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New test provides employers with more flexibility
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A new Department of Labor (DOL) test for determining when interns are employees who must be paid in accordance with the Fair Labor Standards Act (FLSA) has employers wondering if there might be a resurgence in unpaid internships.
The DOL on Jan. 5 adopted a "primary-beneficiary test" for determining whether interns are employees. The department abandoned a rigid test whose six parts all had to be met for someone to be considered an unpaid intern and not an employee.
"Because the new primary-beneficiary test relies on a more 'totality of the circumstances' approach than the previous six-factor test, unpaid internships may increase in prevalence as compared to recent years," predicted Franklin Wolf, an attorney with Fisher Phillips in Chicago.
But Charles Krugel, Esq., an attorney in Chicago, said, "I don't believe that unpaid internships will have a resurgence."
Under the old six-factor test, all of the following criteria had to be met for an internship to be unpaid:
[SHRM members-only toolkit: Employing Interns]
Four appellate courts rejected the DOL's six-part test because the FLSA's definition of employment is broad and is not a strict all-or-nothing test like the DOL used, noted Jim Paul, an attorney with Ogletree Deakins in St. Louis.
Wolf said the DOL's newly adopted primary-beneficiary test, used by the courts that rejected the six-factor test, does not require each of its seven factors to be met. The new test includes consideration of the extent to which:
"The new test is meant to eliminate confusion by aligning the DOL's position to that of the trend in case law and to give both businesses and DOL investigators more flexibility in examining internship programs," said Camille Olson, an attorney with Seyfarth Shaw in Chicago, Los Angeles and San Francisco. "It is also meant to take into consideration that nonmonetary benefits often flow to interns in connection with an internship relationship."
None of the seven factors in the primary-beneficiary test are yes/no questions, she emphasized. "They ask the extent to which each factor is met rather than whether a factor is met," she noted. The factors are used to determine which party—the intern or the company—is the primary beneficiary of the relationship.
If at least 51 percent of the benefits go to the intern, he or she is the main beneficiary and does not have to be paid, Krugel said.
He observed that unpaid internships arose following the Great Recession, when employers were cutting wages and benefits to survive. Increased regulation and enforcement of the FLSA on behalf of interns followed. Companies that relied on unpaid interns who should have been paid had to change their practices, he noted, and "many of the changes made to internship programs are now part of company culture."
That said, he acknowledged that there now are "improved conditions for unpaid internships."
Companies that choose to rely on unpaid internships should revise all program-related documentation—such as policies, advertisements and recruiting materials—to use the language of the seven factors in the primary-beneficiary test, Paul said.
Both the student intern and the business should sign agreements incorporating the same language, he added. "This way, a clear understanding of the relationship can be demonstrated without dispute and potential liability," he stated.
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