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U.S. Department of Labor Changes Course on Interns

January 9, 2018

By J. Kent Pearson, Jr.

In 2011, we alerted employers to the issue of unpaid interns bringing claims and lawsuits for unpaid wages, alleging that they qualified as employees entitled to the minimum wage and overtime protections of the Fair Labor Standards Act (FLSA) and corresponding state law. The U.S. Department of Labor (DOL) also pursued these claims in employer audits.  The DOL and the interns pursuing claims generally relied on informal guidance issued by the DOL in 2010, which set out a difficult standard for employers to meet to establish that a trainee was not an employee.  After the test set out in the guidance was rejected by four federal appellate circuits, the DOL announced last week that it will abandon the 2010 standard and adopt the standard employed by the courts.
The appropriate standard for determining whether an individual qualified as an unpaid trainee or an employee entitled to wages was analyzed in Walling v. Portland Terminal Co., 330 U.S. 148 (1947).  In that case, the U.S. Supreme Court examined a number of factors, and ruled that railroad trainees were not employees covered by the FLSA, since the trainees, rather than the railroad, were the direct beneficiaries of the training.
Purporting to rely on the factors identified in the Portland Terminal decision, in 2010, the DOL issued an informal guidance setting forth a six-part test for determining whether an individual was properly characterized as an unpaid intern or an employee entitled to the minimum wage and overtime.  (See Wage & Hour Div., US Department of Labor, Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act (April 2010) https:// ). According to the DOL guidance, an individual performing services for an employer was an employee unless the employer could establish all of the following factors:
1. The internship is similar to training that would be given in an educational environment;
2. The internship is for the benefit of the intern;
3. The intern does not displace employees, but works under their close supervision;
4. The employer providing the training derives no immediate advantage from the intern’s activities, which may, in fact, occasionally impede the employer’s operations;
5. The intern is not necessarily entitled to a job with the employer at the conclusion of the internship; and
6. Both parties understand that the intern is not entitled to wages for the duration of the internship.
The six–factor standard announced by the DOL was difficult for employers to satisfy, and in response, many employers cut back on existing internship programs rather than run the risk of a wage and hour lawsuit. 
Some courts examining such claims by interns rejected the DOL standard, and instead applied a standard intended to determine whether the intern or the employer was the primary beneficiary of the training at issue. In a case decided in December, 2017, the Ninth Circuit Court of Appeals, which is the federal appeals court with jurisdiction in Oregon, held that student trainees of a beauty school did not qualify as employees. Benjamin v. B & H Education, 2017 WL 6460087 (9th Cir. Dec. 19, 2017).  The Benjamin court rejected the DOL six-factor test and applied the “primary beneficiary” analysis used by the Circuit Courts of Appeal in the Second, Sixth, and Eleventh Circuits.  Since the services provided by the beauty school students provided them with the necessary clinical experience required by law to take the state licensing exam, the court determined that the students were the primary beneficiaries of the training.
In a news release dated January 5, 2018, the DOL noted that the Ninth Circuit Court of Appeal had become the fourth federal appellate court to reject the 2010 DOL test. Moreover, the DOL clarified that going forward, it would apply the “primary beneficiary” test to determine whether interns qualified as employees under the FLSA. Further, the DOL indicated that the DOL Wage and Hour Division would update its enforcement policies to align with the new standard.
The DOL announcement is welcome news for employers and provides a more flexible framework for analyzing whether trainees are employees. It remains to be seen whether the Oregon Bureau of Labor and Industries will adopt this approach or continue to utilize the now-outdated DOL standard.  Oregon employers should also recall that in 2013, Oregon HB 2669 A extended the Oregon statutory discrimination protections to interns. The 2013 law adopted the DOL six-factor test for determining whether an individual is an intern. However, the law expressly denied creating an employment relationship for the purposes of Oregon’s wage and hour laws.

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