The use of unpaid interns is a common practice across many industries, especially in the D.C. Metro area. And the question recently addressed by the Ninth Circuit is not a new one: under what set of circumstances does an unpaid intern in the private sector cross the line and become an employee under the Fair Labor Standards Act (“FLSA”) and thus become entitled to compensation? Since 2010, the Department of Labor (“DOL”), when grappling with this question, has applied a rather inflexible, six-part test set out in its Intern Fact Sheet. The test was derived from a 1947 Supreme Court case that articulated a similar test for determining whether railroad brakemen trainees should be deemed employees. Until last week, the following criteria, all six of which needed to be met, were applied by the DOL to distinguish an intern from an employee:

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;
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.

The trend in the courts, however, has been to steer away from the rigid DOL test and to instead apply a “primary beneficiary” analysis; that is, does the relationship primarily benefit the intern or the employer? As the Court of Appeals for the Second Circuit noted in Glatt v. Fox Searchlight Pictures, 811 F3d 528, 536 (2015), this approach has three primary features: first, it focuses on what the intern receives in exchange for the work; second, it gives courts the flexibility to examine the economic reality as it exists between the intern and the employer; and third, it acknowledges that the intern-employer relationship should not be analyzed in the same manner as the standard employer-employee relationship because the intern enters into the relationship with the expectation of receiving educational or vocational benefits that are not necessarily expected with all forms of employment.

The Glatt court went on to apply the foregoing reasoning and suggested that the following, non-exhaustive seven factors should be considered when making the intern/employee determination:

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;
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; and
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 foregoing, which has become known as the “Glatt test,” was recently adopted by the Ninth Circuit, which became the fourth federal circuit to reject the former DOL six-part test and adopt the more flexible test articulated in Glatt. The courts, and now the DOL, in adopting a primary beneficiary approach, have embraced the Glatt test because it is more flexible, focuses on the educational aspect of the internship, allows for the analysis of the intern/employer relationship on a case-by-case basis, and because the criteria are non-exhaustive, may consider evidence beyond the seven factors, as appropriate. And, as the Glatt court pointed out, the application of the considerations requires a balancing of the factors, and no one factor is dispositive of the issue.

If you are in an industry that utilizes unpaid interns, hopefully you will never be confronted with a claim that they should be deemed employees and thus entitled to compensation. However, should such an issue arise, in assessing any such claim, going forward, the DOL is going to focus on the economic reality of the relationship, determine which party is the primary beneficiary of the relationship, and consider the seven-part Glatt test in making its determination. As an employer, you would be well-served to keep these factors in mind when establishing the ground rules of your company’s relationship with its unpaid interns.