Unpaid internships are a popular way for college students—and now college graduates—to fill out their resumes, gain valuable work experience, and, perhaps, locate a full-time, paying job. The recent recession, which made employers wary of hiring, has made unpaid internships even more popular. Many employers believe that if interns receive college credit for their work, they need not be paid. This is not accurate. Unpaid internships may violate federal and state minimum wage laws if they are not designed to conform to legal guidelines.

Several companies—including entertainment and media giants such as Fox, Hearst, and Fox Searchlight—have recently been sued by former interns who allege that they should have been paid. One of the lawsuits—against Fox Searchlight—is a class action claim. But a firm of any size could encounter a claim that the unpaid intern should have received at least minimum wage (currently $7.25 per hour, although some states have higher minimum wage rates).

Yesterday, in Glatt v. Fox Searchlight Pictures, a federal judge in New York ruled that Fox Entertainment Group and its subsidiary, Fox Searchlight Pictures, violated both the federal Fair Labor Standards Act and state minimum wage laws because it did not pay individuals who worked as “interns” for the company. Searchlight had argued that the interns were “trainees” and thus could lawfully be unpaid under a provision of the Fair Labor Standards Act. The court rejected that argument, based upon a 1947 ruling by the U.S. Supreme Court that provided detailed guidance on the factual circumstances that establish that an individual is a “trainee.”

Searchlight also argued that the court should rule based on whether the interns or the company gained the greater benefit from the interns’ work, stating that the primary beneficiary of its internships was the interns themselves. The court rejected that argument, stating that two interns performing the same duties might differ in the amount of knowledge they obtained, and this would make their status under the FLSA unpredictable and subjectively determined. The court instead turned to a fact sheet produced by the U.S. Department of Labor (DOL) that lists six factors that DOL uses to determine whether or not an individual is an employee who must be paid, or an intern who is not an employee.

  1. 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;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. 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;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

The court then reviewed the interns’ activities, which, among others, consisted of “assembling office furniture, arranging travel plans, taking out trash, taking lunch orders, answering phones, watermarking scripts, and making deliveries,” according to the court. The court concluded that the interns received no training and did work that regular employees would have done had the interns not been present. The court said that the interns “worked as paid employees work, providing an immediate advantage to their employer and performing low-level tasks not requiring specialized training. The benefits they may have received—such as knowledge of how a production or accounting office functions or references for future jobs—are the results of simply having worked as any other employee works, not of internships designed to be uniquely educational to the interns and of little utility to the employer.”

The court also found that Searchlight had violated New York’s minimum wage law. To the company’s argument that the internship could be unpaid under state law because students received academic credit, the court replied: “Receipt of academic credit is of little moment. A university's decision to grant academic credit is not a determination that an unpaid internship complies with the [New York law]. Universities may add additional requirements or coursework for students receiving internship credit, but the focus of the [New York law] is on the requirements and training provided by the alleged employer.”

The court awarded summary judgment to two of the plaintiff interns, ruling that they were employees, and certified a class action against Fox Entertainment Group under both the federal FLSA and New York law for all interns “hired” by those companies.

The Fair Labor Standards Act does not permit employees to waive their FLSA rights, even if they want to. Courts have refused to enforce signed waivers in which employees agree not to be paid overtime or not to receive minimum wage. Even a written agreement with the intern that the job will be unpaid, while necessary to meet the sixth test listed above, is not, standing alone, sufficient to protect the employer from wage claims.

What can an employer do to both provide badly needed work experience for young people and avoid potential legal liability? The safest strategy, of course, is to pay the intern, and to monitor the hours the intern spends at work in order to avoid overtime liability. If payment is out of the question, then the company needs to ensure that the six steps listed above are followed carefully. Providing a substantial educational component as part of the internship (which would benefit the intern and not the employer) is a good start, but all six tests must be met. A written agreement between the company and the intern that elaborates on the educational component, states that the internship will be unpaid, and declares that the internship is not a guarantee of future employment, will also help the employer demonstrate later, if necessary, that the six part test had been followed.

Unpaid internships may be more costly in the long run than hiring entry-level workers and paying them minimum wage. Companies should check state law requirements as well as following the FLSA’s six-part test if they wish to create unpaid internships.