If you thought you knew when to pay (or not pay) an intern, think again.

A federal appellate court just blew up the U.S. Department of Labor’s spot. Allow me to explain in slightly less colloquial fashion.

Fart, #themoreyouknow, YOLO

(There, out of my system…)

The DOL six-part internship test.

In 1947, the U.S. Supreme Court recognized (here) that certain unpaid workers should not be treated as employees under the Fair Labor Standards Act. This matters because the FLSA generally requires that “employees” receive minimum wage and premium overtime pay.

Twenty years later, the DOL distilled the facts of the Supreme Court’s decision into a six-part test for determining whether an intern was truly an intern, or actually an employee:

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.

An employer covered under the FLSA could treat an individual as an intern provided that all six criteria were met.

A federal judge modifies the DOL test slightly.

In 2013, a New York federal judge considering whether individuals working on the set of Fox Searchlight Pictures’ Black Swan were interns or employees, modified the DOL’s test by balancing the six DOL factors, rather than requiring that each one be satisfied. Still, it concluded that the plaintiffs, who were all college students or recent college grads working on Black Swan, did enough to qualify as employees.

The Second Circuit rejects the DOL’s “rigid” test.

On appeal, in this opinion, the Second Circuit Court of Appeals declined to utilize the DOL’s test. Because the DOL test was based on the specific facts of the Supreme Court’s decision, the Second Circuit found it to be “too rigid” and unpersuasive. Instead, the Second Circuit determined that the “proper question is whether the intern or the employer is the primary beneficiary of the relationship.” To reach this conclusion, a court must apply, at least, the following seven factors (no one of which is controlling):

1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation.
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.

The court’s rationale behind this flexible test was to appreciate the “relationship between the internship and the intern’s formal education….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.”

This case now heads back to the lower court, where the facts of the case will be applied to this new test.

Takeaways for employers.

The conservative approach outside of the Second Circuit is to continue to apply the six-factor DOL test (as well as any more restrictive state or local test that may apply where you conduct business). Still, the Second Circuit’s clear rejected from the DOL test nay open the door for other courts to do the same. But, under either test, there is a strong educational component. Therefore, employers will have a tougher time arguing that certain individuals who are not enrolled or recently graduated from school are, indeed, interns. And, as a practical matter, if a company is using unpaid labor to displace other workers that would otherwise get paid, you’re setting yourself up for trouble.

Image Credit: COD Newsroom