Individuals Enrolled At For Profit Vocational Academy Found to Be Primary Beneficiaries & Thus Not Entitled to Compensation Under the FLSA

Velarde v. GW GJ, Inc. d/b/a The Salon Professional Academy of Buffalo - Second Circuit Court of Appeals

Facts:  Patrick Velarde ("Velarde") enrolled at The Salon Professional Academy of Buffalo ("Academy") in order to become a cosmetologist.  The Academy is a for profit cosmetology training school that offered individuals both classroom instruction and supervised practical experience in its student salon in which the public could receive cosmetology services and the Academy's students could practice their skills.  (The State of New York requires individuals seeking to become cosmetologists to undergo training before receiving their cosmetology license.)  After finishing eight weeks in the classroom, Velarde worked in the salon, under supervision, logging 34 unpaid hours per week for 22 weeks.  The salon offered "discounted prices" to the public but did not share these prices with the students.  Although students were allowed to receive tips, those tips were described as nominal.

After several months at the Academy, Velarde completed his 1,000 hour course of study, which included the above mentioned classroom instruction and supervised practical experience.  Approximately three years after completing the program at the Academy and becoming a licensed cosmetologist, Velarde filed suit against the Academy on the grounds that the Academy violated the Fair Labor Standards Act ("FLSA") and New York law by not paying him for the work he did in the salon.  Velarde sought unpaid hourly minimum wages including tips and overtime both on his own and on behalf of other former and present students at the Academy.  In his suit, Velarde argued that the Academy students were actually employees of the Academy while they performed services at the salon.  The District Court entered judgment for the Academy.  Velarde subsequently appealed.

Holding:  As readers are likely aware, the FLSA requires employers pay"[e]mployees engaged in commerce" an hourly minimum wage.  As well, New York Labor Law ("NYLL") requires state employers to pay their "employees" a set minimum wage.  Notably, the FLSA and NYLL define "employee" in nearly identical terms.

Turning to the question over whether Velarde, and other students at the Academy were actually employees, the Court acknowledged that applying the "primary beneficiary" test from Glatt v. Fox Searchlight Pictures, Inc. (a 2015 Second Circuit case) was proper.  This primary beneficiary test stipulates that if an intern (or in this case, the student) is the primary beneficiary of the relationship, then the host entity is not the employer and has no obligation to pay compensation.  On the other hand, if the host entity is the primary beneficiary, then the entity is an employer and compensation is owed to the intern (or in this case, the student).  

Velarde argued the primary beneficiary test from Glatt did not apply as he was not an intern (as that was what the issue in Glatt centered around.)  As a result, Velarde stated that the District Court should have instead focused solely on the economic reality of his relationship with the Academy, which he argued would lead to a finding that he was an employee and therefore entitled to compensation because the Academy derived revenue from Velarde's work in the salon.  The Court was unswayed, however, pointing out that the primary beneficiary test is a "way to distinguish employees from bona fide interns."  That test was found to be equally suitable for distinguishing between employees and bona fide students of vocational schools or vocation related programs.  Accordingly, the Court agreed with the District Court's finding that the primary beneficiary test was appropriate to apply in order to determine whether Velarde was an employee or student of the Academy.

Turning to the test set out in Glatt, the Court noted that a vocational school is more likely to be found to "employ" its students if it does not have a formal education program with integrated coursework.  However, in evaluating the totality of the circumstances in this case, the Court held that Velarde was not an employee of the Academy when he was enrolled there, as he was the primary beneficiary of his relationship with the Academy.  Of note, Velarde obtained significant benefits from his work at the Academy's salon such that he was able to obtain his cosmetology license.  In this case, the Academy was providing a state-accredited course of vocational study, including classroom instruction and supervised practical experience, that required no more than the number of hours specified by the State of New York to obtain a cosmetology license.  Going one step further, the Court acknowledged that "the mere fact that an employer obtains a benefit from providing a clinical [program] does not mean that the employer is the 'primary beneficiary' of the relationship."  While the Academy was a for profit institution and derived financial benefit from Velarde's work in the salon, that alone was not dispositive.

Judgment:  The Second Circuit Court of Appeals affirmed judgment in favor of a for profit vocational academy, finding that the primary beneficiary of the relationship between the student and the academy was the student, thus that the student was not an employee of the academy and therefore not entitled to compensation for any work performed in the academy's salon during the course of vocational training.

The Takeaway:  The 2015 Glatt case was monumental in so much that it established the primary beneficiary test in determining whether interns were entitled to compensation under the FLSA for their work during the course of their internship.  This particular case turned the Glatt test a bit on its head, when considering whether students at a vocational school were employees of the school and therefore entitled to compensation for work performed at the school.  Bear in mind every case is different and another circuit could reach a different conclusion.  However, when considering the totality of the circumstances, as the Court of Appeals laid out here, I think they reached the correct conclusion in finding that the students were in fact the primary beneficiaries of the relationship with the for profit vocational school and therefore were not entitled to compensation for work performed.  One key takeaway here is the Court's recognition that just because the for profit vocational school received a benefit from the student, that alone did not turn the case on its head.  As the Court pointed out, the fact that the school derived some financial benefit from the student's work was not dispositive or make this an open and shut case in favor of the student.

Majority Opinion Judge:  Judge Carney

Date:  February 5, 2019

Opinion:  http://hr.cch.com/ELD/VelardeGWGJ020519.pdf