Employers have considerable leeway to use unpaid interns legally when the work serves an educational purpose, a federal appeals court ruled on Thursday, setting aside a lower court decision that the movie studio Fox Searchlight Pictures had improperly classified former workers as unpaid interns rather than employees.
The decision, which sends the case back to the lower court, could have broad ramifications for the way employers rely on unpaid labor. It erects large barriers to further class-action lawsuits by unpaid interns against companies where they had worked.
Two of the plaintiffs, Eric Glatt and Alexander Footman, had done work as unpaid interns connected to the movie “Black Swan” between 2009 and 2010, where their duties included copying documents, maintaining takeout menus, assembling furniture, taking out trash and, in one case, procuring a nonallergenic pillow for the movie’s director, Darren Aronofsky.
In 2011, Mr. Glatt and Mr. Footman filed a complaint in federal court alleging that Fox Searchlight had violated minimum wage laws and seeking to receive compensation for their labor. A third former Fox intern, Eden Antalik, eventually joined them to pursue a class-action claim.
In 2013, Judge William H. Pauley III of Federal District Court ruled that Mr. Glatt and Mr. Footman should have been classified as employees, citing a set of six criteria put forth by the Labor Department in 2010.
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The ruling led to a flood of claims by interns against the companies for whom they had performed uncompensated work. Many large employers, including NBCUniversal and Viacom, settled such claims for millions of dollars rather than litigating them at length in court.
The appeals court vacated Judge Pauley’s decision, arguing that he had applied an incorrect standard for determining whether a worker should be classified as an employee rather than an unpaid intern.
Writing for a three-judge panel of the United States Court of Appeals for the Second Circuit, Judge John M. Walker Jr. held that the Labor Department’s criteria were both out of date and not binding on federal courts.
He argued that the proper way to determine workers’ status was to apply a “primary beneficiary test” — a concept proposed by Fox in which the worker can be considered an employee only if the employer benefits more from the relationship than the intern.
Judge Walker wrote that he and his fellow judges on the panel “agree with defendants that the proper question is whether the intern or the employer is the primary beneficiary of the relationship.”
He further argued that the test should hinge largely on the internship’s educational benefits: for example, whether the internship was tied to the intern’s formal schooling and whether it occurred in an educational setting.
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The appeals court sent the case back to the lower court, which may be asked to rule again on the underlying facts of the case. But the lower court would have to rely on the standard that the appeals court laid out, rather than the Labor Department’s.
As a practical matter, Mr. Glatt and Mr. Footman are still likely to prevail in their case since neither was enrolled in an educational institution at the time of their internship. But the opinion raises the bar much higher for future interns who may seek to bring claims against their employers.
“On the positive side, the court was clearly focusing on ensuring that internships provide robust training programs,” said Rachel Bien, the lawyer representing Mr. Glatt and Mr. Footman. “But my concern is that the factors the court cites are divorced from the Fair Labor Standards Act’s broad definition of an employee,” as well as the standards laid out in the existing Supreme Court precedent on the issue.
The ruling also dims the prospects of Ms. Antalik’s class-action suit considerably. A test of whether the worker benefits more from a relationship than the employer, or vice versa, is much more likely to be applied individual by individual, appearing to undermine most class-action claims involving unpaid interns.
“Instead of using the clear standards of the Department of Labor, it leaves it on a case-by-case basis,” said Mr. Glatt, who has just completed law school. “Every intern who thinks something is questionable has to litigate it. It’s a terrible, terrible burden. Why burden the most vulnerable possible employee with all the heavy work?”