Articles Posted in Corporate Spotlight

Given that the name of this site is CommLawCenter, our focus is generally on communications law and regulation.  More accurately, however, our focus is on legal developments that affect the media and telecom industries, even when they emanate from entities other than Congress or the FCC.  This is particularly true where a change in non-communications laws could have an outsize impact on the communications industry.  For that reason, we have in the past written about changes involving a variety of employment matters, including who is entitled to overtime pay and when does an intern need to be paid?

Because of that industry focus, being a good communications lawyer often requires more subject matter versatility than most lawyers will ever need.  However, it is certainly helpful to also have access to the excellent group of employment lawyers at Pillsbury, which brings me to today’s topic–last week’s release by the Department of Labor of a new final rule replacing the prior test for determining whether a worker is an employee (entitled to overtime and other benefits) or an independent contractor under the Fair Labor Standards Act.

The new DOL rule restores the six-factor “economic realities” test used during the Obama administration, which generally makes it harder to classify a worker as an independent contractor by focusing on the degree to which the worker is economically dependent on the “employer.”  This replaces the two-factor test adopted by the DOL during the Trump administration, which focused principally on two factors–the employer’s degree of control over the work and the worker’s opportunity for profit and loss.

The six factors of the new test are:

1. The opportunity for profit or loss depending on the worker’s managerial skill
2. Investments by the worker and the potential employer in the work being produced
3. The degree of permanence of the work relationship
4. The nature and degree of the worker’s control over the work
5. The extent to which the work performed is an integral part of the potential employer’s business
6. Whether the work performed requires special skills or initiative

A far more detailed description of the new test and how each of these factors enters into the determination (and may interact with a state’s own employment laws) can be found in a pithy advisory from Pillsbury’s employment team on the subject: Employers Face Greater Misclassification Risk Under Resurrected Federal Independent Contractor Rule, Opening Door to Substantial Liability.  It is well worth the read, particularly given the substantial costs and penalties faced by businesses found to have misclassified employees as independent contractors.  It is also time to review your prior classifications of workers as independent contractors to make sure they still hold up under the new rule.

Back in 2015, I wrote a post on CommLawCenter discussing the prevalence of interns in the communications industry, and the Department of Labor’s crackdown on businesses illegally failing to pay their interns.  That crackdown began in 2010, with the DOL applying a rigid six-part test to determine whether an intern must be paid at least minimum wage for time spent working.  This caused a lot of consternation in media companies, with many electing to just drop internship programs rather than risk a violation of the Fair Labor Standards Act.  For those media companies, and the students that faced a suddenly diminished number of available internships, an announcement this past week from the Department of Labor will be welcome news.

When the Department of Labor stepped up enforcement against for-profit businesses illegally using unpaid interns, it released a Fact Sheet on whether an individual could be classified as a trainee or intern exempt from the Fair Labor Standard Act’s requirement that employees be paid at least the federal minimum wage and receive overtime pay. The Fact Sheet laid out the six-part test that the DOL adopted in the 1960s, noting that “[i]nternships in the ‘for-profit’ private sector will most often be viewed as employment” unless all six of the criteria are met. The six criteria were:

• the internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;

• the internship 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 that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;

• the intern is not necessarily entitled to a job at the conclusion of the internship; and

• the employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

From the DOL’s perspective, if an employer couldn’t demonstrate that all six factors were met, the intern was an employee, and the employer would be liable for paying the intern wages and overtime.

The reason I wrote about the crackdown in 2015, however, was because of a then-recent ruling by the U.S. Court of Appeals for the Second Circuit which found the Department of Labor’s test too rigid, and instead applied a more flexible standard that assessed whether the business or the intern was the “primary beneficiary” of the arrangement.  Specifically, the court examined whether the internship was primarily for the economic benefit of the employer or primarily for the educational benefit of the intern.

As I noted at the time, that was good news for businesses in New York, Connecticut, and Vermont, which are within the Second Circuit’s jurisdiction, and potentially for businesses elsewhere, as the U.S. Court of Appeals for the Second Circuit is influential.  The logic of its ruling might well persuade courts in other circuits to follow suit.

