Analyzing Second Circuit's Ruling on Internships

Glatt announced a remarkable new test for determining whether internships are exempt from the FLSA. Glatt focuses on whether an internship provides a significant educational benefit to the intern, including whether the internship: 1) “provides training that would be similar to that which would be given in an educational environment”; 2) “is tied to a formal educational program by integrated coursework or the receipt of academic credit”; 3) “accommodates an intern's academic commitments by corresponding to the academic calendar”; 4) is of a duration that “is limited to the period in which the internship provides the intern with beneficial learning”; and 5) complements, rather than displaces, the work of paid employees while providing “significant educational benefits” to the intern. (Two other criteria identified in Glatt are that the intern and employer clearly understand there is no expectation of payment, and whether the intern and employer understand that the internship does not create an entitlement to a paid position at its conclusion.

The requirement that internships must provide tangible educational benefits as part of a formal educational program to be exempt from the FLSA is unprecedented.

Settled Cases

Glatt should curb abusive internship programs, which have developed to an industrial scale at some large employers. A spate of recent FLSA internship cases in the Southern District of New York has brought to light the massive internship programs at some employers, especially employers in the media and entertainment fields. Plaintiffs' counsel in these cases successfully pursued groundbreaking challenges to unpaid internship programs. In O'Jeda v. Viacom, 13 Civ. 5658 (S.D.N.Y. 2013), the parties recently settled the class-action claims for $7.2 million, covering a class of approximately 10,500 interns who had worked at the entertainment conglomerate during the class period. In Ballinger v. Advance Magazine Publishers, 13 Civ. 4036 (S.D.N.Y. 2013), the parties settled claims for $5.8 million, covering a class of approximately 7,000 Cond' Nast interns. In Grant v. Warner Music Group Corp., 13 Civ. 4449 (S.D.N.Y. 2013), the parties settled claims for $4.2 million, covering a class of approximately 4,500 interns at the record label. In Fraticelli v. MSG Holdings, 13-cv-06518 (S.D.N.Y. 2013), the parties settled claims for $800,000, covering a class of approximately 1,000 interns at the sport franchise.

Presumably the facts in the settled intern cases were as meritorious as the facts in the cases still being contested, which provide a more developed view of prevailing internship practices. In Glatt, for example, the district court found little evidence that interns at Fox received any significant educational benefit from their internships: “They worked as paid employees work performing low-level tasks not requiring special training. The benefits they may have received ' such as knowledge of how a production or accounting office functions or references for future jobs ' are the results of simply having worked as any other employee works, not of internships designed to be uniquely educational ' [t]hey received nothing approximating the education they would receive in an academic setting or vocational school.” Glatt v. Fox Searchlight Pictures, 293 F.R.D. 516 (S.D.N.Y. 2013).

Similarly, in Wang v. The Hearst Corp., 12 CV 793 (S.D.N.Y. 2012), the district court credited evidence that Hearst “used interns to perform entry-level work with little supervision ' job duties were similar to what a web editorial assistant would have done if Hearst had hired one ' [his] primary job responsibility was to pick-up and return sample clothing items that were being considered for inclusion in the magazine.”

While these cases have not been adjudicated through trial, it is doubtful that all, or even most, of the interns in these large programs received the type of tailored educational benefit required by the Second Circuit. Further, the Second Circuit was writing on a blank slate. The Glatt decision therefore does not supplant any established employee-friendly law and the law that had developed in this area was sufficiently opaque that questionable internship programs flourished. But as it clearly announces unprecedented benchmarks that internship programs must meet, it is difficult to view the Glatt decision as a victory for employers operating internship programs.

Internships under FLSA

Despite the fact that the FLSA was adopted over 75 years ago (in 1938) and unpaid internships have been a staple of career development for decades, no decision prior to Glatt addressed whether unpaid internships comply with the FLSA. The primary authority on the issue was an anachronistic 1947 Supreme Court decision Walling v. Portland Terminal Co., 330 U.S. 148 (1947). Walling concerned whether participants in a one-week instructional course for train brakemen were employees under the FLSA. Unlike modern office internships, the brakemen's instruction in Walling was short in duration, highly task oriented, closely supervised by instructors, clearly did not displace existing workers, and resulted in a participant being pre-qualified for employment as a brakeman in the event such a position opened with the employer.

