Hiring Interns? New “Primary Beneficiary” Test Sets Flexible Legal Standards

March 27, 2018
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The Department of Labor has reversed course on internship standards set in 2010, which should create a favorable climate for the return of many programs in 2018.

Eight years ago, the DOL sought to crack down on businesses that hired unpaid interns who should have been paid employees. As part of the Fair Labor Standards Act, the DOL enacted a 6-part test to determine whether an intern had to be paid at least minimum wage for their services performed.

Several unintended consequences arose from this test. Many companies dropped their internship programs, which resulted in a lack of available internships. Meanwhile, a number of high profile legal cases were brought by unpaid interns against their employers. While some of the verdicts favored the interns, several courts in the past two years determined that the 6-factor test was too rigid and created unfavorable conditions for internship programs. In essence, under the former guidelines, if an employer could not demonstrate that all six factors were met, an intern was deemed an employee that had to be paid wages and overtime.

The New, More Flexible Standards

In January of 2018, the DOL reversed course and issued the current guidelines, entitled Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act. The new 7-part “primary beneficiary test” is more flexible and should encourage many employers who had previously dropped or minimized their internship programs to ramp back up again. It seeks to determine whether an intern or a student is actually an employee under the FSLA, by allowing courts to examine the “economic reality” of the intern-employer relationship by considering the following 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 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.

One of the most rigid standards is removed under the current, more forgiving guidelines. Companies are no longer prohibited from deriving “immediate advantage from the activities of the intern.” This ambiguous clause was a catalyst for lawsuits, and was a standard no company could be sure its internship program passed.

Takeaways from the new guidelines for classifying paid and unpaid internships:

1. The new guidelines intend to establish the “primary beneficiary” in the employer-intern relationship. If the relationship is primarily educational, and secondarily economic, the intern is the primary beneficiary, and no financial compensation is necessary.

2. The previous 6-part test demanded that employers must meet each factor for the internship to qualify as unpaid. The current 7-part test is a holistic set of guidelines. It is about the extent to which the criteria are met. No single factor is decisive.

3. Organizations that want to use internships as a talent pipeline to develop and train future prospective employees and to nurture relationships with them can now do so.

4. These guidelines establish federal policy. A state or municipality may have more stringent rules surrounding internships that take precedence over the looser federal guidelines.

Companies that relied on unpaid interns to perform economically valuable work prior to 2010 will find no justification to start up their illicit programs again with the 2018 guidelines. If the DOL’s calculus is correct, however, the new standards should bring back legitimate programs that did provide fair educational value to interns.