With summer right around the corner, many high school and college students are preparing to begin unpaid internship programs at companies across the country. Such programs have long been considered a staple for U.S. businesses, as well as a valuable option for students seeking opportunities that will offer them real-world experience while opening doors in their sought-after career fields. But in recent years, these internship programs have come under intense scrutiny and fierce legal attack. Indeed, employers in a broad swath of industries have faced a veritable flood of class and collective actions challenging the legality of their unpaid internship programs.

Propelled by a continuously aggressive plaintiffs’ bar, these suits have attempted to hold companies liable under the federal Fair Labor Standards Act (FLSA) and parallel state laws under the theory that the sponsoring employers are unlawfully withholding minimum wage and overtime pay from their interns, while reaping the benefits of their “free” labor. Victory for the intern-plaintiffs in these suits means not only back pay with interest, but also hefty attorneys’ fees. Indeed, these suits have become so costly to defend that several high-profile companies have elected to discontinue their internship programs altogether.

So, with intern “season” upon us, let’s review whether your company’s internship program is compliant with applicable wage and hour laws, and, if not, what you can do to bring the program into compliance..

U.S. Department of Labor (DOL) Position

The DOL initially ignited the debate over the use of unpaid interns when, in April 2010, it issued Fact Sheet #71 – modeled in part on a 1947 Supreme Court decision. According to that Fact Sheet, employers must classify and pay interns as if they were employees – unless the employer-intern relationship meets every one of the following six criteria:

  1. The internship is similar to training given in an educational environment
  2. The internship experience is for the benefit of the intern
  3. The intern does not displace or supplant regular employees, or perform duties traditionally rendered by regular employees
  4. The employer derives no immediate advantage from the intern’s activities (ideally, the intern impedes the employer’s operations)
  5. The intern is not necessarily entitled to a job at the conclusion of the internship
  6. The employer and the intern understand, preferably in a signed writing, that the intern is not entitled to receive remuneration for his/her work

If the internship does not satisfy all six of these criteria – and, for New York employers, also all 11 of the partially duplicative factors that the New York State Department of Labor has articulated – the employer must pay its interns and otherwise follow all wage and hour requirements as if the interns were regular employees.

Rush to the Courthouse

In the wake of the DOL’s publication of Fact Sheet #71, unpaid interns have inundated federal and state court dockets claiming violations of the FLSA and other applicable minimum wage and overtime laws. Several such lawsuits already have resulted in important decisions regarding the circumstances under which companies must pay their interns.

But the most important decision on this issue is still weeks – if not months – away. That decision will come from the federal Court of Appeals for the Second Circuit in Manhattan, which is currently considering two related appeals regarding the permissibility of company-sponsored unpaid internship programs. The Second Circuit’s decision is expected to decide and delineate when (if ever) a company may engage a student (and other type of) intern without treating and paying the intern as an employee. The appellate court will also likely clarify whether and to what extent federal courts should defer to Fact Sheet #71 (of which the appellate panel appeared skeptical during oral argument on January 30, 2015). The defendant-employers, for their own part, have urged the court to adopt a “primary beneficiary” test, or a totality test of the six DOL factors, rather than the DOL’s all-or-nothing test.

A favorable decision for the interns in the Second Circuit will inevitably lead to a slew of new lawsuits. Because of this, many anticipate the Second Circuit’s decision to be the most important wage and hour decision of 2015. It is anticipated to have significant impact on the future structure and use of internship programs not only in New York, but also nationwide.

What Does This Mean for My Company?

The flood of lawsuits by unpaid interns is continuing, with no appearance of slowing any time soon. And although the impending Second Circuit decision should provide some clarity on the legality of unpaid internship programs, employers must, in the interim, take pragmatic steps to minimize their exposure – both to unfavorable judgments as well as to lawsuits in the first instance.

Prudent employers, with counsel, therefore should examine the current DOL regulations to best ensure that their internship programs – both in policy and practice – actually satisfy the six Fact Sheet #71 requirements (and any applicable state or local laws). If not, employers should retool their internship programs now, and, if necessary, after the Court of Appeals’ ruling. For some employers, unpaid internship program risks – which include not only potential liability for wage and hour violations but also potential tax- and benefits-related sanctions – may finally outweigh the current programs’ rewards.