Thursday, December 2, 2021
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Despite ruling, rules on internship remain a mess

🕐 5 min read

The recent federal appellate decision on the employment status of summer interns has excited quite a controversy. In Glatt v. Fox Searchlight Pictures, the U.S. Court of Appeals for the 2nd Circuit softened considerably the impact of the Labor Department’s 2010 guidance on when interns of for-profit companies have to be paid. In particular, the panel ruled that interns need not be paid when they rather than the companies are the primary beneficiaries of the internship.

Reaction was swift, and hotly divided. Ross Perlin, writing in the New York Times, charged the judges with facilitating “an exploitative system in which colleges encourage or even require students to join in a race to the bottom, working for free under the guise of training and recruitment.” Economist Diana Furchtgott-Roth of the Manhattan Institute called the decision”good news for young people who want to get temporary work experience as a valuable qualification for permanent employment.”

Actually, the decision deserves neither the praise nor the derision it has received. It represents a mild, middle-of-the- road effort to clear up the chaos created by the Labor Department’s stance.

Let’s go back to 2010. In April of that year, the department issued a fact sheet to clarify when interns at for- profit companies must be paid. It included a six-part test drawn from Walling v. Portland Terminal Co., a 1947 Supreme Court case that held unpaid railroad brakemen trainees exempt from the Fair Labor Standards Act. The 2010 fact sheet, applying the same approach to interns, has the practical effect of banning unpaid internships except in the public and nonprofit sectors.

In the Glatt lawsuit, individuals who contended that their work for Fox was illegally unpaid, sought to certify as a class all interns who worked for various divisions of the company from 2005 to 2010. The federal district court, relying on the criteria in the 2010 fact sheet, granted partial summary judgment to the plaintiffs and conditionally certified the class.

The 2nd Circuit vacated and remanded, rejecting the Labor Department criteria. Instead, the panel wrote, “the proper question is whether the intern or the employer is the primary beneficiary of the relationship.” The court then articulated “a non-exhaustive set of considerations” — seven in all — that judges should use in determining whether an intern is an employee. I won’t take the space to list those “considerations” here. Suffice to say that the panel defended its test as one properly focused “on the educational aspects of the internship,” an approach that “better reflects the role of internships in today’s economy than the DOL factors.”

Although, for reasons I will get to, there is a deep conceptual problem at the heart of the Labor Department’s guidance, the critics of the Glatt decision have points in their favor.

In the first place, there is a sense in which nearly every summer internship carries an educational component. Even if the intern is only answering phones and making coffee, there will be a learning curve with respect to the details of both the work and the protocol in a particular department of a particular organization. Thus the judges have potentially exempted nearly every summer intern.

More important, the 2nd Circuit’s “primary beneficiary” test will likely prove impossible to apply. The opinion seems to consider work to be a zero-sum game. Either the worker or the boss is always winning, and so the court’s task is to figure out which.

This seems mistaken. Consider a paid employee who receives the market wage. Is the primary beneficiary the employer who profits from the employee’s labor? Or is the primary beneficiary the employee, who prefers the wage to not working? There is no objective answer to the question.

In the case of the intern, the matter is even more difficult. Once more, the company receives some benefit, even if that benefit is only the answering of phones and the fetching of coffee. The intern gets no money, but makes connections, receives training and burnishes her resume. It’s impossible to say who gets the better of the bargain. Very likely, both parties think the trade is worthwhile. In a market, that’s how exchanges are made.

Critics who say that the test is unworkable therefore have a point. Nevertheless, the Glatt decision, for all its weaknesses, does present the opportunity to revisit the problematic Labor Department position. The difficulty isn’t the criteria the department wants to apply to determine who is an employee. The difficulty is the criteria the department wants to apply to determine who is an employer.

The 2nd Circuit, in a footnote, explains that its ruling applies only to profit-making entities. The approach makes sense in light of the Labor Department’s guidance, which also applies only to the for-profit sector. What doesn’t make sense is the department’s near-complete walling off of the not-for-profit world as free to use interns without paying them.

As I have noted before, the statute expressly exempts some forms of unpaid work (volunteers at food banks, for instance), but the department, on its own initiative, added “an exception for individuals who volunteer their time, freely and without anticipation of compensation for religious, charitable, civic, or humanitarian purposes to non-profit organizations.” The fact sheet further explains: “Unpaid internships in the public sector and for non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible.” In practical effect, then, the Labor Department’s interpretation is that the statute forbids unpaid internships only at for-profit entities.

This distinction is unpersuasive. Under the department’s guidance, the government, a multi-billion-dollar foundation, a wealthy university and a national political campaign can all take on unpaid interns. A small local business cannot. As Perlin points out in his book”Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy,” the nonprofit sector too can be exploitative toward unpaid labor. It’s hard to see the basis for the department’s discrimination as anything other than a hostility to profit. The 2nd Circuit’s test has its problems, but the Labor Department’s 2010 guidance is indefensible.

— Stephen Carter is a Bloomberg View columnist and a law professor at Yale.

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