Update on Unpaid Interns and Independent Contractors

Over the course of the past month, there have been two important developments in labor law. The first involves the classification of independent contractors, the other involves when an unpaid intern is not an employee that must be paid the minimum wage. I wanted to take a minute to cover them today.

Department of Labor Independent Contractor Classification

The Department of Labor has issued new guidance on how to distinguish between employees and independent contractors. This issue is one of importance to both employees (who miss out on employer paid taxes and benefits) and whistleblowers (who can report unpaid taxes from misclassified workers to the IRS). The sx factor test places renewed emphasis on the economic realities test. This means that a worker who is economically dependent on an employer is an employee. If the individual can be said to truly be in business for him or herself, then they can be an independent contractor. Changing the label that is applied to these individuals (such as calling them “owners” or “members of a limited liability company” does not change the analysis.

The list of factors includes:

– whether the work is an integral part of the employer’s business.
– whether the worker’s managerial skill affects the worker’s opportunity for profit or loss.
– whether the worker is making an investment in the business compared relatively to the investment made by the employer to allow the individual to do their work
– whether the work preformed requires special skill and initiative.
– whether the relationship between the worker and the employer is permanent or indefinite.
– the nature and degree of the employer’s control.

Second Circuit on Unpaid Interns

At the beginning of the month, the Second Circuit ruled in Glatt et al. v. Fox Searchlight Pictures, Inc. et al.

The History:
The three plaintiffs were hired as unpaid interns at Fox Searchlight and have asserted a claim for compensation as employees under the Fair Labor Standards Act (FLSA) and New York Labor Law. The district court granted a partial motion for summary judgment concluding that two of the plaintiffs were improperly classified as unpaid interns rather than employees.

The Law:
The FLSA requires that employees be paid a specified minimum wage and time and one-half for the hours worked in excess of forty per week (non-exempt employees). The issue of when an unpaid intern was an employee under the FLSA and entitled to compensation was one of first impression in the Second Circuit.

The Argument:
Both parties agreed that there are cases where an unpaid intern is an employee and should be paid under the law. Both sides also agreed that some unpaid interns are not employees under the FLSA. The court noted that some employers are looking to exploit their unpaid workers while others have developed a program that greatly benefits the interns. The Department of Labor, as amicus curiae, argued that each of the six factors in its Intern Fact Sheet were a requirement for interns to be legally unpaid.

The Decision:
The Court agreed with the Defendants that the question is whether the intern or the employer is the primary beneficiary of the relationship. The court proposed a non-exhaustive list of factors to aid in judicial analysis of the question. No factor is to be considered dispositive and every factor need not point in the same direction for the court to conclude an intern is not entitled to the minimum wage. The factors specified included:

1. The extent of the understanding that there is no compensation.

2. The extent to which the internship provides training similar to that provided in an educational environment.

3. The extent the internship is tied to a school’s educational program by integrated coursework or academic credit receipt.

4. The extent of accommodation to academic commitments by corresponding to the academic calendar.

5. The extent the internship is limited to a period providing beneficial learning.

6. The extent to which the intern’s work complements, rather than displaces, paid employees while providing significant educational benefit to the intern.

7. The extent to which the intern and the employer understand that there is no entitlement to a paid job at the conclusion of the internship.

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