Second Circuit Adopts Unpaid Internship vs. Employee Test

Following the trial court victory in 2013 of unpaid interns of Fox Searchlight Studios, who argued that the studio had in fact treated them as employees (and therefore the interns were entitled to overtime and other employee benefits), the Second Circuit on the studio’s appeal has recently upended the trend towards restricting the use of unpaid internships.

The Second Circuit (which covers Vermont, New York, and Connecticut) rejected both the interns’ argument that a worker should be deemed an employee whenever the business derives an immediate advantage from work done by the intern, as well as the U.S. Department of Labor’s argument (made in an amicus brief to the court) that interns should be deemed employees whenever the employer fails to satisfy any of the six factors from the DOL’s Intern Fact Sheet (relied upon by the trial judge in making the initial determination in the case), which include:

– the internship is similar to training given in an educational environment

– the experience is for the benefit of the intern

– the intern does not displace regular employees, but works under close supervision of existing staff

– the employer derives no immediate advantage from the intern’s work, and the employer’s operation may occasionally be impeded by the internship

– the intern is not necessarily entitled to a job at the conclusion of the internship

– the inter and employer understand that the intern is not entitled to wages or benefits

Instead, the Second Circuit adopted a “primary beneficiary test”, which instead focuses on the benefits received by the intern, while also examining the reality of the nature of the relationship between the intern and employer. The Second Circuit enumerated several non-exclusive factors to consider, including:

– the extent to which intern and employer understand there is no expectation of compensation; any promise of compensation, express or implied, suggests an employment relationship, while the lack of promise suggests an internship

– the extent to which intern and employer understand that there is no expectation of a paid position at the end of the internship

– the extent to which the internship provides training similar to that provided in an educational environment

– the extent to which the internship is related to the intern’s formal education program through integrated coursework or the receipt of academic credit

– the extent to which the internship accommodates the intern’s academic calendar and obligations

– the extent to which the internship is limited in duration to the period in which the intern receives beneficial learning

– 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

While the Second Circuit’s factors largely track those of the DOL’s Fact Sheet, there appears to be a greater acceptance for interns performing work that benefits the employer, so long as paid employees are not displaced and the work provides educational benefits for the intern.

It remains to be seen whether similar suits in other federal circuits are ruled upon similarly by those courts. If not, the circuit split will ultimately have to be resolved by the Supreme Court. In addition, different states have adopted different laws and tests relating to unpaid internships, so unpaid interns in some states may have viable state wage law claims. In any event, employers looking to bring on unpaid interns should consider both the U.S. DOL’s as well as their state DOL’s guidelines regarding unpaid internships.

Proposed Revisions to Overtime Rules Under FLSA

A few weeks ago, the Obama Administration published proposed rules that would change the rules for qualifying a salaried employee as exempt from overtime rules. The rules will soon be open for public comment, with the aim of issuing final regulations that would become effective early next year.

Under the proposed rules, the minimum weekly salary a salaried white-collar employee could earn while being exempt from overtime rules would rise from $455 per week to $970 per week — therefore, salaried white-collar employees earning under $970 a week would be eligible to earn overtime pay. The proposed rules also include mechanisms to automatically raise the minimum salary levels in step with inflation, to avoid the current situation where the salary levels become outdated.

Although the goal of the new regulations would be to lead to an increase in wages for overtime-exempt employees, employers will have to weigh the costs of bringing on additional workers to avoid paying overtime, which also include additional benefits requirements (such as those required under the Affordable Care Act). It remains to be seen what issues these proposed regulations will have for employers (which they are likely to bring up during the comment period) and how employers will adjust.

The New Massachusetts Earned Sick Time Law

A few weeks ago, the Massachusetts Attorney General’s office issued final regulations for the new Earned Sick Time Law, setting the deadline for compliance for qualifying employers.

The Earned Sick Time Law applies to employers in Massachusetts with at least 11 employees — this includes part-time, temporary, and seasonal employees — in any 20 total weeks or 16 consecutive weeks during the company’s calendar year. Employers are required to give all employees, after a 90-day trial period after the commencement of employment, one hour of paid sick time for every 30 hours worked. If the employee works for the company both within and outside of Massachusetts, the employee’s total hours working in all locations must be counted.

