In two much-awaited decisions last month, the Second Circuit Court of Appeals ruled in the Glatt et al. v. Fox Searchlight Pictures and the Wang v. Hearst Corp internship cases. You may recall that in September 2011, Eric Glatt and Alexander Footman filed suit against Fox Searchlight stemming from their internships in connection with the production of the film, Black Swan. In the Wang case, Diana Wang, a former intern for Harper’s Bazaar, filed suit against Hearst, claiming she was an “employee” under federal and New York law and not an intern. Both sets of plaintiffs alleged that the companies violated the Fair Labor Standards Act and New York labor law by misclassifying them as unpaid interns when they were actually performing the work of entry-level employees. Well, as of July 2, the 3-judge panel arguably made it much more difficult for former interns to successfully sue by setting out a new test to establish whether an individual is, in fact, an intern or if he is, instead, performing entry-level employment tasks.

Cases up citing Fair Labor Standards Act violations until this point have been decided based on the six-point test that the Department of Labor (“DOL”) derived from a 1947 U.S. Supreme Court case (Walling v. Portland Terminal Co.) and set out in 2010, which requires that:

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

2) The internship is for the benefit of the intern;

3) The intern works under close staff supervision and does not displace regular employees;

4) The employer derives no immediate advantage from and may in fact be impeded by the intern;

5) The intern is not necessarily entitled to a job after the internship; and

6) The employer and the intern understand that the intern is not entitled to wages.

However, as of these two rulings, this test is largely old news. The Second Circuit Court disregarded the six-point test and promulgated a new standard, the “primary beneficiary test,” which holds than an intern will not be classified as an employee if he or she is the primary beneficiary of the internship. In applying the test, the court must balance the following seven factors:

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 education 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.

In adopting this new test, the court stated that the former DOL test is too rigid to apply to all workplaces and held that the proper question is not whether the employer receives an immediate advantage from the activities of the intern (which was not permitted under the former DOL test). Instead, the court held that the proper question is “whether the intern or the employer is the primary beneficiary of the relationship.”  The court also indicated that questions related to the primary beneficiary test may not be satisfied with generalized proof, potentially creating a significant hurdle for employees seeking to certify class/collective actions.

With this in mind, the Glatt and Wang cases certainly represent a victory for employers. Primarily, the fact that employers receive some benefit from interns’ work no longer means that internships are automatically illegal. Second, not only is the test far more lenient (the factors indicated above are to be balanced and are not an exhaustive list of requirement elements) but the bar has been risen a bit in terms of filing class actions. According to the Second Circuit rulings, “Courts must consider individual aspects of the intern’s experience” and that such analysis may be sufficient to find that unpaid interns are not similarly situated, even at first-stage conditional certification. This suggests that class actions may no longer be appropriate vehicles for former interns in jurisdictions that apply the new test, namely New York. Lastly, because class actions appear to be less promising under this new holding, plaintiffs will have to pursue their claims individually and not as part of larger lawsuits. This will likely serve as a benefit to employers as it will probably disincentivize interns from filing suit based on grounded but small claims.

One last issue remains undiscussed, and it is an important one considering the number of pending internship lawsuits. What about the cases filed in New York state court, as opposed to federal court, which is where Glatt and Wang filed suit? If you recall, Glatt and Wang filed suit in federal district court in New York citing violations of both federal law (Fair Labor Standards Act) and state law (New York Labor Law). Many of the cases at hand (think: Gucci, Zac Posen, Ralph Lauren, Coach, Lacoste, Tommy Hilfiger, Fendi, Calvin Klein, Burberry, Marc Jacobs, Oscar de la Renta, etc.) have been filed in New York state court and only cite violations of New York Labor Law. What affect will the Second Circuit’s ruling have on these cases, which do not explicitly cite violations of the Fair Labor Standards Act, and thus, do not necessarily call the Second Circuit’s new primary beneficiary test into use? Well,  it seems there will, in fact, be some overlap. 

New York fashioned its own test to determine whether an individual is an intern or an employee. In 2010, the New York State Department of Labor adopted the DOL’s six-factor test and added five additional factors. According to a statement from Epstein, Becker and Green, a national employment, labor and workforce management-focused firm, the rulings will affect state cases: “At least for the time being, until the U.S. Supreme Court hears this or a similar case, interns need not meet the DOL’s rigid six-factor test in order to be excluded from the definition of “employees” under the FLSA or NYLL.” More to come …