Did you know that unpaid interns may qualify as employees under the Fair Labor Standards Act?

Summer is here and many clients have retained unpaid interns. But, despite the prevalence of this practice, there are liability risks associated with paying interns below minimum wage — or not paying them at all. In several recently-filed putative class actions, unpaid interns have challenged their unpaid designation: These plaintiff interns have demanded that they be classified as employees under the Fair Labor Standards Act (FLSA or the Act) and sought both minimum wages and overtime pay. This type of FLSA litigation is on the rise and can potentially result in substantial awards against employers or force employers to enter into costly settlements. Businesses that utilize unpaid interns should be forewarned and take steps to ensure that they have properly classified these individuals as interns.

Understanding the Risk – Collective Actions Based on Improper Classifications

The last few years have seen a deluge of litigation under the FLSA, and in recent weeks and months, several high-profile class action lawsuits have been filed by unpaid interns alleging that they were employees who should have received wages and benefits. For example:

  • „„A judge in the Southern District of New York permitted a case brought by an unpaid intern at Harper’s Baazar to go forward against Hearst Corporation to determine whether the intern should have been classified as an employee.
  • „Charlie Rose, and his production company, settled a lawsuit brought by an unpaid intern for US$110,000 after the intern alleged that she, and other interns, were owed wages for the work performed as part of their internships.
  • „„Similar lawsuits have been filed by unpaid interns against Atlantic Records, Warner Music, designer Norma Kamali, the website Gawker, and Fox Soccer Channel, among others.

An individual may be classified as a “trainee” or intern who is not covered by the FLSA. Under the Act, individuals who believe they are owed wages, including overtime pay, can sue individually or in what is known as “collective actions” (akin to class actions). 29 U.S.C. § 216(b). Employees may also bring individual or class action claims under state wage and hour laws, which are not preempted by the FLSA. In addition to recovery of wages, and overtime for all hours worked above forty hours in a week for the preceding two years of employment (three if the Act was violated willfully), employees may also recover attorneys’ fees and liquidated damages in the amount of unpaid wages and overtime wages. Together, these can total significant sums.

Who is an Employee and Who is an Intern?

The U.S. Department of Labor (DOL) Wage and Hour Division issued a fact sheet to employers that sets out a six-factor test for determining whether an individual may be classified as a trainee or intern who is not covered by the FLSA. The DOL explains that “[i]internships in the ‘for-profit’ private sector will most often be viewed as employment,” unless all six of the following DOL “trainee” test criteria are met:

  1. Educational Component

The internship must be similar to training which would be given in an educational environment, and often should be tied to an educational program, despite taking place in a place of business. An employer’s safest course would be to ensure that all unpaid internships are structured around a classroom or academic setting, such as in situations where a school exercises oversight over the internship program and provides educational credit to interns.

  1. Benefit to the Intern

The internship experience must be for the benefit of the intern and offer benefits to an intern that would not be available to a paid employee. Any benefits that would be intrinsic to any working experience — like connections or references — do not suffice as they are not unique to the unpaid internship experience. Accordingly, employers may actually have to impede their own efficiency to offer opportunities to an intern that would not be available to a regular employee, like special trainings or education.

  1. No Substitution for Regular Employees

The intern must not substitute or augment regular employees. Indeed, any task that would be performed by a regular employee in the absence of an intern — such as answering the phones, filing documents, or other tasks — cannot be properly performed by an unpaid intern or trainee. A rule of thumb in adopting this criteria would be for a business to determine if its employees would need to work longer hours, or if another employee would need to be hired, to accomplish the tasks assigned to the intern. If so, the DOL would likely classify the intern as an employee.

  1. “No Immediate Advantage” to the Business

The DOL criteria stipulate that the business retaining an unpaid intern should not “derive any immediate advantage” from the activities of the intern. In essence, this criterion bolsters the strength of the previous two criteria — those that require that the intern receive benefits outside of those derived in the normal course of business and that the business not shunt necessary tasks to unpaid interns — by requiring that the business fail to realize an advantage from the relationship. A scenario in which this might be the case would be where the business provides an unpaid intern with job shadowing opportunities of regular employees, but the intern does not perform any work.

  1. No Entitlement to a Job

In order for an unpaid intern to not be classified as an employee — albeit on a temporary or probationary basis — the internship must be set for a defined and finite period of time at the outset. The employer should not treat the internship as a test period or extended interview and must make clear that the intern is not guaranteed, or entitled to, a job at the conclusion of the internship.

  1. Clear Understanding of Non-Payment

It is key that the business and the intern understand at the outset of the relationship that the position is unpaid and that the intern is not entitled to wages for the time spent in the internship. Though stipends are not usually provided to unpaid interns at for-profit enterprises, this type of payment can undermine the understanding of nonpayment. Moreover, if the person is paid a stipend — and thus is likely to be treated as an employee — then the stipend must equate to at least minimum wage for all hours worked.

Re-Evaluating Classifications and Ensuring Compliance

Though not all federal courts have adhered to the DOL’s six-factor test, its tenets provide excellent guidance — and warnings — to employers seeking to retain unpaid interns.1

The DOL has estimated up to 70% of all employers do not comply with the FLSA. Employers looking to avoid the costs associated with litigation and overdue salary and overtime payments would be well-served by re-evaluating their treatment of unpaid interns.

In California, the DOL’s Standards Likely Apply, Though Employers May Want to Consider More Stringent Historical Standards

No California law or regulation addresses whether and under what circumstances interns are properly considered exempt for purposes of the State’s wage and hour laws relating to minimum wage and overtime. Historically, the California Department of Labor Standards Enforcement (DLSE) employed an 11-prong test to determine whether an intern can be unpaid or paid less than minimum wage. The test included the six factors considered by the DOL above, and imposed the following five additional requirements for the overtime and minimum wage exemption to apply to internship programs:

  • „„The training must be similar to that which would be provided in a vocational school;
  • „„Any clinical training must be part of an educational program;
  • „„The interns must not receive employee benefits;
  • „„The screening process for the internship program cannot be the same as for employment, and must involve criteria that is relevant only for the internship program; and
  • „„Any advertisements for the internship program must be couched in educational terms, though an employer may indicate that qualified graduates may be considered for employment.

In 2010, in a change of gears, the DLSE seemingly abandoned the five additional criteria identified above in an opinion letter concerning an internship program run by a non-profit organization providing information technology training to 18-24 year olds. In rejecting the prior 11-factor test, the DLSE noted that “the 5 additional factors do not appear to be based upon any source statute or regulation from which they derive nor are the additional factors identified with specific case law.” Thus, in light of this opinion letter, there is a compelling argument that only the six DOL factors need to be considered in ensuring compliance. However, given that DLSE opinion letters containing the historical 11-factor test have not been formally withdrawn by the DLSE, and because there is no definitive legislative guidance on the subject, more risk-averse California employers may nonetheless want to consider whether their internship programs satisfy the five additional factors above.