The Second Circuit has weighed in on the on-going litigation by unpaid interns looking for pay.

Who says that unpaid internships don’t teach interns anything? Why, just recently a number of unpaid interns learned an important lesson: what a trial judge giveth, an appeals court can taketh away. The U.S. Court of Appeals for the Second Circuit has vacated an intern-friendly decision in Glatt v. Fox Searchlight Pictures, Inc., better known (to some, at least) as the “Black Swan Interns Case”.

Glatt, of course, is one of several lawsuits filed by former interns. The targets of these suits have tended to be big media companies with deep pockets – think Fox, NBCUniversal, Hearst and the like. The interns had presumably been tickled pink to have gotten to work in connection with the production of a major motion picture (e.g., The Black Swan) or prominent television shows (e.g., The Charlie Rose Show, Saturday Night Live) even without pay. But, eventually, they apparently came to realize the gross unfairness of not getting paid, possibly when they got in touch with a law firm that happens to specialize in suing big media companies on behalf of unpaid interns. (You can check that firm’s website for yourself; it’s loaded with information about the various lawsuits for which they’re responsible.)

As I reported a couple of years ago, the interns won a couple of important rulings in the Glatt case, but another U.S. District Judge in another case (involving Hearst) went the other way. I followed up shortly thereafter with a post on another intern victory (with respect to the issue of class certification) in a lawsuit against Gawker media. Some settlements in other cases, possibly inspired by the Glatt decision, came next, although (also as I chronicled) at least one of those settlements may be in question thanks to a dramatic opt-out by one former intern.

But all those decisions were at the trial court level. And now the Second Circuit has weighed in on Glatt, the first of the intern cases to reach it.

To recap, the Black Swan Case involved plaintiffs who had interned, for free, for Fox Searchlight between 2005-2010. The trial judge (that would be Judge William Pauley) had held that two of the named plaintiffs should have been deemed “employees” and, thus, were entitled to have been paid for their work. Pauley also concluded that all interns who worked for Fox Searchlight in New York between 2005-2010 should be considered a single class for purposes of the lawsuit, and that a separate class – consisting of other interns who worked for Fox Searchlight anywhere in the country between 2005-2010 – should also be conditionally certified.

Fox Searchlight asked for, and was granted, leave to appeal Judge Pauley’s decision immediately, even though some issues remained to be litigated before the trial judge. And when the dust had settled, Judge Pauley’s decision had been vacated on all points, with the case sent back down to him for further proceedings.

As a technical matter, the case involves the Fair Labor Standards Act (FLSA), which generally requires that employees be paid a specified minimum wage and time-and-a-half for overtime. There is no FLSA requirement that interns be paid diddly-squat. Judge Pauley’s conclusion that the plaintiffs were “employees” – and, thus, entitled to be paid – was based on his analysis of the Department of Labor’s Fact Sheet #71. In that 2010 document, DOL had identified six criteria to be considered in determining whether a person is an “intern” or an “employee”. Those six DOL-identified criteria are:

  1. 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;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. 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;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

In the District Court, Judge Pauley concluded that four of the criteria favored the intern-plaintiffs as did the remaining two, although less conclusively. In his analysis he expressly declined to take the “primary beneficiary” approach, which assigns considerable importance to the determination of which party is “the primary recipient of benefits from the relationship”.

And that, in the Second Circuit’s view, was a mistake. According to the Circuit, “the proper question is whether the intern or the employer is the primary beneficiary of the relationship”. And to answer that question, a court should not necessarily be limited to consideration of only the six DOL Fact Sheet factors. While not a perfect standard, the Circuit’s more flexible approach permits a court to examine “[t]he economic reality as it exists between the intern and the employer”.

(Interestingly, DOL appeared as an amicus in the Second Circuit, arguing that its six-criteria test was derived directly from a Supreme Court case and that all six criteria must be found to be present before a program can be deemed to be a legitimate internship. In making this argument, DOL claimed that the court should defer to DOL’s interpretation, because DOL is in charge of administering the FLSA. The Circuit rejected DOL’s suggestion, pointing out that the six-criteria test derives from a Supreme Court decision, and DOL’s interpretation of judicial decisions is entitled to only limited, if any, deference.)

