Category: Labor

Compensation Obligations for Vocational Students and Unpaid Interns under the FLSA

Ryan Savercool

Young professionals enroll in vocational programs and internships to gain hands-on experience that is required for licensure or to obtain an advantage over their peers in the marketplace for coveted jobs.  These individuals, oftentimes students, “work” for no remuneration beyond academic credit or the incremental advancement towards completion of the program.  Recently, interns and vocational students have filed class action lawsuits contending that some employers and vocational schools have violated the Fair Labor Standards Act (“FLSA”) by failing to pay them as “employees.”  Thankfully, guidance on this issue has emerged from the federal courts and the Department of Labor (“DOL”). 

The FLSA requires employers to pay all “employees” a specified minimum wage and overtime of time and one-half for hours worked in excess of forty hours per week.  However, the FLSA defines “employee” somewhat vaguely as an “individual employed by an employer.”  29 U.S.C. § 203(e)(1).  Federal courts and the DOL have applied a “primary beneficiary” test to determine whether an intern or vocational student is an “employee” covered by the FLSA.  Recent decisions from the Second Circuit are illustrative of how courts resolve this issue.

In Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528, 536-37 (2d Cir. 2016), the Second Circuit adopted seven non-exhaustive factors to determine whether an intern is an “employee”:

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 — and vice versa.

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.

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 court stressed that “[n]o one factor is dispositive and every factor need not point in the same direction for the court to conclude that the intern is not an employee entitled to the minimum wage. 

            More recently, in Velarde v. GW GJ, Inc., — F.3d — (2d Cir. Feb. 5, 2019), the Second Circuit extended the application of the primary beneficiary test to individuals enrolled in for-profit vocational schools, and held that a former cosmetology student was not entitled to unpaid wages from the for-profit vocational school he attended while in pursuit of his state cosmetology license.  The Second Circuit held that the primary beneficiary test “is equally suitable for distinguishing between ‘employees’ and ‘bona fide students’ of vocational schools or vocation-related programs (such as a training salon) where trainees acquire necessary skills by practicing their craft in a real-world setting.”  Id. at 10.  “Like interns,” the Court explained, “vocational students enter a course of study with ‘the expectation of receiving educational or vocational benefits that are not necessarily expected with all forms of employment.’”  Id. at 10-11 (quoting Glatt, 811 F.3d at 536). 

            In its opinion, the Velarde Court made the following observations:

  • “a vocational school is more likely to be found to ‘employ’ its students if it does not have a ‘formal education program’ with ‘integrated coursework,’ and instead exclusively requires students to perform tasks that are the same as those done by regularly compensated employees”;
  •  “a vocational school that runs a training program whose duration far exceeds ‘the period in which the program provides the student with beneficial learning’ may well be the primary beneficiary of that relationship.”
  • “state licensing requirements may often serve as strong evidence of the amount of practical training necessary for a student to become a competent professional, but will not always be determinative.”

            The Court rejected the plaintiff’s assertions that he should have been able to allocate his time differently among the various areas of study and that he should not have been required to do clerical and janitorial tasks:

That a vocational school does not provide the optimal learning experience for a student does not necessarily transform it into the primary beneficiary of the relationship. This is especially so where the school (as did the Academy here) provides a state-accredited course of vocational study, requires no more than the number of hours specified by the state, the state’s required numbers of hours are not challenged as unreasonable, and the school adequately prepares students for that state’s licensure exam . . . .

The Court concluded that“[t]his is not a case in which a business uses the façade of a vocational school to deceive students into working unexpectedly long hours without compensation, replacing the labor of its paid employees, or working hours well beyond the long-standing state requirements.”  Id. at 16-17.

            Accordingly, vocational schools and for-profit entities should familiarize themselves with the primary beneficiary test when designing academic programs. Courts determine compensation obligations under the FLSA on a case-by-case basis by analyzing the economic realities of the parties’ relationship.  In the vocational school setting, adherence to licensing requirements is probative evidence of the student’s status as the primary beneficiary of the relationship.   

