N.D. CalAuthored by Eric Hill

Seyfarth Synopsis: Airline customer service representative denied pay for pre-employment 10-day classroom training program under the FLSA and California Labor Law.

The maxim “it is extremely difficult to find someone to pay you to learn” has been proven again! This must be why we, or at least most of us, eventually leave school to enter the working world.

Meanwhile, the trend in the law is clear:

  1. Where trainees are truly “learning,” as a precursor to “working,” and are the primary beneficiary of pre-employment training, there is no duty to pay them.
  2. But, where the trainee’s “on the job” training involves performing work an employee would otherwise perform (to the employer’s financial advantage), the trainee must be paid.

In a January 9, 2017 ruling, Judge Vince Chhabria of the Northern District of California held that a customer service representative for Hawaiian Airlines was not entitled to be paid during a 10-day pre-employment training program that consisted of classroom work and tours of the facilities rather than actual “on-the job” customer service training. The decision is notable for its practical, straightforward analysis regarding when trainees should be paid under federal and California law.

The Court adopted the “primary beneficiary test,” cautioned against a mechanistic application of the six Department of Labor criteria, and granted Hawaiian Airlines summary judgment. (While the lawsuit is a proposed class action, the parties opted to file cross-motions for summary judgment before litigating the class certification question.)

According to the Court, the key question was whether the airline was taking financial advantage of the trainee during the training program by using her to perform work that an employee would otherwise perform. Because the plaintiff did not perform the work of the customer service employees, the Court found no reasonable juror could conclude she was acting as an “employee” during her training course.

The Court noted the classroom instruction and touring were only precursors to performing the work of an employee. The airline did not receive any direct benefit from the training, which taught trainees about FAA regulations, the computer system, and the way the company operated. Because the airline was not using the trainees as “anything close to employees,” the plaintiff was the “primary beneficiary” of the training.

As is the trend, the Court rejected the argument that a trainee is an employee unless the employer can satisfy all six of the DOL’s criteria. Stating that the six criteria are “relevant but not conclusive,” the Court focused instead on whether the trainee or the employer was the “primary beneficiary” of the training. It warned against “mechanistically applying the six criteria,” and called the case “a good illustration” of why “just about every court” has “rejected the Department of Labor’s approach.”

The Court emphasized that the DOL’s criteria seem to be designed for true “on-the-job” training, whereas the plaintiff here was not involved in this type of training. The Court also pointed out there is no difference between the federal and California legal standards for determining whether a worker qualifies as an “employee” during training.

Despite its warnings about reliance on the six DOL criteria, the Court found that application of the criteria would lead to the same result. The criteria are:

  1. The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school.
  2. The training is for the benefit of the trainees.
  3. The trainees do not displace regular employees, but work under close observation.
  4. The employer that provides the training derives no immediate advantage from the activities of the trainees; and on occasion his operations may actually be impeded.
  5. The trainees are not necessarily entitled to a job at the conclusion of the training period.
  6. The employer and the trainees understand that the trainees are not entitled to wages for the time spent training.

This decision is not the first “training time” case to grant summary judgment to an employer under these circumstances. Despite the positive trend, these cases are highly fact-driven and do not foreclose the possibility that trainees will be deemed to be employees. But they do signal that, where trainees are not performing the work of the employees and are not engaging in traditional work-alongside-the-employees “on the job” training, they do not cross the line from “trainee” to “employee” and need not be paid as a matter of law.

Co-authored by Robert Whitman and Meredith-Anne Berger

Blog readers who have been following the recent wave of wage and hour lawsuits by interns will recall that the Second Circuit, in a major decision issued in early July, held that the “primary beneficiary” test should govern whether interns were properly classified as such or should have been treated as full-fledged employees.

In the first appellate decision since then, the Eleventh Circuit agreed with the reasoning underlying that ruling. Rejecting the Department of Labor’s six-factor test and adopting the Second Circuit’s “non-exhaustive set of considerations,” the Eleventh Circuit held that courts evaluating interns’ claims should “focus on the benefits to the student while still considering whether the manner in which the employer implements the internship program takes unfair advantage of or is otherwise abusive towards the student.”

