In a decision that is sure to shake up how many employers handle their internship programs, a federal district court has ruled that unpaid interns working in the offices of motion picture production companies were not “trainees” under the federal Fair Labor Standards Act (FLSA) or New York law, but employees who had to be paid.

As is common in the motion picture industry, a “production company” was incorporated to make the movie “Black Swan;” and another was incorporated to make “500 Days of Summer.” Fox Searchlight Pictures, Inc., entered into production agreements with the production companies in which interns were employed to perform low-level office work. These interns took lunch orders, answered phones, arranged employees’ travel plans, and took out the trash. If an intern was not available to perform any of these tasks, they would be completed by a paid employee.

Citing the very broad definition of “employee” under the FLSA, Judge William H. Pauley III of the U.S. District Court for the Southern District of New York first determined that Searchlight became the joint employer of the production companies’ employees. The FLSA looks at “economic reality rather than technical concepts.” Searchlight and the production companies were the joint employer of the interns, he reasoned, because Searchlight retained the power to control key elements of the work relationship between the production companies and those who worked for them.

To resolve whether the plaintiffs were employees or could be classified as unpaid “trainees,” Judge Pauley rejected the “primary beneficiary” test used in several other circuits. Instead, he adopted a six-factor test published in an April 2010 U.S. Department of Labor (DOL) fact sheet. Judge Pauley determined that the DOL’s fact sheet relied substantially on the 1947 U.S. Supreme Court decision Walling v. Portland Terminal Co. According to the Court, an employer must meet all six of the factors below to properly use the services of an unpaid intern or “trainee:” 

  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.

Applying these factors, Judge Pauley found that there was no effort to train the interns beyond the “on-the-job” knowledge that any employee would pick up, and no job was promised or expected at the end of the internship. The completion of the internship provided no benefit in securing future employment beyond the ability to put the experience on a resume, or to have a reference — just like any paid employee. He found that that if not for the interns, paid employees would have completed many of the same administrative tasks, which, while “menial,” were necessary. In reaching his decision, Judge Pauley noted that even under the “primary beneficiary” test, the plaintiffs would still be considered employees and not “trainees.”

As part of his ruling, Judge Pauley also granted conditional class certification for unpaid interns working at several other divisions of parent company Fox Entertainment Group, Inc. He noted that these companies requested interns based on their “needs,” and therefore requested more interns when they were busier. This, the court noted, was the “opposite of what one would expect if interns provided little advantage to the company and sometimes impeded its work.” Judge Pauley admonished that “[u]sing unpaid interns to fill the interstices created by eliminating paid positions is a clear violation of the [New York labor laws].”

The Fox Searchlight case is just the first of a growing trend of comparable lawsuits. Interns for Hearst Magazine have filed a class action alleging similar claims, and in February a class of unpaid interns filed suit against Elite Model Management seeking $50 Million in unpaid wages. Exposure in such cases can be quite substantial, especially because of the availability of attorneys’ fees, interest, treble damages and/or penalties in many jurisdictions.

Employers with unpaid interns should review their programs with legal counsel to be sure they meet the applicable employee classification test in their jurisdiction. The use of unpaid interns eager to break into an industry or gain workplace experience when jobs are scarce, is increasing. The use of interns is also the subject of increasing scrutiny in the courts, and can have serious financial consequences for a company if not done correctly.