts in Maryland, Virginia, North Carolina, South Carolina and West Virginia.

[15] Wolfe v. AGV Sports Grp., Inc., No. CIV. CCB-14-1601, 2014 WL 5595295, at *3 (D. Md. Nov. 3, 2014) (citing McLaughlin v. Ensley, 877 F.2d 1207, 1209 (4th Cir. 1989)).

[16] Wolfe, 2014 WL 5595295, at *3 (citing Wirtz v. Wardlaw, 339 F.2d 785 (4th Cir. 1964)).

[17] Wolfe, 2014 WL 5595295, at *3 (citing McLaughlin v. Ensley, 877 F.2d 1207, 1210 (4th Cir. 1989)).

[18] The Fifth Circuit conducts a “balancing analysis” that considers the “relative benefits” of the putative employee's work, see Donovan v. American Airlines, Inc., 686 F.2d 267, 272 (5th Cir. 1982), and the Sixth Circuit asks whether the employee in a “learning or training situation” is the “primary beneficiary of the work performed [,]” Solis v. Laurelbrook Sanitarium & Sch., Inc., 642 F.3d 518, 525 (6th Cir. 2011).

Veronica Nannis is a Principal and the litigation practice group manager at Joseph, Greenwald & Laake, P.A. She focuses on complex, civil litigation, including business disputes, employment litigation and False Claim Act cases involving health care fraud. You can find her on LinkedIn or email her at: vnannis@jgllaw.com.

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