The plaintiffs in Schumann v. Collier Anesthesia, P.A. were interns in an anesthesia practice that provided training for student-registered nurse anesthetists. The clinical training, which required experience in 550 different patient cases, was mandatory to obtain both a master’s degree in the specialty and the professional license required to practice as a registered nurse anesthetist. They sued the owners of the practice and the for-profit college where they were enrolled, arguing that they were unlawfully denied minimum wage and overtime during their clinical internships.

The District Court granted summary judgment in favor of the defendants, holding that the students were not employees under the FLSA and thus not entitled to minimum wage or overtime pay. The appellate court vacated that decision and remanded with instructions to evaluate the interns’ claims under the factors listed by the Second Circuit in Glatt v. Fox Searchlight Pictures, Inc.:

  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.

Like the Second Circuit, the Schumann court said the DOL’s six factors were entitled to limited deference and concluded that the Glatt factors were a better reflection of the “modern internship.” In particular, it noted that students’ willingness to work as unpaid interns “drive[s] the need for the internships to exist,” as opposed to employers’ business need for interns. It also cited the public interest in promoting clinical internships in order to obtain professional licenses and the risk that an anesthesiology practice would face in hiring inexperienced students.

The court then examined the interns’ experiences under the Glatt factors, noting the following facts that supported a finding that the students were bona fide interns rather than employees: the dates of the internships corresponded to the academic calendar; and the length of the program was not excessive (although the court acknowledged that if the students were required to work “grossly excessive hours,” that would weigh in favor of employee status). The court was not persuaded by a Medicare rule, on which the plaintiffs relied, that allowed the clinic to be reimbursed for the students’ work in place of full-time nurses, although it did advise the District Court to take a closer look at that factor.

In a related development, the DOL recently released a guide for employers that encourages them to establish programs for interns as a way to transition students into the workplace. While the focus of the guide is on students with disabilities, much of the DOL’s text could be read to apply to internships more generally. Of particular note, the DOL states that, while pay may not be a “central motivation” for interns, payment is considered a “best practice” to attract a “wider array of candidates.” The guide directs employers to the six-factor test to determine whether interns must be paid the minimum wage. (See the discussion of the DOL guide on our Employment Law Lookout blog here.)

The fate of those six factors remains to be seen. For now, two federal appellate courts have rejected them in favor of a more flexible approach. Other courts will surely register their views soon as well.

Co-authored by Robert WhitmanAdam J. Smiley, and Meredith-Anne Berger

As this blog previously reported, a three-judge panel of the Second Circuit ruled against two separate groups of interns in early July, applying the “primary beneficiary” test—to evaluate whether unpaid interns are trainees not entitled to wages or employees who must be paid—and stating that conditional and class certification in internship lawsuits could be exceedingly difficult for plaintiffs to achieve.

On August 14, the interns in Glatt v. Fox Searchlight and Wang v. Hearst Corp. asked the Second Circuit for reconsideration of the July ruling or, alternatively, for review en banc by the full court. They argue that categorizing unpaid interns differently than other employees is contrary to Supreme Court and Second Circuit precedent and creates a category of “quasi work” that would allow private employers to receive free labor. They urge the court to adopt a test that allows unpaid internships only where employers receive no ‘immediate advantage’ from any work done by” the interns.

The plaintiffs also took issue with the panel’s ruling on their class certification motion. In addition to arguing that the interns’ claims in Glatt were substantially similar, they said the panel should not have commented on the likelihood of class certification more generally and should instead have simply remanded the issue to the trial court to have the panel’s new test applied.

If en banc review is granted, the entire roster of 13 active judges on the Second Circuit (i.e., those not on senior status) would rehear the case. Such requests are very rarely granted. In addition to the plaintiffs, a coalition of organizations such as the National Employment Law Project and Intern Worker Alliance also appear to be supporting the request for further review of the panel’s decision.

The Glatt decision is already being relied on at the District Court level. Pop culture website Gawker recently filed a motion for summary judgment in its case against several former interns and argued that, under Glatt, the interns’ claims could not survive because the interns had “precisely the sort of hands-on, educational internships that the Second Circuit endorsed in Glatt.”

While Glatt appeared to throw cold water on potential internship claims, the trend of new lawsuits continues. Most notable is the recently filed class action against Dualstar Entertainment Group, the entertainment company owned by twins Ashley and Mary-Kate Olsen of Full House fame, in which the plaintiff alleges that the company violated the New York Labor Law by failing to pay its interns.

