As part of its revision of Obama-era policies, the U.S. Department of Labor (“DOL”) recently announced a new test for assessing whether interns qualify as employees under the Federal Labor Standards Act (“FLSA”). The agency’s adoption of a “primary beneficiary” test aligns the DOL with several circuit court decisions and provides greater flexibility in analyzing intern-employer relationships under federal law.

The FLSA requires “for-profit” employers to pay employees for their work. Interns, however, may not be classified “employees” under the FLSA—in which case the interns are not entitled to compensation for their work.

The status of interns was a point of emphasis in the Obama administration, as the DOL believed that employers were broadly using intern designations to skirt wage and hour laws. The DOL issued informal guidance in 2010 as to whether interns were employees under the FLSA. According to the DOL’s six-factor test, an intern was an employee unless all of the following factors were met: (1) the internship, even though it included actual operation of the facilities of the employer, was similar to training which would be given in an educational environment; (2) the internship experience was for the benefit of the intern; (3) the intern did not displace regular employees, but worked under close supervision of existing staff; (4) the employer that provided the training derived no immediate advantage from the activities of the intern; and on occasion its operations may actually have been impeded; (5) the intern was not necessarily entitled to a job at the conclusion of the internship; and (6) the employer and the intern understood that the intern was not entitled to wages for the time spent in the internship.

Since the DOL’s 2010 guidance, four federal appellate courts have rejected the DOL’s six-part test and instead adopted a “primary beneficiary” test to determine whether an intern is an employee under the FLSA. As a result, on January 5, 2018, the DOL announced that “going forward, the [agency] 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.”

Rejecting the all-or-nothing six-factor test, the DOL issued a new Fact Sheet regarding internship programs under the FLSA, listing seven factors to consider for evaluating whether an intern is an employee:

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 DOL noted that courts have described the “primary beneficiary” test as “flexible,” and that any determination over whether an intern qualifies is an employee under the FLSA depends on the unique circumstances of each case. If analysis of those circumstances reveals that an intern is actually an employee, then he or she is entitled to both minimum wage and overtime pay under the FLSA.

The DOL’s decision to adopt the “primary beneficiary” test is welcome news for employers with internship programs. The test focuses on what the intern receives in exchange for his or her work, allows for flexibility in examining the economic reality between the intern and the employer, and acknowledges the distinction between intern-employer and employee-employer relationships. Nonetheless, employers should continue to ensure that internship programs are designed to primarily benefit interns. Further, since state laws may apply to the intern-employer relationship, employers must ensure that internship programs also comply with any applicable state law tests.