Unpaid internships seem to be increasingly popular. When jobs are scarce, more persons are eager to take an unpaid internship. For college students, recent graduates, the unemployed and those looking to enter a new field, unpaid internships are often considered an important step in securing fulfilling paid positions in fields where entry jobs may be difficult to obtain. Understandably, most unpaid interns and employers consider the relationship a win-win—the intern gets a foot in the door, makes contacts and enhances her resumé, and the employer gets the benefit of some unpaid work and the opportunity to assist a talented and motivated person learn about its industry or line of work. But, such programs are receiving increased scrutiny, are an increasingly frequent subject of litigation and can create significant liability if not carefully created and executed.
Unless its program is carefully constructed, a company using interns to perform unpaid labor may violate the law because the person designated an intern may, in fact, be an employee. The Fair Labor Standards Act (FLSA) requires that non-exempt employees be paid the minimum wage for all time worked and an overtime premium for work time that exceeds 40 hours per week. In a 2010 New York Times article, Nancy J. Leppink, the Acting Director of the Wage and Hour Division of the United States Department of Labor (WHD), stated her skepticism about unpaid internships: "If you're a for-profit employer or you want to pursue an internship with a for-profit employer, there aren't going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law [.]" The WHD has issued a fact sheet that summarizes the factors considered in determining whether an unpaid intern is actually an employee entitled to pay under the FLSA. According to the WHD, unless all of the following six factors are met, the unpaid intern will be considered an employee entitled to pay under the FLSA:
- 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.
- The internship experience is for the benefit of the intern.
- The intern does not displace regular employees but works under close supervision of existing staff.
- The employer that provides the training derives no immediate advantage from the activities of the interns, and on occasion its operations may actually be impeded.
- The intern is not necessarily entitled to a job at the conclusion of the internship.
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Although the fact sheet provides general guidance, few reported court decisions have applied the test to real-world situations. Moreover, although the WHD's fact sheet states that all six criteria must be met, the United States Courts of Appeal are divided as to whether the factors must be applied and, if so, whether all six factors must be met, or whether consideration of a totality of the circumstances analysis is more appropriate. The following cases demonstrate the different approaches taken by the Courts of Appeal:
- Solis v. Laurelbrook Sanitarium and School, Inc., 642 F.3d 518 (6th Cir. 2011) (holding that "the proper approach ... is to ascertain which party derives the primary benefit from the relationship").
- Reich v. Parker Fire Prot. Dist., 992 F.2d 1023 (10th Cir. 1993) (adopting a totality of the circumstances standard and holding that six factors are relevant but not conclusive).
- McLaughlin v. Ensley, 877 F.2d 1207 (4th Cir. 1989) (confirming that the general test in the Fourth Circuit is whether the employee or the employer is the primary beneficiary of the trainees/intern's labor).
- Donovan v. Am. Airlines, Inc., 686 F.2d 267 (5th Cir. 1982) (citing WHD factors with approval and applying WHD test).
Regardless of these differences, employers considering or currently using an unpaid internship program should view the six factors as a starting point for evaluating whether their program is likely to withstand legal challenge.
Recently, three class action cases have challenged unpaid internship programs. All three cases have been brought in New York and involve plaintiffs who allege they were improperly classified as interns and should have been paid for their work. The defendants are (1) Fox Searchlight Pictures, Inc. (interns on the set of its movie Black Swan), (2) The Hearst Corporation (the interns at Harper's Bazaar) and (3) Charles Rose of the Charlie Rose Show on PBS.
Although the three class actions are from the media industry, it is virtually certain that similar claims will be made in other industries. Many interns will be satisfied with their unpaid internships, but it only takes one unhappy intern or a Labor Department audit to drag a company into a fight about its internship program. The risk is substantial. If an unpaid intern is found to be an employee, the employer could face significant liability, including double the amount of unpaid wages (including overtime if sufficient hours had been worked), and payment of the intern's attorneys' fees.
Application of the test for evaluating whether an unpaid intern is an employee requires careful analysis, but certain facts are red flags of potential problems. Is the intern performing low-level, gofer-like tasks? If interns are engaged in the routine operations of the employer or are performing productive work that benefits the employer (for example, filing, performing other clerical work or assisting customers), then the fact that the interns may be receiving some benefits in the form of a new skill or improved work habits likely will not exclude them from the FLSA's protections. Can the company demonstrate that the internship program contains an intentional, nonproductive, learning component that benefits the intern? Examples of such learning opportunities can be observation of processes, attendance at meetings in which the intern has no role, and job-shadowing. Also, unpaid internships generally should not be used by the company as a trial period for individuals seeking employment.
At this time, the WHD factors apply only to private for-profit employers. As noted by the fact sheet itself, certain individuals who volunteer to perform services for a state or local government agency and individuals who volunteer for humanitarian purposes for private nonprofit food banks may be excluded from the coverage of the FLSA. The WHD "also recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation for religious, charitable, civic or humanitarian purposes to nonprofit organizations." Therefore, "[u]npaid internships in the public sector and for nonprofit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible." Examples of permissible nonprofit volunteers include helping in a school cafeteria, assisting the elderly, serving as a scoutmaster or working with disadvantaged youth. However, this area of apparent clarity may change. The WHD has stated that it is reviewing the need for additional guidance on internships in the public and nonprofit sectors, and employers are not shielded from the risk of unpaid interns solely by their nonprofit status.
Unpaid internships are receiving increasing attention. The fact that an individual may have eagerly accepted, or even proposed, an unpaid internship is not a defense. Employers with unpaid internship programs are highly encouraged to carefully review their internship program to ensure that they will withstand legal challenge.