The issue of whether interns are employees--and thus entitled to wages under the Fair Labor Standards Act ("FLSA")--has been at the forefront of employment litigation in recent years. Most recently, cosmetology students across the country have filed suits against their schools, claiming that they are entitled to wages for hours spent performing cosmetology services as part of their curriculum and to obtain state licenses. While the cosmetology schools often charge customers discounted rates for the student's services, the students are unpaid. Unsurprisingly, state and federal courts hearing these suits have reached different answers and applied different tests in determining the nature of the employment relationship.
Ninth Circuit Ruling
For the first time, the Ninth Circuit, which includes California, Nevada, Oregon, and Washington state, has provided much-needed clarity on this disputed issue. In so doing, the court adopted the Second Circuit's "primary beneficiary" test to determine employment classification of student interns under the FLSA. In determining whether student interns are employees, Ninth Circuit courts will now ask this crucial question: which party is the primary beneficiary of the relationship?
In Benjamin v. B&H Education, Inc., 2017 WL 6460086 (9th Cir.), the court held that cosmetology and hair design students at beauty schools in California and Nevada were not statutory employees entitled to minimum wage and overtime pay. The court further held that the students were not statutory employees under California and Nevada law, affirming summary judgment in the beauty school's favor on the students' minimum wage, overtime, and related claims.
In reaching its holding in B&H Education, the Ninth Circuit reviewed the significant case law on the employment classification of student interns, starting with the Supreme Court's decision in Walling v. Portland Terminal Co., 330 U.S. 148 (1947), which the Ninth Circuit deemed "the guiding source of the principles governing cases involving claims of both trainees and students to be treated as employees." B & H Educ., 2017 WL 6460087, at *2.
The seminal Portland Terminal case arose from a training program offered by the Portland Terminal Company in the late 1940s. The training program ran for seven to eight days and allowed prospective railroad brakemen to practice their skills under supervision in the rail yard. Trainees who successfully completed the training were certified as competent and their names were added to a list of brakemen eligible for future employment. Importantly, the brakemen trainees were unpaid.
In holding that the brakemen trainees were not employees under the FLSA, the Supreme Court noted that the railroad's business occasionally suffered as a result of the training and that "the railroads receive no 'immediate advantage' from any work done by the trainees." Instead, the Court held that the trainees were the true beneficiaries of the relationship because they received much-needed training for their future profession. Walling v. Portland Terminal Co., 330 U.S. at 153.
Economic Reality Test
Since Portland Terminal, the Supreme Court has refined the employment relationship test under the FLSA, using an "economic reality" approach that accounts for the totality of circumstances. The Ninth Circuit developed its own version of the economic realities test, which considered "whether the alleged employer has the power to hire and fire the employees, supervises and controls employee work schedules or conditions of employment, determines the rate and method of payment, and maintains employment records." Hale v. State of Ariz., 993 F.2d 1387, 1393 (9th Cir. 1993).
In the Supreme Court's most recent discussion of the economic realities test in the employment context, the Department of Labor (DOL) brought suit against the Tony and Susan Alamo Foundation, a nonprofit religious corporation, claiming that the foundation had violated the minimum wage, overtime, and record-keeping provisions of the FLSA. As part of its work, the foundation operated a wide array of commercial businesses, including hog farms, service stations, restaurants, and retail stores, which were staffed by approximately three hundred volunteer "associates," most of whom were drug addicts or criminals before their rehabilitation. The volunteer associates were unpaid but were provided non-monetary compensation in the form of food, clothing, and shelter.
The Court held that because the volunteers "work[ed] in contemplation of compensation" that they were employees under the FLSA. Tony & Susan Alamo Found. v. Sec'y of Labor, 471 U.S. 290, 301 (1985).
Department of Labor Guidelines
In an effort to streamline the analysis of intern classification, the Department of Labor ("DOL") issued informal guidance in 2010 as to whether unpaid interns are employees under the FLSA. Under the DOL's test, an intern is an employee unless all six factors are met:
•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;
•The internship experience is for the benefit of the intern;
•The intern does not displace regular employees, but works under close supervision of existing staff;
•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;
•The intern is not necessarily entitled to a job at the conclusion of the internship; and
•The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
See Wage & Hour Div., Fact Sheet #71, Internship Programs Under the Fair Labor Standards Act (April 2010).
Subsequently, federal appellate courtswere inconsistent in interpreting and applying the Portland Terminal and DOL factors, with some courts strictly adhering to the DOL's test and others eschewing the test altogether.
Primary Beneficiary Test: Not So Cut and Dry
In the leading recent federal appellate decision to consider the DOL test, the Second Circuit rejected the DOL's test as an inflexible "distillation of the facts discussed in Portland Terminal." Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528, 536 (2d Cir. 2016).
