Recently, the United States Ninth Circuit Court of Appeals (which includes California) ruled on how we answer the question Is Your New Hire an Unpaid Student Intern or a Paid Employee?
The Federal court adopted what is referred to as the “Primary Beneficiary Test” to determine this issue under the Fair Labor Standards Act (“FLSA”). (Benjamin v. B&H Education, Inc., 2017 WL 6460086 (9th Cir.))
Under the Primary Beneficiary Test, the court set forth seven factors to consider in deciding if the FLSA applies to a student internship, thus requiring them to be paid and treated like an employee, and subjecting the hiring company to the same wage and hour laws, including overtime, that apply to other employees.
Here are those 7 factors:
- 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.
- 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.
United States Department of Labor, Wage and Hour Division; Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528 (2d Cir. 2015)
It is important to understand that this 7 point Primary Beneficiary Test is non-exhaustive. That means other factors may apply, and no single factor shall be determinative of the outcome. Therefore, to this list I would add that the arrangement should be memorialized in a written agreement signed by both the student intern and the hiring company to remove all doubt about the party’s intention to treat the new hire as an unpaid student intern instead of a paid employee. It is most highly recommended that this written agreement also be approved (which means signed) by whatever educational institution the student intern is presently enrolled.
Fortunately, the court recognized that each case is unique, and to that extent, it also recognizes that this test “reflects a central feature of the modern internship – the relationship between the internship and the intern’s formal education.” (Glatt, 811 F.3d at 537)
To put a fine point on it, the court’s focus is on what the intern receives in exchange for his/her work. So the hiring company should be cautious that a company’s internship program continues to be related to a formal educational program.
To ensure as much as possible that the new hire is treated as an unpaid student intern and not an employee, the hiring company should carefully review the Primary Beneficiary Test above, and be certain they are satisfying all the requirements, especially in providing regular training opportunities and not simply treating the student intern as free labor.
 The FLSA applies to your company if your annual income is $500,000.00 or more, or your company is engaged in interstate commerce, which is quite easy to establish and covers nearly all employers regardless of size. So, chances are high that the FLSA applies to you.