Executive Summary: Recently, the US Department of Labor (DOL) announced that it will adhere to a new test for determining whether interns qualify as employees under the Fair Labour Standards Act (FLSA). The FLSA requires for-profit employers to pay ‘employees’ for their work; however, whether interns or students qualify as ‘employees,’ and, thus, are entitled to compensation for services provided, has been the subject of considerable litigation. In its statement, the DOL abandoned the six-factor test it instituted in 2010, and instead endorsed the ‘primary beneficiary’ test which was established by the Second Circuit in Glatt – v – Fox Searchlight Pictures, Inc. Further, the DOL stated that the Wage and Hour Division’s investigators will “holistically analyse internships on a case-by-case basis.” This is a strategic change in the DOL’s enforcement policies to align its procedures with several circuit court decisions.

New ‘Primary Beneficiary Test’:

The newly enacted “primary beneficiary test” allows courts to examine the “economic reality” of the intern-employer relationship. Essentially, the test focuses on whether the intern or the employer derives the primary benefit from their relationship. The Glatt court and several other federal courts have identified the following non-exhaustive seven factors as part of the test for determining whether an individual is an intern or an employee:

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.

In adopting the primary beneficiary test, the DOL indicated that this is meant to be a flexible test with no determinative single factor. Each inquiry will be highly individualised, and if an intern, trainee, or student is found to be an employee, he or she will be entitled to both minimum wage and overtime compensation under the FLSA.

Employers’ Bottom Line:

The new primary beneficiary test adopted by the DOL certainly relaxes the criteria for establishing an unpaid internship under the FLSA and therefore is good news for employers who wish to establish such programmes. However, employers should still re-evaluate how they structure and draft the terms of their internship programs to ensure compliance. In doing so, employers should note the flexibility of the primary beneficiary test and ensure internship programs emphasize educational development, while also recognizing that the highly individualised nature of the primary beneficiary test may require a more specific or targeted approach to internships in general.