Joint-Employer Status: The National Labor Relations Board Set to Change Standard (Again)

On September 14, 2018, the National Labor Relations Board (NLRB) published a Notice of Proposed Rulemaking addressing its joint-employer standard, which governs when two distinct business entities will be considered a joint employer under the National Labor Relations Act (Act).  Under the Proposed Rule, the NLRB would return to its long-standing test that an entity must both possess and exercise direct control over employees’ terms and conditions of employment in order to be considered a joint employer.  The effect of the Proposed Rule would be to avoid unintentionally drawing third parties, who have not played an active role in deciding wages or other essential terms and conditions of employment for employees of a separate entity, into a collective-bargaining relationship.  With the Proposed Rule’s imposition of a more concrete and stringent standard, businesses will have greater certainty that they will not be held jointly and severally liable for unfair labor practices committed by their business partners.  Although this development should be of particular interest to franchisors and entities that utilize the services of vendor employees and staffing agencies, it has the potential to affect all entities covered by the Act.

The Act does not define the term “joint employer,” which has prompted an ongoing dispute over how to address situations where the working conditions of a group of employees are affected by two separate companies engaged in a business relationship.  For over thirty years, a joint-employer relationship arose if two independent business partners shared or codetermined those matters governing employees’ essential terms and conditions of employment; the putative joint employer possessed the right to control the terms and conditions of its business partner’s employees’ employment; and the putative joint employer exercised that control directly, immediately, and in a broad manner.

That changed in 2015 when the NLRB issued its decision in Browning-Ferris Industries of California.  In that decision, the NLRB greatly expanded the joint-employer standard by holding that the “right to control” any matter governing the “essential terms and conditions of employment” in and of itself is “probative of joint-employer status.”  No longer was direct control or the exercise of control required; a company could be deemed a joint employer even if its “control” over the essential working conditions of another business’s employees was indirect, limited, and routine, or was contractually reserved, but never exercised.  The Browning-Ferris decision thus rests on the premise that the rights of employees under the Act are best advanced if an independent business partner (the putative joint employer) participates in the collective-bargaining process any time that business partner has the potential to impact, even in a limited fashion, the represented employees’ terms and conditions of employment.

The relaxation of the standard prompted an appeal to the D.C. Circuit, which remains pending.  Shortly after the appeal was filed, a newly recomposed majority of the NLRB overruled Browning-Ferris in Hy-Brand Industrial Contractors, Ltd., and restored the preexisting standard that required proof that a joint employer actually exercised direct and immediate control in a manner that was neither limited nor routine.  The return to prior precedent was short-lived.  On February 26, 2018, the NLRB vacated its decision in Hy-Brand for reasons unrelated to the merits of the decision.   The vacatur of Hy-Brand effectively reinstated Browning-Ferris.

Now, a majority of the NLRB has resolved to address the issue and overrule Browning-Ferris through rulemaking.  If adopted, the Proposed Rule will require a finding that the putative joint employer “possess[ed] and actually exercised[ed] substantial direct and immediate control over the employee’s essential terms and conditions of employment” before a joint employer relationship is established.  Accordingly, businesses and employers should welcome the new standard as it will provide greater clarity to joint-employer determinations and ensure that only those employers who can meaningfully contribute to collective bargaining are at the table.

The Notice of Proposed Rulemaking, along with the full text of the Proposed Rule, is available here.  Following the Notice and Comment period, the NLRB may adopt its proposed joint-employer standard in a final rule, issue a supplemental proposed rule, or terminate the rulemaking process.  Until a final rule is adopted, a majority of the NLRB overrules Browning-Ferris, or, perhaps, the D.C. Circuit Court of Appeals renders a decision, the joint employer standard continues to be governed by the expanded Browning-Ferris definition.  Given this state of flux, all employers should carefully watch developments in this area.