By PETER KNOPP, J.D.
Contributing Editor, Best Practices in Compensation & Benefits
Many employers take on unpaid students or recent graduates as trainees in the
hope of discovering good workers whom they can add to their paid workforce at
the end of the training period. The students may be glad to participate in the
training program without pay (and even work their heads off) because of the
job experience they will gain, as well as the possibility of being asked to
stay on as full-time, salaried employees after the training program is over.
Since the students have no expectation of being paid and are so happy to be
in the training program, the employers may assume that the Fair Labor Standards
Act (FLSA) is not relevant to this arrangement. That assumption "ain't
necessarily so." Before trying to get too much of a good thing, employers
should make certain that their unpaid trainees will not be considered "employees"
under FLSA. If they are, the employer will be subject to liability under FLSA
unless it has complied with FLSA's minimum wage and overtime requirements.
Who is an employee under FLSA? While employees are protected by FLSA,
the law defines "employer" and "employee" only in the broadest
of terms. Under FLSA, an "employer" includes "any person acting
directly or indirectly in the interest of an employer in relation to an employee"
(29 U.S.C. s.203(d)). An "employee" is "any individual employed
by an employer" (29 U.S.C. s.203(e)(1)). To "employ" is "to
suffer or permit to work" (29 U.S.C. s.203(g)).
Are trainees employees? FLSA neither defines trainees nor provides specifically
that trainees are not employees covered by the Act. Supreme Court decisions
and regulations of the Department of Labor, however, have developed an exclusion
from FLSA for trainees.
The Supreme Court, in Walling v. Portland Terminal Co., 67 S.Ct. 639
(1947), held that FLSA was "obviously not intended to stamp all persons
as employees, who, without any express or implied compensation agreement, might
work for their own advantage on the premises of another." The workers in
that case were being trained as railroad brakemen in a training period lasting
one week. The Court concluded that these trainees did not fall within FLSA's
definition of employee because the employer did not receive any immediate benefit
from the work done, and the trainees had no expectation of getting paid.
The economic reality. The Supreme Court elaborated on this case in its
holding in Tony and Susan Alamo Foundation v. Secretary of Labor, 471
U.S. 209 (1985). The Court noted: "The test of employment under [FLSA]
is one of economic reality." The Alamo case involved individuals who worked
for long periods of time for a nonprofit religious foundation. They received
no wages but didreceive food, clothing, and shelter. So the "economic reality"
was that, though the individuals weren't being paid cash, they were receiving
wages in another form and, therefore, were employees under FLSA.
DOL's six-part test. After the Court's holding in Portland Terminal,
DOL's Wage and Hour Division issued a six-part test to guide the determination
of whether a trainee is in fact an employee under FLSA. The test, in relevant
"Whether trainees or students are employees of an employer under the Act
will depend upon all of the circumstances surrounding their activities on the
premises of the employer. If all of the following criteria apply, the trainees
or students are not employees within the meaning of the Act:
1. The training, even though it includes actual operation of the facilities
of the employer, is similar to that which would be given in a vocational school.
2. The training is for the benefit of the trainees or students.
3. The trainees or students do not displace regular employees, but work under
their close observation.
4. The employer that provides the training derives no immediate advantage from
the activities of the trainees or students, and on occasion, his operations
may actually be impeded.
5. The trainees or students are not necessarily entitled to a job at the conclusion
of the training period.
6. The employer and the trainees or students understand that the trainees are
not entitled to wages for the time spent in training." (See Wage &
Hour Manual (BNA) (1975).)
Lessons to be learned. One can see that the hypothetical situation described
at the outset of this article may not exempt the employer from liability under
FLSA. Even though the so-called "trainees" may not be expecting to
get paid and may be glad to work just for the experience and possibility of
future full-time work, there could be a situation where they are deemed "employees"
under FLSA if the employer derives "immediate advantage" from their
A Note on Independent Contractors. Independent contractors, like trainees,
are neither defined by nor specifically excluded from FLSA. Based on the Supreme
Court's decision in United States v. Silk, 331 U.S. 704 (1947), the courts have
developed five factors to be considered in determining whether an individual
is an employee under FLSA or an independent contractor falling outside the ambit
of FLSA. No single factor is decisive. The totality of the circumstances has
to be considered. The five factors are as follows:
1. The degree of control exercised by the employer over the workers.
2. The workers' opportunity for profit and loss and their investment in the
3. The degree of skill and independent initiative required to perform the work.
4. The permanence or duration of the working relationship.
5. The extent to which the work is an integral part of the employer's business.
Even though the employer treated the worker as an independent contractor, and
the worker accepted this treatment for a period of several years, does not prevent
the worker from subsequently claiming he was an employee under FLSA. This much
at least is apparent from the recent New York federal district court case of
Lee v. ABC Carpet & Home (reported in New York Law Journal, March 11,
Richard Lee, after working for ABC for eight years as a carpet installation
mechanic and all that time identifying himself as self-employed on his tax returns,
claimed that he was an employee under FLSA and entitled to back wages. Denying
ABC's motion for summary judgment, the court applied the five-factor test and
found plenty of disputed facts pertaining to almost all of them. So, now the
case will proceed to trial.