Up to 40 hours may be earned by the employee in a calendar year — the employer is required to inform the employee upon starting employment what the “calendar year” of the employer will be. Exempt full-time employees are considered to have worked 40 hours in a week, while exempt part-time employees are considered to have worked the hours they were scheduled.

Employers are required to keep track of the accrual and use of paid sick time. They may only require medical verification from the employee only after the employee has used paid sick time for at least 24 consecutively scheduled work hours (so for example, if an employee is scheduled for 8-hour daily shifts Monday through Friday, and the employee take Monday through Wednesday off, the employer can require medical verification; however, if the employee takes Monday and Tuesday, returns to work Wednesday, then takes Thursday off, the employer cannot require medical verification).

Employees may used paid sick time for their own illness (this includes to address the effects of domestic violence), or to care for an ill family member, or to attend the employee’s or a family member’s medical appointment.

Finally, employers are not required to pay out unused paid sick leave upon the employee’s termination, but must include notice of this in its earned sick time policy.

Employers who believe they may be subject to the Earned Sick Time Law, or who already have an existing paid sick time policy, should review their policies to determine whether they are required to comply with the new law. Once policies are put in place, they should be examined to ensure that they are in compliance with the Law’s standards, as well as in compliance with other medical leave policies the employer may be subject to, such as the federal Family Medical Leave Act.

Mass. Permits Enforcement of Arbitration Agreements By Third Parties

Last month, the SJC reaffirmed an aspect of Massachusetts arbitration law that permits a party to enforce an arbitration agreement against a party that signed the agreement, even though the enforcing party was not a party to the agreement. In Machado et al. v. System4, the SJC upheld the right of System4 to compel the plaintiffs to arbitrate their claims, based on an arbitration provision in franchise agreements the plaintiffs had with another entity, NECCS, which plaintiffs alleged existed solely to do the business of and was the agent of System4. 

The SJC ruled that because the plaintiffs’ claims arose out of the franchise agreements (specifically, the plaintiffs alleged that under the franchise agreements, System4 and NECCS misclassified them as independent contractors. The SJC held that the plaintiffs could not fairly attempt to seek relief relating to the franchise agreements, yet at the same time deny and attempt to avoid the arbitration clause in the same franchise agreements, given especially that the plaintiffs had in their allegations lumped together both System4 and NECCS, the other party to the franchise agreements.

It would be interesting to see how Massachusetts courts would apply this precedent in cases where there is not such a close link between the non-party defendant attempting to enforce arbitration and the actual party to the arbitration agreement. Most states and federal law in the realm of arbitration holds that arbitration is favored, but can only be enforced where the parties have agreed to arbitrate. Could plaintiffs be compelled to arbitrate if they argue that they never agreed to arbitrate against the defendant, even if the plaintiffs’ claims arise out of an agreement with an arbitration provision, but the defendant has a more tenuous link with the other party to agreement than existed between System4 and NECCS?

Further reading:

Massachusetts Finds Workers to Be Independent Contractors and Reaffirms State Test

Some consider Massachusetts to have the highest standards for classifying workers as independent contractors, rather than as employees by default. However, the Supreme Judicial Court recently ruled that taxi drivers in Boston were properly classified as contractors. In its ruling, the SJC reaffirmed the state law qualification test for independent contractors, known as the “ABC test”.

Under the ABC test, a worker is presumed to be an employee, and can only be classified as an independent contractor if all three of the following factors can be shown:

1) The worker is free from control and direction in the performance of her/his services (both under the terms of the contract for services as well as in actual practice).

2) The services performed are outside the usual course of business for the entity receiving the services.

3) The worker is customarily engaged in independently providing services of the same nature.

The court ruled that taxi drivers were not employees of the taxi garages, since the drivers provided no services to the garages, nor were they employees of the medallion owner companies or the dispatch companies, since the dispatch companies provided services to the medallion owners, who then leased their medallions to drivers (with the condition that drivers use the medallion owner’s dispatch company), and the leases were based on a flat fee (rather than fares received) that mean that the drivers were not engaged in the usual course of the medallion owner’s business.

Massachusetts’ ABC test contains three of the more prominent factors of the IRS and Department of Labor tests for independent contractors. However, the difference is that while each factor could separately and independently support a determination that a worker is an independent contractor, the ABC requires that all three factors are met. 

The SJC’s ruling serves as a reminder of the difficulties for a company to properly classify its workers as independent contractors. 

Further reading: