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Second Circuit deals setback to unpaid interns pursuing wage claims

July 9th, 2015  |  Lisa Milam

By Lisa Milam-Perez, J.D.

Dealing a major setback for unpaid interns hoping to convince a court that they are “employees” entitled to minimum wage and overtime pay under the FLSA, the Second Circuit rejected the Department of Labor’s six-factor test of “trainee” vs. “employee” status. Instead, addressing an issue of first impression, the appeals court adopted the “primary beneficiary” approach favored by the presumptive employer: Fox Searchlight, the defendant in a closely watched lawsuit brought by former production and publicist interns. The Second Circuit, which presides over the epicenter of (largely New York-based) intern wage litigation, also set forth its own “non-exhaustive” list of factors to consider in evaluating which party gains the primary benefit from the internship.

Even more problematic for interns seeking to pursue their wage claims on a class basis, the key question—which party gains the most from the internship—can’t be answered with generalized proof. Because “the question of an intern’s employment status is a highly individualized inquiry,” the appeals court vacated an order conditionally certifying the interns’ FLSA collective and certifying a Rule 23 class under the New York Labor Law.

Background. The FLSA collective action against Fox was brought by former production interns on the Oscar-winning movie Black Swan and a publicity intern at the company’s New York corporate office, the latter of whom also brought a Rule 23 class action under the NYLL. The allegations were the same, as to both claims: The interns should have been classified as employees and thus should have been compensated for their efforts. A district court granted their partial motion for summary judgment, concluding they were improperly classified as interns; it also certified the New York class and nationwide FLSA collective.

Then, at Fox Searchlight’s urging, the court certified its order for immediate appeal, inviting the Second Circuit to decide the appropriate standard for evaluating whether “interns” are employees; whether the court had correctly declared the Fox interns to be employees; and whether the court properly certified their New York class and nationwide collective actions. The starting point: The parties agreed, in theory, that “there are circumstances in which someone who is labeled an unpaid intern is actually an employee entitled to compensation under the FLSA.” They also agreed with the countervailing notion that unpaid interns are often not employees under the FLSA. The dispute lay within those parameters.

Academic, yes… For their part, the plaintiffs said interns should be deemed employees “whenever the employer receives an immediate advantage from the interns’ work.” The DOL appeared on the interns’ behalf and also to defend its own six-factor test, issued in 2010, for defining interns vs. employees. Fox Searchlight argued for a more “nuanced” test, in which an employment relationship inheres when the benefits to the intern, both tangible and intangible, are greater than the intern’s contribution to the employer’s operation. The latter approach won out.

As the Second Circuit saw it, the test favored by Fox jibes with the economic realities of the internship relationship, focusing on “what the intern receives in exchange for his work,” and more fittingly accounts for the totality of the circumstances. As for the DOL test? It was unpersuasive and “too rigid” for circuit precedent; the appeals court refused to defer to it.

Having framed the proper question as “whether the intern or the employer is the primary beneficiary of the relationship,” the appeals court proposed a list of “non-exhaustive factors” to aid courts in answering that question. Its newly crafted test better reflects, in its view, “a central feature of the modern internship—the relationship between the internship and the intern’s formal education.” It wrote, “By focusing on the educational aspects of the internship, our approach better reflects the role of internships in today’s economy.”

… but not a class. The appeals court also held the lower court erred in concluding that common questions of liability predominated over individual damages calculations. The evidence was not sufficient to resolving each intern’s employee status—a highly individualized inquiry. “Common evidence will not help to answer whether a given internship was tied to an education program, whether and what type of training the intern received, whether the intern continued to work beyond the primary period of learning, or the many other questions that are relevant to each class member’s case,” the court explained. “Moreover, defendants’ undisputed evidence demonstrated that the various internship programs it offered differed substantially across the many departments and four Fox divisions included in the proposed class.”

For the same reasons, the lower court erred too in conditionally certifying the FLSA collective. The proposed class members were not similarly situated “even under the minimal pre-discovery standard,” the appeals court said. “Under the primary beneficiary test we have set forth, courts must consider individual aspects of the intern’s experience. None of the common proof identified by [the plaintiff], and relied on by the district court, will address these questions.” If anything, given the nationwide scope of the proposed FLSA class, the proposed collective presented “an even wider range of experience” than the Rule 23 class, and so was even less suitable for resolution on a classwide basis.

Bottom line. In the end, the Second Circuit found it conceivable that an intern might well be a statutory employee in certain circumstances, and it was confident that its new test could suss out those cases. On remand, the appeals court invited the court below at its discretion to allow the interns to submit more evidence of their employment status (particularly as it relates to their formal education), and it professed to have no opinion as to how the interns might fare under the primary beneficiary test set forth here.

As to whether that question could ever be resolved on a class or collective basis? That prospect seemed largely foreclosed.