That did in fact happen, with the California-based Ninth Circuit court recently becoming the fourth circuit to adopt the “Primary Beneficiary” test.  Recognizing this judicial tide, the Department of Labor announced on January 5, 2018 that it is also adopting the Primary Beneficiary test.  It indicated it was doing so both to comply with these court rulings and to eliminate the confusion of dueling tests that depend on what part of the country a business is located.

While I have had to learn a lot about employment law in handling mergers, sales, and other media transactions, I am not an employment lawyer, have not played one on TV, and did not stay at a Holiday Inn Express last night.  I would therefore encourage those interested in getting the full details of the DOL’s announcement to take a look at a new Employment Advisory on the subject by Pillsbury’s own Julia Judish and Andrew Lauria.  In particular, you should note their admonition that this only changes the federal standard, and if your state has a more restrictive standard, you will need to take that into consideration.

Among other things you will learn is that the DOL, in classic government fashion, replaced the rigid six-factor test with a seven-factor test.  The big difference, however, is that the old test required every factor to be met, whereas the new test has seven factors for consideration (along with any other factors that might be relevant to a particular intern), with no single factor being determinative of the outcome.  For example, if your internship program met five of the six old factors, but you couldn’t prove that the internship yielded no “immediate advantage” to the business and that the intern might actually impede your operations, the new test may be more to your liking.

So if you discontinued your internship program because you couldn’t show all six factors favored a finding that the position was correctly categorized as an unpaid internship or, as was often the case, you just didn’t want to risk having to defend yourself against a lawsuit for unpaid wages, you may want to revisit that decision.  If an objective review would find that the business is the primary beneficiary of the internship, you’ll still need to pay wages and overtime to your interns.  But if you are comfortable (after checking with counsel of course) that the primary beneficiary is the intern, then it is time to relaunch your internship program and introduce a whole new generation to the wonders of the media workplace.  Maybe, just maybe, they will then become your ambassadors to a new generation that doesn’t really know what to make of any media that doesn’t have the word “social” in front of it.

Interns are a perennial part of the media landscape, and you have probably heard a lot over the last few years on the subject of unpaid interns. Specifically, that unless they qualify as genuine interns under a six-part Department of Labor (DOL) test, businesses are required to treat them (and therefore pay them) as employees.

The resurgence in interest in the subject came in early 2010 when the Department of Labor began stepping up enforcement against for-profit businesses illegally using unpaid interns. In April of 2010, the DOL’s Wage and Hour Division released a Fact Sheet providing guidance on when an individual can be classified as a trainee or intern exempt from the Fair Labor Standard Act’s requirement that employees be paid at least the federal minimum wage and receive overtime pay. The Fact Sheet dutifully laid out the six-part test that the DOL adopted in the 1960s, noting that “[i]nternships in the ‘for-profit’ private sector will most often be viewed as employment” unless all six of the criteria are met. The six criteria are:

• the internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;

• the internship 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 that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;

• the intern is not necessarily entitled to a job at the conclusion of the internship; and

• the employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

From the DOL’s perspective, if an employer can’t demonstrate that all six factors are met, that intern is an employee, and the employer is liable for unpaid wages.

However, if you operate in New York, Connecticut, or Vermont, the rules have now changed, and if you operate in one of the other 47 states, change may be on the way. In a case launched by unpaid interns that worked on the film Black Swan, the influential U.S. Court of Appeals for the Second Circuit last week rejected the DOL’s test as too rigid. In doing so, the Second Circuit overturned a lower court’s certification of class actions on behalf of the unpaid interns, finding that the question of employment status is a “highly individualized inquiry” poorly suited to a class or collective action.

As discussed in much more detail in a Pillsbury Client Alert from our own Julia Judish and Osama Hamdy, the Second Circuit chose instead to adopt a “Primary Beneficiary” test, which “focuses on what the intern receives in exchange for his work” and “also accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.” Simple, right?

