As with independent contractors and overtime exempt workers, employers must be diligent in complying with the factors that define a worker's status, even unpaid interns.
The US Department of Labor (DOL) has shelved its contested six-part test for intern status for interns working at for-profit companies. The short-lived test was replaced it with a more comprehensive set of factors taken directly from those established by the Second Circuit in 2015.
This decision removes the previous guidance that had been explicitly rejected several appellate courts as being inconsistent with the Fair Labor Standards Act (FLSA) in response to employee lawsuits.
The announcement was published on the DOL website:
“On Dec. 19, 2017, the U.S. Court of Appeals for the Ninth Circuit became the fourth federal appellate court to expressly reject the U.S. Department of Labor’s six-part test for determining whether interns and students are employees under the Fair Labor Standards Act (FLSA).”
“The Department of Labor today clarified that going forward, the Department 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.”
Defining the Scope of Unpaid Internship
The Department of Labor’s Wage and Hour Division released a Fact Sheet in 2010 that introduced the six-part test. The test consisted of six questions that determined the factors required for an unpaid intern at a for-profit company not to be deemed an employee under the FLSA.
The intern’s experience needed to mirror the type of instruction received in a classroom setting and the employer should derive “no immediate advantage from the activities of the intern.”
According to an article at JD Supra,
“The upshot of the test was that if the company received any economic benefit from the intern’s services, the intern was an employee and therefore entitled to minimum wage, overtime, and other protections of the FLSA.”
While the DOL required that an unpaid internship meet all of the six factors, a number of courts took issue with one requirement in particular. The factor establishing that the employer derives "no immediate advantage from the activities of the intern" was subject to dispute and prone to misinterpretation.
As a result, beginning with the Second Circuit Court, a number of courts devised their own tests. Previously, an employer had to be able to say “Yes” to all six questions or else classify the intern as an employee. Under the new, no single question will disqualify the worker from being classified as an unpaid intern.
The new test mirrors practically verbatim the questions adopted by the four Circuit Courts. Specifically, the DOL points out that the courts have described the “primary beneficiary test” as a flexible test, without a single determining factor.
"Accordingly, whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case," the DOL said.
The seven-factor test leaves the “economic reality” of the intern-employer relationship up to the courts to determine which party is the “primary beneficiary” of the relationship.
According to the original 2010 DOL Fact Sheet #71, the guidance made clear that unpaid internships in the public sector and for non-profit charitable, religious, civic, or humanitarian organizations “are generally permissible.”
In fact, the vast majority of legal cases have involved “for-profit private” businesses, so the status of public sector and non-profit charitable organizations seems to have gone unchanged with the new guidance.
The DOL's New Questions
The major element missing from the new test is the question of whether the intern is providing tangible benefit to the employer. The new test doesn’t ask if the employer is receiving a benefit and really only touches on whether the intern’s work may displace the work of a paid employee.
The new test, on the other hand, places the bulk of its emphasis on the academic focus of the internship. The previous test only had one question about the training and educational aspects of the job. Significantly, in the new test, four of the seven questions speak to training and education factors.
Under the court’s primary beneficiary test, the DOL advises that employers should consider the following:
- 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.
- 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.
- The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- 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.
- 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.
Get Professional Help with HR Compliance
An updated and streamlined reporting strategy will help your organization meet its obligations, while providing accuracy and timeliness. So take time to understand the new laws and prioritize accurate record keeping. In this way, you will make HR compliance a sure thing.
Another key step in maintaining HR compliance and increasing your company's cost-effectiveness is to consider outsourcing. A professional agency such as Accuchex can provide much-needed help with Human Resources needs and questions.
Accuchex is a full spectrum Payroll Management Services provider offering expertise in Time Management, Insurance and Retirement issues, as well. Call Accuchex Payroll Management Services at 877-422-2824.