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dreamstime_m_51781723Many businesses like to hire college or graduate school students as unpaid interns. The student gets a realistic learning experience and the business gets an unpaid, engaged employee.

Unfortunately, the Department of Labor issued Fact Sheet #71 which has the effect of ending the practice. The Department of Labor’s new position requires interns to paid at least the minimum wage. Failure to pay an intern can result in a violation of the Fair Labor Standards Act (FLSA).

The Second and Eleventh Circuit Courts of Appeal have rejected the the Department of Labor’s position. The Supreme Court has not decided who’s right.

Under Fact Sheet #71 there is a six part test. If all the conditions are met, then the unpaid internship is legal:

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 experience is for the benefit of the intern;

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 activities of the intern; 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.

However, two federal appellate courts, the Second and the Eleventh Circuit Courts of Apeal have rejected the Department of Labor’s six point test.  The Second Circuit, in Glatt v. Fox Searchlight, not only rejected the Department of Labor’s test, but set forth it’s own, more flexible test.

The Second Circuit stated the  question is “whether the intern or the employer is the primary beneficiary of the relationship. The primary beneficiary test has two salient features. First, it focuses on what the intern receives in exchange for his work.  Second, it also accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.”

The court then laid out its own it non-exclusive test:

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.

Unlike the Department of Labor’s rigid approach, the Second Circuit’s test 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.

The Department of Labor does not agree with the holding in Glatt, and the Supreme Court has not weighed in on this topic. This means that hiring an unpaid intern, despite the ruling of the Second Circuit Court of Appeals, could open an employer to a claim for back wages. If you are thinking about hiring an unpaid intern check with a lawyer first. Call or email us if you have any questions.