Business owners might justifiably complain that the court replaced a complicated six-part subjective test with a simpler but even more subjective test. However, the Pillsbury Client Alert lays out a number of considerations suggested by the court for determining whether an intern is the primary beneficiary of the relationship with the employer, including an increased focus on the connection between the internship and the intern’s academic course of study.  The court wrote that

[b]y focusing on the educational aspects of the internship, our approach better reflects the role of internships in today’s economy than the DOL factors, which were derived from a 68‐year old Supreme Court decision that dealt with a single training course offered to prospective railroad brakemen.

While a number of the considerations suggested by the Second Circuit are similar to those in the DOL test, the difference is that the court’s test provides the flexibility to look at other factors that might be relevant to answering the question, and unlike the DOL test, does not consider the absence of any one factor to be determinative of an intern’s status under the Fair Labor Standards Act.

Rather than listing the court’s suggestions for factors that might (in addition to others) be considered, let me suggest you take a look at the Client Alert. It not only outlines those factors, but suggests a number of steps businesses can take to clarify their relationship with unpaid interns, whether they are subject to the DOL or the Second Circuit criteria.

The good news for employers is that the Second Circuit’s test (which for the moment only applies in the Second Circuit’s jurisdiction of NY, CT, and VT) allows a business to present any information relevant to demonstrating that the unpaid intern is not an employee. The bad news is that the unpaid intern has that same flexibility in seeking to prove he or she is really an employee that needs to be paid.  In addition, employers in these states face an increased risk of misclassification claims for internships not connected with an academic program.  Making sure your business has done all it can to end up on the right side of that analysis is your next challenge.

Being businesses built upon the value of information, and working constantly to create new business models aimed at monetizing that information, the communications industry tends to be very careful about letting any form of information leave the building. That, along with the highly competitive nature of the industry, means many industry players keep a very tight grip on all business-related information. As a result, the communications industry often ranks up there with defense contractors in imposing broad confidentiality restrictions on their employees, either by contract or through general corporate policy.

There are times, however, when the government has determined that public policy considerations outweigh the need of a business for secrecy. The most obvious exceptions come in the form of subpoenas and search warrants. However, there are also more subtle exceptions, one of which is addressed today in a Pillsbury Client Alert from our employment and litigation practices. The Client Alert addresses a number of decisions that have been coming out of the National Labor Relations Board, several of which found that the respective employer’s confidentiality policies violated the National Labor Relations Act because the policies could be read to prohibit employees from discussing wages, benefits, or other terms and conditions of employment with anyone else.

Under the National Labor Relations Act, such confidentiality restrictions are illegal, largely because they impede employees from engaging in collective bargaining or other employee protection activities. For those who are about to breath a sigh of relief after thinking to themselves “this doesn’t affect me since my business isn’t unionized,” hold that breath for a moment. As the Client Alert points out, while it is true that the National Labor Relations Act, and the National Labor Relations Board, are known mostly for their union-related jurisdiction, the National Labor Relations Act applies to all private employers that affect interstate commerce, not just union shops.

As the federal government’s regulation of much of the communications industry, particularly broadcasting, is based upon the interstate nature of those businesses (even where a station’s service area is entirely within a single state), it is safe to say there are few in the communications industry that are not subject to these recent rulings. In fact, while I won’t attempt to summarize the Client Alert here, as it is brief and well worth taking the time to read, I will note that one of the decisions discussed involves a player in the communications industry whose confidentiality policy was actually found to be acceptable.

In light of these recent decisions, all businesses should take a look at their confidentiality policies to determine whether they can be read to prohibit, for example, employees from discussing their salaries, raises and bonuses with each other. If the confidentiality policy is written so broadly as to unintentionally prohibit such activities, a rewrite of that policy is in order. In contrast, if the very notion of employees discussing their salaries with each other gives you heartburn, and your confidentiality policy is specifically targeted at preventing such conversations, then you have a more extensive policy rewrite ahead of you, and a lot more heartburn coming.