Given the state of the economy, companies are finding it easier to attract impressively credentialed unpaid interns. But the recent filing of several class action lawsuits claiming that businesses misclassified workers as unpaid interns in order to minimize labor costs makes clear that employers sponsoring internship programs must be diligent to ensure compliance with federal and state laws — a task that presents significant challenges, to say the least.

In Glatt v. Fox Searchlight Pictures Inc., No. 1:11-cv- 06784, and Wang v. Hearst Corp., No. 1:12-cv-00793, both filed in the United States District Court for the Southern District of New York, former interns claim that they performed work assignments that would otherwise have been executed by employees. The court in Glatt, after permitting former interns on the movie Black Swan class-related discovery, ruled that plaintiffs may expand the class to interns associated with the Fox Entertainment Group, a holding company that serves as the parent for hundreds of independent companies. Meanwhile, the court in Wang, filed by an intern who alleges she was “Head Accessories Intern” from August 2011 to December 2011 for Harper’s Bazaar, certified a class that included all interns from Hearst’s twenty magazines.

Proving that smaller employers are not immune from becoming the target of such claims, an intern for the Charlie Rose Show filed a claim in New York state court arguing that she performed the duties of an employee. Bickerton v. Charlie Rose, Index No. 650780/2012. Then, on July 3, 2012, the plaintiff in the Wang v. Hearst Corp. case discussed above filed a second lawsuit, this time against Fenton Fallon Corporation, alleging that it had misclassified her as an intern from June 2011 through August 2011, while Wang gathered press clippings, prepared samples, purchased raw materials, and constructed jewelry on behalf of the company. Wang v. Fenton Fallon Corp., No. 1:12- cv-05188. The complaint positioned Wang to file for class certification, but the parties settled the lawsuit and it was dismissed on September 18, 2012.

To avoid such suits, for-profit entities must comply with both federal and state laws. Under the federal Fair Labor Standards Act (the “FLSA”), an unpaid intern must meet the following six criteria:

  • the internship is similar to training that could be given in an educational environment;
  • the internship experience is for the benefit of the intern;
  • the intern does not displace regular employees, but rather works under closer supervision of staff; 
  • the entity derives no immediate advantage from the intern and its operations may occasionally be impeded;
  • the intern is not entitled to a job at the conclusion of the internship; and 
  • the entity and intern understand that the intern is not entitled to wages for time spent participating in the internship.

The United States Department of Labor (the “USDOL”) has explained that the “training” prong should provide the intern with skills that can be used in multiple employment settings, as opposed to skills that are particular to the entity’s operation. This standard puts a significant burden on companies, essentially requiring that such a program be structured as an extension of the classroom. While the internship must be for the benefit of the intern, the FLSA does not forbid the entity from deriving a benefit from the activities of an intern. Companies should keep in mind that the “supervision” provided must be more intense than the supervision regular employees receive. An unpaid intern cannot be considered to be working for a trial period before being hired as an employee; rather, a legally compliant internship should be for a fixed period of time and interns must not have the expectation that an employment offer will flow from the internship.

Unfortunately, the situation is even more challenging in New York. Even if an unpaid internship program can pass muster under the FLSA, it is rare that such a program will comply with the New York State Minimum Wage Act (the “NY Wage Act”). The NY Wage Act has eleven criteria that must be met in order to properly classify an unpaid intern. Six of these criteria are repetitive of the FLSA, but employers should not let that fool them into thinking that they only need to comply with the additional five requirements – the NY Wage Act also interprets the FLSA requirements far more strictly than the USDOL.

In a recent fact sheet released by the New York State Department of Labor (the “NYSDOL”), it explains that in a compliant internship program “[t]he intern is not engaged in the operations of the employer and does not perform productive work (such as filing, other clerical work, or helping customers)” and “the employer cannot gain an immediate advantage from the intern’s presence.” Under this interpretation it is the rare unpaid internship program that could survive. Further, while many employers have believed that they are compliant so long as the intern receives school credit, the NYSDOL explains that such credit is merely “some evidence” that the intern is benefitting from the program. In addition, under New York law, the intern may not substitute for absent employees and interns must be notified in writing that they will not receive any wages in connection with their internships.  

The five additional NY Wage Act criteria are:

  • any clinical training is performed under the supervision and direction of people who are knowledgeable and experienced;
  • the trainees or students do not receive employee benefits, such as insurance, pension credit, or discounted or free goods and services from the employer; 
  • the training qualifies the intern for work in similar businesses and is not designed specifically for a job with the employer that offers the program;
  • the intern screening process is not the same as for employment and only uses criteria relevant for admission to an independent educational program; and 
  • any recruitment efforts must clearly discuss education or training, rather than employment, although employers may indicate that qualified graduates may be considered for employment.

The NYSDOL also warns that “[a]ny training that is specific to an employer and its operations is conclusive evidence that an employment relationship exists.”

Thus, in most cases, New York employers who engage interns will need to comply with terms of the NY Wage Act, including payment of minimum wage of $7.25 per hour and overtime pay for hours in excess of forty in any week. Employers who choose this path should consider whether to amend their employment benefit plans to specifically exclude interns from participation, to the extent permitted by law, and offer letters provided to interns should indicate that they are not entitled to any benefits and state the last day of the internship.