Based on Walling, in 1967 the Department of Labor (DOL) issued informal guidelines concerning trainees exempt from the FLSA. Only in 2010, did the Labor Department issue a similar informal Fact Sheet addressing unpaid interns working in the private sector. See , Department of Labor, Wage & Hour Division, Fact Sheet #71, Internship Programs Under the Fair Labor Standards Act. The Labor Department fact sheet listed six criteria that should be met for unpaid interns to be exempt from the FLSA: 1) the internship is similar to training provided in an educational environment; 2) the internship experience is for the benefit of the intern; 3) interns do not displace other employees; 4) the employer derives no immediate advantage from the activities of the intern and the employer's activities may actually be impeded by the program; 5) the intern is not entitled to a job at the end of the internship; and 6) the intern understands that wages will not be paid for the time spent in the internship.

Impact of Glatt

The district court in Glatt applied the Labor Department's six-factor test (although not explicitly requiring that all the factors be met) and held that the plaintiffs were covered by the FLSA. On appeal, the Labor Department appeared as amicus curiae and encouraged the Second Circuit to adopt the six-factor test promulgated in the Labor Department Fact Sheet.

The Second Circuit declined. The appeals court held that the department's criteria were merely an interpretation of the Walling decision and therefore not entitled to special deference: “Unlike an agency's interpretation of ambiguous statutory terms or its own regulations, an agency has no special competence or role in interpreting a judicial decision.”

Unconstrained by any relevant precedent or administrative guidance, the Second Circuit ruled that internships should be evaluated under a “primary beneficiary” test to determine if the primary beneficiary is the employer or intern. To that end, the court formulated the “non-exhaustive” list of factors discussed earlier in this article that focus on an internship's educational benefits to the interns.

Glatt suggests a safe harbor for carefully constructed internship programs. To be exempt from the FLSA, employers should, among other things: 1) schedule internships to accommodate interns' academic schedules, preferably permitting interns to work after class hours, on weekends, or during vacations; 2) limit the duration of internships to the time needed to impart specifically identifiable educational or training benefits to interns; 3) liaise formally or informally with interns' schools or instructors and document how the internship complements the interns' academic program, preferably resulting in the intern receiving academic credit for the internship; and 4) assign individual mentors/supervisors to each intern to ensure that the intern receives some structured instruction and is not relegated only to performing menial tasks.

As the first high-profile case succinctly addressing this issue, Glatt should have a powerful prescriptive effect as employers adopt these and other reforms in attempts to voluntarily to comply with its holding.

The Glatt decision, however, also makes it much harder to challenge internship programs through class actions. The Second Circuit reversed the lower court's certification of a plaintiff class of interns, holding that questions regarding the educational benefits obtained by interns are highly individualized: “[C]ommon evidence will not help to answer whether a given internship was tied to an education program, whether and what type of training the intern received, whether the intern continued to work beyond the primary period of learning, or the many other questions that are relevant to each class member's case.”

This aspect of the Glatt decision certainly will deter employers from entering the type of class-wide settlements that had become common. Glatt therefore will discourage class action firms from pursuing these claims. Nevertheless, the provisions of the FLSA allowing for compensatory and liquidated damages, together with attorney fees and interest, should still incentivize counsel to pursue individual or group actions in this area.

Thomas E. Chase is a litigation partner based in the New York City office of Rottenberg Lipman Rich. This article originally appeared in the New York Law Journal, an ALM sibling of Entertainment Law & Finance.

This summer, the U.S. Court of Appeals for the Second Circuit decided Glatt v. Fox Searchlight Pictures, 791 F.3d 376 (2d. 2015), an important decision concerning whether Fox's unpaid interns were “employees” under the federal Fair Labor Standards Act and the New York Labor Law (collectively, the FLSA) and, therefore, entitled to recover minimum wage, plus time-and-a-half for overtime, for the periods they worked at Fox.