There is no timetable for the Second Circuit’s decision on the en banc request, but watch this blog for further developments.

Co-authored by Robert Whitman, Adam Smiley, and Meredith-Anne Berger

In a closely watched case affecting the viability of unpaid internship programs at for-profit employers, the Second Circuit held that the “primary beneficiary” test should be used to decide whether interns should be deemed employees or trainees. The court also held that this test requires highly individualized inquiries — a conclusion that may deal a blow to plaintiffs’ abilities to obtain class or collective certification in these cases.

The plaintiffs in Glatt v. Fox Searchlight Pictures, Inc., served as unpaid interns for the film production company, including on the movie Black Swan. In a 2013 decision, Judge William Pauley of the Southern District of New York granted summary judgment to two of the interns, holding that they should have been treated as employees entitled to compensation and held that a third intern could pursue his related claims as a class and collective action under the FLSA and New York Labor Law.

The Second Circuit vacated those rulings. On the question of employee status, the court declined to defer to the Department of Labor’s 6-factor test, holding that it is “too rigid” since it was based on a 68-year old Supreme Court decision involving railroad trainees and was not entitled to special deference. The court also declined to adopt the interns’ proposed test, under which employee status would exist whenever the employer receives an “immediate advantage from the interns’ work.”

Instead, the Second Circuit held that the primary beneficiary test provides a more appropriate framework by focusing on “what the intern receives in exchange for his work” and providing “the flexibility to examine the economic reality as it exists between the intern and the employer.”

Rather than using a rigid set of factors to evaluate the internship, the court fashioned a flexible, non-exhaustive set of considerations:

  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.

The court specifically noted that courts may consider relevant evidence beyond the specified factors in appropriate cases. Further, these considerations require a “weighing and balancing [of] all 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.”

At the heart of the decision is the notion that a legitimate internship program must “integrate classroom learning with practical skill development in a real world setting,” and that focusing on the academic aspect of an internship program is critical and better reflects the modern workplace. The court also appeared to recognize that for any meaningful internship experience, the intern must do some “work.” With this understanding, the court said that interns may perform work so long as it “complements” rather than “displaces” the work of the company’s regular employees.

On the question of class and collective certification, the court held that “the question of an intern’s employment status is a highly individualized inquiry” given the nature of the primary beneficiary test. Even under the FLSA’s more lenient standard, it said, the interns were not “similarly situated” to each other because of the “individualized aspects of [their] experience,” especially given the nationwide scope of the proposed collective action.

Through a summary order, the Second Circuit also upheld a Southern District of New York decision that denied class certification in Wang v. Hearst Corp., a tandem internship case.  Putting a finer point on the certification issue than in Glatt, the court held:

As we have framed the relevant inquiry, courts must analyze how the internship was tied to the intern’s formal education, the extent of the intern’s training, and whether the intern continued to work beyond the period of beneficial learning. Irrespective of the type of evidence used to answer them, these questions are individual in nature and will require individual analysis. . . . Therefore, because of variation in the proposed class and the need for individual analysis of each intern’s situation, common questions do not predominate over individual ones.

***

So what does this all mean?

First, the DOL’s 6-factor test, at least in the Second Circuit, is no longer valid. As the court said, “[B]ecause the DOL test attempts to fit [the Supreme Court’s railroad decision’s] particular facts to all workplaces, and because the test is too rigid for our precedent to withstand, we do not find it persuasive, and we will not defer to it.”

Second, the decision makes clear that interns may perform some “work” so long as the work does not displace an employee. While no bright line exists, interns may likely be assigned projects that help current employees do their work more effectively. However, the amount of work should be weighed in the context of the entire intern program to ensure that the scale still tips toward the intern being the primary beneficiary of the program.

Third, the educational component of the internship is a critical factor. Companies’ programs should emphasize training and educational opportunities, such as speaker series, mock projects, information sessions, open door policies to ask questions about the industry, and attendance at industry conferences or events. The greater the educational component of the program, the more likely that the interns will be the primary beneficiaries.

Fourth, the recent wave of internship cases may have crested and crashed, based not only on the Second Circuit’s decision on the merits, but as much or more because class and collective certification has become more difficult. Plaintiffs’ lawyers may now decide to forego cases where the inherent individual inquires necessary to evaluate interns’ experiences mean that certification will be difficult or impossible.

