2nd Cir. Adopts Test for Employee Status, Directs New Look at Fox Searchlight Interns

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By Lisa Nagele-Piazza

July 2 — The U.S. Court of Appeals for the Second Circuit July 2 adopted a “primary beneficiary” test to determine whether interns are employees under federal and state wage and hour laws, calling a Labor Department test “too rigid” and reversing a lower court's ruling in favor of two former movie interns.

In June 2013, Judge William H. Pauley of the U.S. District Court for the Southern District of New York granted partial summary judgment to unpaid interns Eric Glatt and Alexander Footman, who worked during the production of Fox Searchlight Pictures Inc.'s film “Black Swan,” finding they were employees under the Fair Labor Standards Act and New York Labor Law. The district court used a version of the Labor Department's six-factor test to determine that the interns didn't fall within an exception for unpaid “trainees.”

The department filed an amicus brief urging the appeals court to follow the DOL's six-factor test and its requirement that every factor be present before an internship may be unpaid. But the Second Circuit declined to defer to the DOL test, calling it “too rigid for our precedent to withstand.” 

Instead, the court found that “the proper question is whether the intern or the employer is the primary beneficiary of the relationship,” and it provided a list of non-exhaustive factors to help answer that question. If the intern is the primary beneficiary, he or she is not an employee, the court said.

Sending the case back to the district court, Judge John M. Walker said, “we express no opinion with respect to the outcome of any renewed motions for summary judgment the parties might make based on the primary beneficiary test we have set forth.”

The appeals court also vacated the district court's orders conditionally certifying intern Eden Antalik's proposed nationwide FLSA collective action and certifying a class of New York interns under Rule 23 of the Federal Rules of Civil Procedure. The most important issue in the case, whether the interns were employees under the primary beneficiary test, can't be answered with generalized proof, the Second Circuit said.

Judges Dennis Jacobs and Richard C. Wesley joined the opinion.

The Second Circuit also issued a summary order July 2 in a separate lawsuit involving unpaid interns for the Hearst Corp., directing the district court to reconsider the case in light of the appeals court's decision in the Fox Searchlight case.

Draws Clear Line, Attorney Says

“We are very pleased with the Court’s ruling, but the real winners are students,” a Fox spokesperson told Bloomberg BNA in a July 2 e-mail. “Fox has always been very proud of its internship programs and continues to believe they offer tremendous benefits to those who participate in them.”

Rachel M. Bien of Outten & Golden LLP in New York, an attorney for the interns, said, “While we’re disappointed with the outcome, because we do not believe it comports with the Fair Labor Standard Act’s very generous ‘employee’ definition, the Court has drawn a clear line that is good for workers.”

Bien added that “under the decision, there is no justification for failing to pay interns who are not in school. Even if an intern is in school, employers must be able to show that they are providing training that is closely tied to the intern’s academic work.”

“Many of the most abusive internships involving low-level tasks and grunt-type work are plainly illegal under this standard,” Bien said. “Those are the internships that these cases targeted, and we believe that the decision will lead many employers to reevaluate their unpaid intern policies.”

District Court Applied DOL Test

According to the case record, Glatt and Footman initially sued Fox Searchlight in September 2011 for alleged violations of the FLSA and the NYLL.

They claimed the company improperly classified them as unpaid interns rather than employees and that they were due minimum wage and other benefits.

To support their claim, the interns said their duties of photocopying, making coffee, filing paperwork and various other tasks didn't have much educational value.

Glatt and Footman moved for partial summary judgment on their claim that they were employees. Applying a version of the DOL's six-factor test, the district court granted summary judgment to the interns.

The DOL issued an April 2010 fact sheet listing the following six criteria for determining when an internship may be unpaid:

• the internship is similar to training that would be given in an educational environment;

• the internship experience is for the intern's benefit;

• 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 intern's activities;

• the intern is not entitled to a job when the internship ends; and

• the employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Instead of requiring that all six factors must be present to establish that an intern isn’t an employee, the district court balanced the factors. It found that the first four factors weighed in favor of finding Glatt and Footman were employees and the last two factors favored finding them to be trainees. Balancing the factors, the district court held that they were misclassified as unpaid interns.

Appeals Court Adopts ‘Primary Beneficiary' Test

On appeal, Fox Searchlight urged the court to adopt a “more nuanced primary beneficiary test” under which an employment relationship is not created if the tangible and intangible benefits the intern receives are greater than the intern's contribution to the employer's operation.

The company argued that this test better reflects the economic realities of the intern and employer relationship. Furthermore, it considers the totality of the circumstances, which is aligned with how the court decides whether individuals are employees in other circumstances, the company said.

The appeals court agreed with the company, finding that a primary beneficiary test has “two salient features.” The test “focuses on what the intern receives in exchange for his work” and “accords courts the flexibility to examine the economic reality as it exists,” the court said.

The Second Circuit provided the following list of non-exhaustive factors for courts to consider when determining the primary beneficiary:

• the extent to which the intern and the employer clearly understand that there is no expectation of compensation, with any promise of compensation, express or implied, suggesting 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; and

• 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.

“Applying these considerations requires weighing and balancing all of the circumstances,” the court said. “No one factor 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.”

In addition to Bien, Adam T. Klein and Juno Turner of Outten & Golden LLP in New York represented the interns. Mark D. Harris, Elise M. Bloom, Chantel L. Febus, Joshua Fox and Amy F. Melican of Proskauer Rose LLP in New York and Neal Katyal, Frederick Liu and Mary H. Wimberly of Hogan Lovells US LLP in Washington represented Fox Searchlight.

Order in Hearst Interns' Lawsuit

In Wang, Judge Harold Baer of the U.S. District Court for the Southern District of New York took a different approach than in the Fox Searchlight case by applying a totality of the circumstances analysis. Baer denied partial summary judgment to the interns, finding there were material facts in dispute.

But the Second Circuit vacated the order and remanded for further proceedings in light of its decision in Glatt. “Although the district court applied a totality of the circumstances test, it understandably did not consider all of the factors we proposed in Glatt,” the appeals court said.

However, the appeals court upheld the district court's order in Wang denying class certification to the interns. The appeals court found that the lower court didn't abuse its discretion in concluding that the interns failed to establish commonality or predominance under Rule 23.

More Unpaid Intern Lawsuits

Other large media companies recently reached settlement agreements in similar unpaid intern lawsuits filed in the Southern District of New York.

NBCUniversal Media LLC and a class of about 9,000 former interns received final approval of a $6.4 million settlement agreement May 27.

And the district court granted preliminary approval May 28 to a $7.2 million deal settling a class of about 12,500 Viacom Inc. interns' class and collective claims.

The parties cited the uncertainty of how the Second Circuit would rule in the Glatt and Wang cases as a risk of continued litigation.

To contact the reporter on this story: Lisa Nagele-Piazza in Washington at lnagele@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

Text of the Glatt opinion is available at http://www.bloomberglaw.com/public/document/Glatt_v_Fox_Searchlight_Pictures_Inc_Docket_No_1304478_2d_Cir_Nov/1 and the Wang opinion at http://www.bloomberglaw.com/public/document/XUEDAN_WANG_on_behalf_of_herself_and_all_others_similarly_situate.