As a helpful guide, the Circuit provided its own list of seven separate factors to be considered in resolving the question of internship vs. employment:

  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 emphasized that no single factor is dispositive, nor is it an all or nothing situation. Courts are supposed to balance these – and other factors that may be presented in any given case – to come to a conclusion. The Circuit somewhat summarized that the main theme of all these factors is the relationship between the internship and the intern’s formal education:

The purpose of a bona fide internship is to integrate classroom learning with practical skill development in a real‐world setting and, unlike the brakemen at issue in Portland Terminal, all of the plaintiffs were enrolled in or had recently completed a formal course of post‐secondary education. By focusing on the educational aspects of the internship, our approach better reflects the role of internships in today’s economy than the DOL factors, which were derived from a 68‐year old Supreme Court decision that dealt with a single training course offered to prospective railroad brakemen

Having set out its seven-factor test, the Court stopped short of declaring a winner in Glatt. Instead, it remanded the case back to the District Court so that Judge Pauley could apply the new standard based on the evidence of record.

Many companies that rely on interns will breathe a sigh of relief with this decision. It does not tip the balance in favor of interns, as Judge Pauley’s approach seemed to. Rather, it affords each party the opportunity to present evidence in support of its position.

And over and above this disposition of the core issue – i.e., were the plaintiffs “interns” or “employees” – the Circuit also concluded that Judge Pauley was wrong in holding that any certifiable “class” existed for class action purposes. To establish a “class”, a plaintiff must demonstrate (among other things) that the questions of fact and law relative to the whole class “predominate” over questions that might apply only to individual members of the class. As the Circuit saw it, the determination that any particular individual might be entitled to “employee” status is a “highly individualized inquiry” requiring analysis of facts particular to that individual. That being the case, class status was inappropriate here.

So where does this leave us? As always, the plaintiffs could petition the Court of Appeals for rehearing by the three-judge panel or rehearing en banc before all of the Second Circuit judges. Or they could ask the Supreme Court to take the case. (FWIW, I think the latter is unlikely because factors that usually warrant Supreme Court review (e.g., a conflict between decisions from different circuits) are absent here.)

For the time being, things are in flux. Employers should remain cautious, but they have reason to be at least cautiously optimistic. First, rejection of class certification is a big win for Fox Searchlight and other big companies. If a class is certified, that means that lots of individual plaintiffs can join in a consolidated attack against a common defendant. Losing class status forces each “little guy” to sue individually, a far pricier and demanding – and, therefore, less attractive – alternative.

And with regard to the core issue, it’s not hard to read the Circuit’s analysis (and list of seven factors) and conclude that there’s a reasonable chance that the Court is understands and, possibly, approves the current concept of “internships”: that internships undertaken for course credit in an area relating to one’s secondary or post-secondary studies do not require payment of the minimum wage or overtime pay under the FLSA. As I see it, most of the internships at issue in the various pending lawsuits could qualify as legitimate internships under most, if not all, of the seven factors laid out by the Circuit.

In my very first post on this subject, I talked about my internship at a local television station. It was pretty typical for the times and, from what I understand in discussing these things with college students I’ve taught over the past decade, for today as well.

I knew I wouldn’t be paid. But I was happy to do it because I could get real life experience related to my major that I couldn’t get in the classroom. And I’d get credit toward my degree. (BTW, my school had to sign off on my internship, thus further integrating it into the formal education program. Plus, I had to write up a summary of the internship at the end of the summer). It was going to last for one summer and nothing more (though I did like it so much I went back the next summer). While I was probably taking the pressure off full-time employees, it wasn’t like I was reporting on-air by myself, nor was I expecting that my writing was going on air without significant review and editing. And there was no promise of a job after I was done.

Under the Second Circuit’s seven factors I would clearly have been on the “intern” side.

But make no mistake: the Second Circuit’s decision is by no means the last word. The Glatt case now has to go back to the District Court for further proceedings (if it doesn’t first go back to the Circuit for rehearing or up to the Supremes). A second District Court decision then will be subject to further possible appeals.

And in any event, as set out by the Circuit, the test is extremely fact-based, meaning that the outcome of any particular case will depend on the particular facts of that case. If you have any doubt on that score, check out what Mr. Glatt’s attorney had to say after the Circuit’s decision came down: “Many of the most abusive internships involving low-level tasks and grunt-type work are plainly illegal under this standard.” She still thinks her clients will prevail, presumably because the chores her clients were called upon to perform in their internships included “grunt-type work”, like making copies, filing, taking out trash, taking lunch orders, etc. etc. It may be difficult for a court to find any real educational component to such tasks. But under the Circuit’s standard, the interns will have a chance to make their showing, and the defendant companies will have a chance to counter that showing with their own demonstration that, on balance, the intern was the primary beneficiary of the relationship.

At a minimum, going forward any company offering an unpaid “intern” program should be careful to design the program in a way that insures that the intern can legitimately be said to be the “primary beneficiary”. Unfortunately, we can’t know exactly how to do that with any confidence until more cases get litigated. We’ll just have to wait and see for the time being.