Stay tuned for more developments as we see how courts in the Second Circuit implement this decision and how it affects lawsuits currently filed, as well as the frequency of new lawsuits.

Co-authored by Robert S. Whitman and Adam J. Smiley

The Second Circuit heard arguments this morning in two cases that raise critical issues for the fate of internships in for-profit businesses: Fox Searchlight’s appeal of the decision granting summary judgment and class certification to interns who worked on film productions, and the appeal by former Hearst Corporation interns whose motion for class certification was denied.

Lawyers from both sides, and from the U.S. Department of Labor, sought to persuade the Court of the appropriate test to evaluate whether interns are employees, subject to the minimum wage and overtime provisions of the FLSA, or “trainees” who are not entitled to compensation.  Under the common law “primary benefit” test advanced by the companies, if the internship primarily benefits the intern rather than the employer, the intern is properly deemed a trainee.  The interns and the DOL voiced support for the DOL’s strict 6-factor test, which provides that if each factor is not satisfied, the intern is entitled to compensation.

The panel of Judges Walker, Jacobs, and Wesley peppered the lawyers with questions, at times joking about the lack of internships when they were students in the “stone age.”  Overall, they were critical of the application of the rigid DOL test, with Judge Wesley candidly noting that the three judges are “skeptics” of the 6-factor approach.

Here are the highlights of the arguments:

  • The panel focused on the utility of the primary benefit test for judges who are accustomed to conducing balancing inquiries.  The primary benefit test, they said, allows for such a balancing analysis, with consideration of all the key issues, while the DOL test is rigid and does not allow for the consideration of important issues such as the receipt of academic credit, the brevity of internships, or the fact that an internship may end at the same time as the academic semester.
  • In further challenging the rigidity of the 6-factor test, Judge Jacobs wondered what a reference letter for an intern would look like if the program fully conformed with the DOL test – suggesting that such a letter would be an “absurd” read that would not paint the intern in a favorable light.
  • In response to this tough questioning, the DOL made what appeared to be an important admission:  that its test is not absolutely rigid, and that under certain circumstances, an intern may properly be deemed a trainee even if the internship did not meet all 6 of the DOL factors.  Lawyers for Fox jumped on this statement as an additional indication that the DOL test is facially contradictory and is in essence encompassed by the primary benefit test.
  • The panel also commented that an intern’s decision to accept no compensation, and no expectation of a future job, suggests that the intern was in fact gaining a benefit from the program – because there would be no reason to accept such a position without other benefits.  Lawyers for the interns countered that, since the 2008 recession, students are desperate to get their feet in the door and are willing to take internships with no benefits in exchange for the remote possibility of a job down the road.
  • The panel, picking up on the interns’ argument, questioned how an intern could gain an educational benefit from performing menial tasks, such as getting coffee and running errands.  The employers argued that being immersed in a particular industry’s work environment and evaluating a type of job are tangible benefits that should be considered under the primary benefit test.  While he acknowledged that this was just one part of the analysis, Judge Wesley expressed disagreement with the proposition that simply “[learning] to co-exist in a work environment” is educational.
  • The panel, and Judge Jacobs in particular, seemed persuaded that the grant of academic credit by an educational institution was an important consideration in favor of finding that an internship had a valid educational component.  Judge Jacobs also criticized the interns’ suggestion that the payment of minimum wage was an easy fix, suggesting that the slew of other legal protections that come with employee status might make it impossible to fire an intern – an observation that drew laughter from the audience.
  • The panel seemed to believe that any internship would necessarily require interns to perform some “real work.”  Judge Jacobs, in fact, gave an example of law school clinic programs where law students clamored for “real work” in writing briefs and meeting with witnesses, and how this is what makes internships desirable.

It may be months before the court issues its decision, and we will provide an update as soon as that happens.  In the meantime, employers should continue to carefully scrutinize their internships to ensure that, at a minimum, the interns are the primary beneficiaries of the program.  We also recommend that employers at least look to the DOL factors as a guide in this analysis, as some of those factors may be adopted by the Court as part of a balancing test, even if it rejects the strict 6-factor approach.

Co-authored by Robert S. WhitmanNadia S. Bandukda, Adam J. Smiley, and Jade Wallace

The Super Bowl isn’t the only major showdown coming this weekend.

On Friday morning, a three-judge Second Circuit panel will hear argument in two cases raising critical issues for the fate of internships in for-profit businesses:  (1) Fox Searchlight’s appeal of the decision granting summary judgment and class certification to interns who worked on film productions and (2) the appeal by former Hearst Corporation interns whose motion for class certification was denied.

At issue in both cases is the test to be used to evaluate whether interns are “employees” under the FLSA or “trainees” who are exempt from minimum wage and overtime requirements.  Under the common law “primary benefit” test, if the internship primarily benefits the intern rather than the employer, the intern is properly deemed a trainee and not entitled to compensation.  The Department of Labor (“DOL”) has declared that internship status should instead be determined by a strict 6-factor test and that if each factor is not satisfied, the intern is entitled to compensation.  The lower courts have applied modified versions of these tests and reached differing results.

We have written frequently on this topic (in May 2013, November 2013, and April 2014), but to tide you over until kickoff, we break down the matchup by looking at what the many friends of the Court have to say about the issue.

Five groups have filed amicus curiae briefs in the two appeals: the Secretary of Labor, the U.S. Chamber of Commerce, the Economic Policy Institute, Organized Labor (AFSCME, SEIU, CWA, UFCW), and the American Council on Education.  Here is where each group stands on the key issues before the Court:

 

DOL

Chamber of Commerce

EPI

Organized Labor

ACE

What test does group support? DOL 6-Factor Test Primary Benefit Test Brief does not urge the court to adopt any specific test DOL 6-Factor Test Functional standard similar to Primary Benefit Test:  leaves the determination of intern status with educational institutions rather than DOL
Key arguments DOL test is based on Supreme Court’s Portland Terminal decision.DOL test provides a consistent, objective standard for analyzing internship programs. Focuses on the benefits to interns and businesses from internship programsDOL test: 1) impedes students’ ability to develop skills in meaningful internship experiences; 2) will reduce available internship opportunities; and 3) places an onerous burden on employers to ensure interns are not engaging in productive work FLSA must be expansively construed to cover internships where “workers are suffered or permitted to work.”“Many… non-traditional jobs come under the broad FLSA definitions of employment, and when scrutinized do not pass muster.” The Primary Benefit test could deny traditional common-law employees from FLSA protection Primary Benefit analysis allows courts to develop a standard that prevents abuse but also permits varied and flexible learning experiences without fear of liabilityThe approval of an internship by a college or university should provide a presumption of compliance with the FLSA
Notable Quotes: “In an internship context, a primary benefit test could be applied to exclude from the protections of the FLSA interns who are receiving very basic training on the employer’s operation while performing productive work for the employer on the theory that because interns are new entrants to the workforce, even the most rudimentary instruction or general exposure to a particular industry inures to their benefit.” “Prohibiting interns from performing any productive work is antithetical to a meaningful internship.” “Unpaid interns are likely to receive jobs with lower median wages than paid interns and applicants with no internship experience.” Applying the Primary Benefit test would “strip [workers] of a slew of other statutory workplace rights – concerning sexual harassment, discrimination on the basis of race and gender, workplace safety, and collective bargaining – that apply only to wage earners.”“Unpaid internships are a hallmark example of the race to the bottom in wages that result when, in the perceived absence of FLSA coverage, workers at the lowest rung of the labor market are forced to compete against one another to offer their services at the cheapest possible rate.” The DOL 6-factor test would be insufficient to address experiential learning and “cannot be used to evaluate the educational value of a particular internship.”“The uncertain and chilling prospect of employer FLSA liability for a legitimate educational internship restricts, if not altogether eliminates, opportunities which college students need in the public sector, in the non-profit sector, and in the business world.”The business concern about employing the 6-factor test and about civil liability under the FLSA has brought a “profound negative impact on the availability of internships” and allowing businesses to feel that such programs are “too risky.”

 

It is of course too soon to know whether the Second Circuit panel will be swayed by any of this.  Given the DOL’s primary enforcement role under the FLSA, its views will surely be given respectful consideration and perhaps strong deference.  But the amicus briefs come from a range of interested parties and reflect the importance of the internship issue to the various constituencies.  As of this post, only the DOL has been allowed any argument time in addition to the parties.

We will report on the arguments shortly after they close on Friday, and update readers as soon as possible thereafter.