In Glatt, three interns sued Fox Searchlight and Fox Entertainment for failure to pay the minimum wage and overtime. The interns complained that they performed menial tasks such as filing, making copies, keeping take out menus up-to-date, setting up office furniture, and running errands. The district court used the six factor test under the "balancing approach" to arrive at its decision to grant summary judgment for the plaintiffs.
The Second Circuit reversed, holding instead that the appropriate test for determining whether interns should receive compensation under the FLSA and New York labor law should be what it termed the "primary beneficiary test."
The Second Circuit provided seven non exhaustive factors to be weighed as part of the 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.
Glatt, 811 F.3d at 537.
This flexible approach, the court said, "reflects a central feature of the modern internship--the relationship between the internship and the intern's formal education." Id.
The Second Circuit explained that it adopted the primary beneficiary test as a result of three key features: 1) The test focuses on what the intern receives in exchange for his work; 2) The test provides the courts with flexibility to examine the economic reality as it exists between the intern and the employer, and; 3) The test acknowledges that "the intern-employer relationship should not be analyzed in the same manner as the standard employer-employee relationship because the intern enters into the relationship with the expectation of receiving educational or vocational benefits that are not necessarily expected with all forms of employment (though such benefits may be a product of experience on the job)." Id. at 536.
Just like the factors utilized by the DOL, no one factor of the primary beneficiary test 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." Id. at 537. The Second Circuit also explained that because the factors are non-exhaustive, "courts may consider relevant evidence beyond the specified factors in appropriate cases." Id.
It remains to be seen whether Ninth Circuit courts will consider relevant evidence beyond the seven specified factors and what kind of evidence the courts will find persuasive.
Application of the Primary Beneficiary Test
Plaintiffs in B&H Education were cosmetology students at Marinello in California and Nevada. Plaintiffs alleged that B&H exploited them for unpaid labor and sought relief in the form of unpaid wages. Benjamin v. B & H Educ., Inc., 2017 WL 6460087 at *1-2.
As part of the cosmetology training program offered by Marinello, students attended lectures, reviewed course materials, took tests, and practiced cosmetology on customers in the clinic under instructor supervision. Id. In performing cosmetology services, the students earned academic credit and training hours that they needed in order to take the state licensing exam. Id.
The Ninth Circuit applied and weighed the seven Glatt factors in reaching its holding that the cosmetology students were not employees under the FLSA.
First, the court found that there is "no dispute" that the students signed up to participate in the program at issue knowing that they would receive no compensation. B&H Educ., 2017 WL 6460087, at *6. Under the second, third, and fourth factors, the court found that the students received hands-on training and supervision in salon environments, that the students received academic credit for hours worked, and that the hours worked provided students with the requisite hours needed to sit for state licensing exams. Id.
Under the fifth factor, the court found "nothing in the record" to suggest that the students were required to participate in the program longer than needed to complete the requisite training hours needed to sit for state licensing exams. Under the sixth factor, the Court found no evidence that the students displaced B&H employees hired to instruct students, perform administrative work, complete janitorial tasks, and monitor inventory. Finally, under the seventh factor, the Court found that the students had no expectation of employment with the school upon graduation. Id.
The Ninth Circuit then went a step further, explaining that "the California Supreme Court would not apply the DOL factors that the federal courts have rejected as too rigid, but would instead apply a test more similar to the FLSA primary beneficiary test . . . because such a test is better adapted to an occupational training setting than the DOL factors." B&H Educ., 2017 WL 6460087 at *8.
Revised DOL Guidelines
Weeks after the Ninth Circuit became the fourth federal appellate tribunal to adopt the primary beneficiary test, the DOL rescinded its 2010 guidance on unpaid internships under the FLSA in favor of the primary beneficiary test. The DOL released updated fact sheet #71, which restates the seven non-exhaustive factors of the Glatt test.
In its press release, the DOL explained that "going forward, the [DOL] will conform to these appellate court rulings by using the same 'primary beneficiary' test that these courts use to determine whether interns are employees under the FLSA. The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the Division's investigators with increased flexibility to holistically analyze internships on a case-by-case basis."
California employers who may be interested in establishing an internship program should continue to be wary in reviewing their classifications of individuals as employees or unpaid interns. Specifically, employers should be mindful of the extent that the program is connected to a formal educational program. Although no single factor of the primary beneficiary test is dispositive, factors one, five, and seven can and should be clarified in a written agreement between the intern, the employer, and the educational institution. Additionally, employers providing internship programs should ensure that the intern is receiving regular training, as a program where the interns perform work independently with little or no supervision will likely run afoul of the primary beneficiary test.
Alan S. Levins is a shareholder and Amanda Osowski is an associate at Littler Mendelson in San Francisco. They specialize in employment litigation and preventive counseling.