Summer is finally here and students are out of school looking for work, which can only mean one thing: the season of the unpaid intern has officially begun.  With the arrival of the intern season, employers should know if their internship programs comply with state and federal laws. 

What follows is an update on the status of unpaid internship programs and how to craft a program that does not run afoul of the Fair Labor Standards Act (“FLSA”). 

The FLSA broadly defines “employ” to include “suffer or permit to work” and provides that workers who perform services for others must be compensated for their labor.  Interns in the “for-profit” private sector (versus public sector, government workers and those who volunteer for charitable organizations) who qualify as employees rather than trainees must comply with the FLSA and state labor laws.  In the broadest terms, this means interns must paid at least the prevailing minimum wage and overtime compensation, when applicable.

Whether an intern is “employed” will be determined on a case-by-case basis and depends upon all of the facts and circumstances of each employer’s program.

In Walling v. Portland Terminal Co., the Supreme Court articulated the “trainee exception” and found that trainees of the railroad were not employees, and as a result were not covered by the FLSA’s wage requirements.  While the trainee exception appears to be a safe harbor for employers, in reality it provides a very narrow exception to the FLSA’s broad definition of employee. 

Are Unpaid Internships Still OK?

With the reasoning articulated in recent court cases, unpaid “for-profit” internships or training programs that are exempt from the requirements of the FLSA to pay employees are extremely rare. 

A recent flurry of high-profile cases involving unpaid interns have employers rightfully questioning the legality of unpaid internships program at “for profit” employers.  Cases have been brought against companies such as Fox Searchlight Pictures (“Searchlight”), The Hearst Corporation, Advance Magazine Publishers, Inc. (“Advance”), and the production company for the Charlie Rose Show. 

In addition to time spent defending against the claims, companies risk incurring significant litigation and settlement costs addressing these cases.  In November 2014, the federal district court in New York approved a $5.85 million settlement against Advance for its failure to pay over 7,000 interns who worked at Conde Nast over the course of four (4) years.

A federal court ruled in 2013 that former unpaid interns who worked on Searchlight’s film “Black Swan” were employees, not interns, and thus entitled to compensation.  By classifying them as unpaid interns rather than employees, the court found that Searchlight violated the FLSA and the New York Labor Law (“NYLL”).  This decision is currently on appeal.

How Do You Structure an Internship Program that Is Compliant?

According to the Department of Labor (“DOL”), an unpaid internship program must meet the criteria originally articulated in the Walling case to be exempt from the requirements of the FLSA.  If a program meets all of the requirements described below, that program would qualify as unpaid “training” as opposed to “employment” for which compensation must be paid.

  1. The internship is similar to training which would be given in an educational environment.
  2. The internship experience is for the benefit of the intern.
  3. The intern does not displace regular, paid employees, but works under the close supervision of existing staff.
  4. The employer providing the training does not benefit from the activities of the intern; and on occasion its operations may actually be impeded.
  5. The intern is not entitled to a job at the conclusion of the internship (unpaid “tryouts” are not allowed).
  6. The employer and the intern understand that it is an unpaid position and the intern is not entitled to compensation.

If all of these factors are met, then an employment relationship does not exist under the FLSA.  As a result, the FLSA’s minimum wage and overtime provisions do not apply to the intern.  

It is worth noting that some states, including California, have adopted their own criteria that must be met in addition to the DOL’s six factors. 

What if an Intern Earns College Credit?

The fact that an intern receives college credit for the internship can be helpful, but that fact alone is not conclusive that a program will qualify as training versus employment.  Recently, courts have opined that offering academic credit will not necessarily shield a company from future litigation. 

“A university’s decision to grant academic credit is not a determination that an unpaid internship complies with the NYLL,” wrote Judge William H. Pauley III in the “Black Swan” decision.  A justification of college credit is not found in the law and courts will look at what employers are actually doing, not what they claim to be doing.

What Should Employers Do To Minimize Litigation Risk?

Legal experts believe these cases are a harbinger of what is to come, with more lawsuits that will challenge the practices of companies that pay little or nothing for student labor.  These lawsuits will force companies in all industries across the country to reconsider using unpaid or underpaid interns, beginning with the “sexy” entertainment industry, where unpaid internships are viewed as a rite of passage and a way to “pay your dues”, and then in industries that have adopted these programs to reduce their labor costs during a sagging economy.

In light of recent litigation and the courts’ willingness to enforce wage and hour laws, the takeaway for companies is to work with an attorney to carefully structure programs that are regularly monitored for compliance.  To create an unpaid internship program that is compliant with federal law, an employer must develop a program with clear guidelines that meets ALL SIX criteria from the DOL (and potentially additional state criteria). 

However, with the increasing risk of litigation over misclassification of workers and the staggering costs associated with defending against such a claim, even if an employer believes its program is compliant, that employer’s safest bet is to properly compensate all interns under both state and federal wage laws.  The expense of paying interns the prevailing minimum wage and possibly overtime pales in comparison to the exorbitant cost of defending a lawsuit. 

By paying its interns, an employer will have the peace of mind that comes from knowing its program is compliant, and that knowledge is priceless.