On July 2, 2015, in Glatt v. Fox Searchlight Pictures and Wang v. The Hearst Corporation, the Second Circuit Court of Appeals addressed when unpaid interns are “employees” entitled to compensation under the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL). This was a question of first impression for the Second Circuit. The plaintiff interns in Glatt argued that whenever an employer receives an immediate benefit from an intern’s efforts the intern is functioning as an employee. The U.S. Department of Labor, as amicus curiae in support of the plaintiffs, asserted that its exhaustive six factor test derived from Walling v. Portland Terminal, a nearly seventy year old Supreme Court case about prospective railroad brakemen, was the appropriate standard to use to assess whether an intern is an employee. The defendant employers urged the Second Circuit to consider an approach in which an intern is only an employee when the “primary beneficiary” of the internship is the employer rather than the intern. In an amicus brief in support of neither party, but submitted on behalf of the American Council on Education and five other organizations representing the collective interests of higher education institutions, Bond attorneys argued that the Department of Labor’s rigid six factor test is inappropriate in the intern context. The amici asked the Court to recognize the role that institutions of higher education play in assessing the value of an internship experience and adopt an analysis that focused on the “primary beneficiary” of the internship. A nuanced approach would, according to the amici, both preserve essential experiential learning opportunities and identify those internships that are exploitative. Institutions of higher education have long understood that real-world experiences offered by internships, combined with classroom instruction, best prepare students to become productive members of the workforce. Many colleges and universities integrate internships into their curriculum, also recognizing that competitive job applicants are those who have not just spent four years in the bubble of academia, but can also cite real-world experience. The amici, concerned with preserving as many legitimate internship experiences as possible, further pointed out that student-interns, upon their return to campus, often share their varied experiences in the classroom to the benefit of their peers as well as the institution, which becomes a more vibrant center for learning because of the experiences of its students. In Glatt and Wang the higher education community cautioned against an outcome that would unduly pressure employers to end unpaid internship programs because of concerns about FLSA and NYLL liability. The Second Circuit ultimately rejected the Department of Labor’s rigid six factor test and instead created a multi-factored, non-exhaustive set of considerations that while consistent with the spirit of Portland Terminal focuses on the “primary beneficiary” of the intern-employer relationship. The Second Circuit’s non-exhaustive set of considerations as articulated in Glatt are:

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 institution;
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 Second Circuit, in these cases, recognized the importance of preserving experiential learning opportunities. Its non-exhaustive set of factors outlined in Glatt is a compromise that will help achieve two important goals of the higher education community: protecting interns from exploitative practices and preserving essential hands-on learning opportunities. For more on Wang and Glatt see Bond’s July 7, 2015 post here.

The U.S. Department of Labor recently released its highly anticipated proposed rule on the Fair Labor Standards Act white-collar overtime exemptions, along with a fact sheet summarizing the proposed rule.  The good news for colleges and universities is that “teachers” will still not be subject to any salary level or salary basis requirements in order to qualify as exempt employees. The USDOL did not propose any changes to the teaching professional exemption, which applies to any employee who is engaged in the primary duty of “teaching, tutoring, instructing or lecturing in the activity of imparting knowledge” in an educational establishment by which the employee is employed, regardless of whether the employee is paid on a salary basis or at a minimum salary level. The bad news is that the proposed rule more than doubles the salary requirement to qualify for other executive, administrative, professional, and computer employee exemptions, from the current level of $455 per week to an amount that is expected to be $970 per week by the first quarter of 2016.  Employees who perform “administrative functions directly related to academic instruction or training in an educational establishment” will continue to fall within the administrative exemption if they meet the new salary level requirement or if they are compensated on a salary basis at a level which is at least equal to the entrance salary for teachers in the educational establishment by which they are employed. It also significantly increases the salary threshold to qualify for the “highly compensated employee” exemption.  The proposed rule also includes a procedure to automatically raise the minimum salary levels to qualify for the white-collar exemptions from year to year without further rulemaking.  The USDOL estimates that nearly five million employees who are currently classified as exempt will immediately become eligible for overtime pay if the proposed rule is adopted as the final rule. USDOL also estimates that average annualized direct employer costs will total between $239.6 and $255.3 million per year, depending on the updating methodology although certain transition strategies may help control and/or alleviate these costs. The USDOL is proposing to set the salary requirement to qualify for the executive, administrative, professional, and computer employee exemptions at the salary level equal to the 40th percentile of earnings for full-time salaried workers, and the salary requirement to qualify for the highly compensated employee exemption at the salary level equal to the 90th percentile of earnings for full-time salaried workers.  The USDOL used data compiled by the Bureau of Labor Statistics from 2013 in drafting the proposed rule, which provides for a minimum salary level of $921 per week to qualify for the executive, administrative, professional, and computer employee exemptions, and a minimum salary level of $122,148 per year to qualify for the highly compensated employee exemption.  However, the USDOL stated in its Notice of Proposed Rulemaking that it will likely rely on data from the first quarter of 2016 if the proposed rule is adopted, which will result in a projected minimum salary level of $970 per week to qualify for the executive, administrative, professional, and computer employee exemptions. There was some speculation that the duties requirements would also be revised to make the exemptions more restrictive, but the USDOL’s proposed rule does not include any revisions to the duties requirements to qualify for any of the white-collar exemptions.  However, the USDOL stated in its Notice of Proposed Rulemaking that it is nevertheless seeking comments on whether the duties tests are working as intended to screen out employees who are not bona fide executive, administrative, or professional employees.  So, there is still a possibility that the duties requirements could be revised based on comments received by the USDOL about the proposed rule. Notwithstanding that the proposed salary level changes do not impact teachers, colleges and universities, like most other employers, undoubtedly have a number of non-teaching positions currently classified as exempt which fall between the current $455 per week salary level and the proposed $970 per week salary level that they should immediately begin assessing. Certainly one purpose behind this review should be to determine whether to raise the salary level of some of these positions should the regulations become finalized, in order to keep the exemption. In some cases, an institution may determine that the increase to $970, especially when coupled with little or no “overtime” work for the position, is such that it makes more sense to simply convert those positions to hourly.   The proposed rule should also serve as impetus for institutions to review their exempt classifications generally, to make sure that they are comfortable with their assessment of where these positions stand in light of the duties test. Application of the FLSA’s exemption is often a complicated and very fact specific analysis, which isn’t always repeated as jobs change over time. As a result, it is not uncommon for all employers to have at least some misclassified positions. Now would be a good time for institutions to look at all of their exempt positions from both a duties and salary perspective.