The Second Circuit reversed the lower court's decision that Fox's interns were employees under the FLSA. Media coverage characterized the Second Circuit's decision as a decisive victory for employers and a defeat for interns. But don't believe the hype. The Second Circuit held that the lower court applied the wrong test for determining whether interns are exempt from the FLSA and remanded the case to be decided under a different ' but not necessarily more lenient ' test. The Second Circuit's decision, moreover, stands out as the only significant decision addressing this important topic, newly imposes important educational requirements upon exempt internship programs and will flunk many internship programs.

New Internship Test

Glatt announced a remarkable new test for determining whether internships are exempt from the FLSA. Glatt focuses on whether an internship provides a significant educational benefit to the intern, including whether the internship: 1) “provides training that would be similar to that which would be given in an educational environment”; 2) “is tied to a formal educational program by integrated coursework or the receipt of academic credit”; 3) “accommodates an intern's academic commitments by corresponding to the academic calendar”; 4) is of a duration that “is limited to the period in which the internship provides the intern with beneficial learning”; and 5) complements, rather than displaces, the work of paid employees while providing “significant educational benefits” to the intern. (Two other criteria identified in Glatt are that the intern and employer clearly understand there is no expectation of payment, and whether the intern and employer understand that the internship does not create an entitlement to a paid position at its conclusion.

The requirement that internships must provide tangible educational benefits as part of a formal educational program to be exempt from the FLSA is unprecedented.

Settled Cases

Glatt should curb abusive internship programs, which have developed to an industrial scale at some large employers. A spate of recent FLSA internship cases in the Southern District of New York has brought to light the massive internship programs at some employers, especially employers in the media and entertainment fields. Plaintiffs' counsel in these cases successfully pursued groundbreaking challenges to unpaid internship programs. In O'Jeda v. Viacom, 13 Civ. 5658 (S.D.N.Y. 2013), the parties recently settled the class-action claims for $7.2 million, covering a class of approximately 10,500 interns who had worked at the entertainment conglomerate during the class period. In Ballinger v. Advance Magazine Publishers, 13 Civ. 4036 (S.D.N.Y. 2013), the parties settled claims for $5.8 million, covering a class of approximately 7,000 Cond' Nast interns. In Grant v. Warner Music Group Corp., 13 Civ. 4449 (S.D.N.Y. 2013), the parties settled claims for $4.2 million, covering a class of approximately 4,500 interns at the record label. In Fraticelli v. MSG Holdings, 13-cv-06518 (S.D.N.Y. 2013), the parties settled claims for $800,000, covering a class of approximately 1,000 interns at the sport franchise.

Presumably the facts in the settled intern cases were as meritorious as the facts in the cases still being contested, which provide a more developed view of prevailing internship practices. In Glatt, for example, the district court found little evidence that interns at Fox received any significant educational benefit from their internships: “They worked as paid employees work performing low-level tasks not requiring special training. The benefits they may have received ' such as knowledge of how a production or accounting office functions or references for future jobs ' are the results of simply having worked as any other employee works, not of internships designed to be uniquely educational ' [t]hey received nothing approximating the education they would receive in an academic setting or vocational school.” Glatt v. Fox Searchlight Pictures, 293 F.R.D. 516 (S.D.N.Y. 2013).

Similarly, in Wang v. The Hearst Corp., 12 CV 793 (S.D.N.Y. 2012), the district court credited evidence that Hearst “used interns to perform entry-level work with little supervision ' job duties were similar to what a web editorial assistant would have done if Hearst had hired one ' [his] primary job responsibility was to pick-up and return sample clothing items that were being considered for inclusion in the magazine.”

While these cases have not been adjudicated through trial, it is doubtful that all, or even most, of the interns in these large programs received the type of tailored educational benefit required by the Second Circuit. Further, the Second Circuit was writing on a blank slate. The Glatt decision therefore does not supplant any established employee-friendly law and the law that had developed in this area was sufficiently opaque that questionable internship programs flourished. But as it clearly announces unprecedented benchmarks that internship programs must meet, it is difficult to view the Glatt decision as a victory for employers operating internship programs.

