On Friday, January 5, 2018, the Department of Labor rescinded prior agency guidance from 2010 regarding internship programs for “for-profit” employers. The prior guidance had been criticized by courts as “too rigid” and inconsistent with the Fair Labor Standards Act.

The 2010 guidance required employers to apply a rigid six-factor test. Under the 2010 guidance, an unpaid intern at a private company would be found to be an employee under the FLSA unless all six factors of the DOL’s test were met. The 2010 guidance required the employer to provide educational-type instruction to the interns and found an employment relationship occurred if the employer received any economic benefit from the intern’s services.

Following the 2010 guidance, several different interns filed lawsuits alleging that they should have been classified as employees. While there was some success, courts ultimately rejected such claims. In 2015, the Second Circuit in Glatt v. Fox Searchlight Picture Searchlight explicitly rejected the 2010 guidance and found that it was not persuasive. Instead, the Second Circuit created its own list of factors to be considered when deciding if an individual is an intern or a student. Other courts soon followed suit.

In light of such criticism, the DOL rescinded the 2010 guidance and adopted the “Primary Beneficiary Test” utilized by the courts. This test permits courts to look at the “economic reality” of the relationship between the intern and the employer to determine whether the intern or the employer is the “primary beneficiary” of the relationship. In making this determination, the DOL adopted a seven-factor test:

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.

This test is meant to be flexible, and no one factor is determinative.

Courts (and employers) will have to look to the unique facts of each case to determine if an intern or student is an employee under the FLSA. Should an employer determine that an intern or student is an employee under the FLSA, that individual is entitled to both minimum wage and overtime pay under the FLSA. However, if an employer determines that the individual is not an employee, the intern or student is not entitled to minimum wage or overtime pay.

Following this updated guidance, the rules regarding unpaid internships for public sector and non-profit charitable organizations, where the intern volunteers without expectation of compensation (which are generally permissible), remain unchanged.

Employers who were hesitant to adopt an unpaid intern program in the past due to the DOL’s prior guidance should once again consider if starting such an internship program would benefit their company.