Unpaid Interns: The Second Circuit Pours Cold Water on a Hot Topic

Can businesses use unpaid interns? Over the past few years, this is a frequent question from corporate clients and a mainstay subject in the legal blogosphere (including right here). The heightened interest stemmed from a rash of well-publicized class action lawsuits brought (mostly in New York City) by unpaid interns who claimed that, during their internships with various businesses, they really functioned like employees and thus were entitled to minimum wage and overtime pay for the time served. Many of these lawsuits came on the heels of an intern “win” in 2013, where a federal district court judge ruled that, under federal and New York law, the interns were indeed employees of a film studio and authorized the case to proceed on a class basis under both federal and New York law. The studio appealed that ruling to the United States Court of Appeals for the Second Circuit (covering Connecticut, New York, and Vermont). 

In the immediate aftermath of that decision, many businesses transitioned to paid internships or abandoned their internship programs entirely. Now, nearly two years later, they may want to rethink their position. In a highly anticipated ruling on the studio’s appeal, the Second Circuit roundly rejected the earlier determination that the interns were in fact employees and could proceed with their wage law claims on a collective and class action basis. In trailblazing fashion, the Second Circuit established a new standard for determining whether interns are employees.

What makes an intern an employee? Before the Second Circuit, the interns argued that an intern should be deemed an employee whenever the business receives an immediate advantage from any work done by the intern. The movie studio urged the adoption of a primary beneficiary test, whereby the tangible and intangible benefits to the intern are weighed against the intern’s contributions to the business’s operations. The United States Department of Labor (DOL), intervening as amicus curiae, argued that interns must be paid as employees whenever the subject business fails to satisfy any of the six factors outlined in the DOL’s Intern Fact Sheet, which was issued in 2010 and relied upon by the district judge in the underlying decision.

Rejecting the tests proposed by the interns and DOL, the Second Circuit opted for the primary beneficiary test with its focus on the benefits that the intern may receive in exchange for any work and its flexibility in examining the economic reality that exists between the intern and the business. With this in mind, the Second Circuit presented a non-exhaustive list of considerations for the assessment of an intern’s employee status, including:

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

With this test, the presumed demise of the unpaid internship now looks potentially misplaced. Recognizing the historic educational value of unpaid internships, the Second Circuit has endeavored to create a reasonable road map that will allow U.S. businesses to create lawful unpaid internship programs that preserve the fundamental educational aspects of the internship concept even in circumstances where the intern may perform some work that benefits the business as well as the intern.

A word of warning, however, to that business that may now feel less constrained to try or resume unpaid internships in light of the Second Circuit’s decision. State courts and federal courts in other circuits may not be inclined to follow or adopt this test. In addition, various state agencies, like the New York Department of Labor, have created their own multi-factor tests for determining an employee’s status which may be far less favorable to corporate interests. The jurisdictional minefield continues to present risk. The biggest economic risk comes from the pooling of otherwise diminutive individual intern wage claims into class or collective actions. Accordingly, businesses that run large unpaid internship programs in jurisdictions with lengthy statutes of limitations for wage claims (see, e.g., New York’s six-year limitations period) might smartly consider including arbitration and class/collective action waiver provisions in their written internship agreements. Indeed, with the proper use of such contractual protections in the first place, unpaid interns may well have never developed into such a hot topic.