Internships under FLSA

Despite the fact that the FLSA was adopted over 75 years ago (in 1938) and unpaid internships have been a staple of career development for decades, no decision prior to Glatt addressed whether unpaid internships comply with the FLSA. The primary authority on the issue was an anachronistic 1947 Supreme Court decision Walling v. Portland Terminal Co., 330 U.S. 148 (1947). Walling concerned whether participants in a one-week instructional course for train brakemen were employees under the FLSA. Unlike modern office internships, the brakemen's instruction in Walling was short in duration, highly task oriented, closely supervised by instructors, clearly did not displace existing workers, and resulted in a participant being pre-qualified for employment as a brakeman in the event such a position opened with the employer.

Based on Walling, in 1967 the Department of Labor (DOL) issued informal guidelines concerning trainees exempt from the FLSA. Only in 2010, did the Labor Department issue a similar informal Fact Sheet addressing unpaid interns working in the private sector. See , Department of Labor, Wage & Hour Division, Fact Sheet #71, Internship Programs Under the Fair Labor Standards Act. The Labor Department fact sheet listed six criteria that should be met for unpaid interns to be exempt from the FLSA: 1) the internship is similar to training provided in an educational environment; 2) the internship experience is for the benefit of the intern; 3) interns do not displace other employees; 4) the employer derives no immediate advantage from the activities of the intern and the employer's activities may actually be impeded by the program; 5) the intern is not entitled to a job at the end of the internship; and 6) the intern understands that wages will not be paid for the time spent in the internship.

Impact of Glatt

The district court in Glatt applied the Labor Department's six-factor test (although not explicitly requiring that all the factors be met) and held that the plaintiffs were covered by the FLSA. On appeal, the Labor Department appeared as amicus curiae and encouraged the Second Circuit to adopt the six-factor test promulgated in the Labor Department Fact Sheet.

The Second Circuit declined. The appeals court held that the department's criteria were merely an interpretation of the Walling decision and therefore not entitled to special deference: “Unlike an agency's interpretation of ambiguous statutory terms or its own regulations, an agency has no special competence or role in interpreting a judicial decision.”

Unconstrained by any relevant precedent or administrative guidance, the Second Circuit ruled that internships should be evaluated under a “primary beneficiary” test to determine if the primary beneficiary is the employer or intern. To that end, the court formulated the “non-exhaustive” list of factors discussed earlier in this article that focus on an internship's educational benefits to the interns.

Glatt suggests a safe harbor for carefully constructed internship programs. To be exempt from the FLSA, employers should, among other things: 1) schedule internships to accommodate interns' academic schedules, preferably permitting interns to work after class hours, on weekends, or during vacations; 2) limit the duration of internships to the time needed to impart specifically identifiable educational or training benefits to interns; 3) liaise formally or informally with interns' schools or instructors and document how the internship complements the interns' academic program, preferably resulting in the intern receiving academic credit for the internship; and 4) assign individual mentors/supervisors to each intern to ensure that the intern receives some structured instruction and is not relegated only to performing menial tasks.

As the first high-profile case succinctly addressing this issue, Glatt should have a powerful prescriptive effect as employers adopt these and other reforms in attempts to voluntarily to comply with its holding.

The Glatt decision, however, also makes it much harder to challenge internship programs through class actions. The Second Circuit reversed the lower court's certification of a plaintiff class of interns, holding that questions regarding the educational benefits obtained by interns are highly individualized: “[C]ommon evidence will not help to answer whether a given internship was tied to an education program, whether and what type of training the intern received, whether the intern continued to work beyond the primary period of learning, or the many other questions that are relevant to each class member's case.”

This aspect of the Glatt decision certainly will deter employers from entering the type of class-wide settlements that had become common. Glatt therefore will discourage class action firms from pursuing these claims. Nevertheless, the provisions of the FLSA allowing for compensatory and liquidated damages, together with attorney fees and interest, should still incentivize counsel to pursue individual or group actions in this area.

Thomas E. Chase is a litigation partner based in the New York City office of Rottenberg Lipman Rich. This article originally appeared in the New York Law Journal, an ALM sibling of Entertainment Law & Finance.