Summer is underway, and ‘tis the season for employers to kick off their summer internship programs. But, employers should proceed with caution before allowing interns to work for no pay as unpaid internships potentially violate federal and state law. A federal court recently ruled that former unpaid interns of Fox Searchlight Pictures (Searchlight) were employees under the Fair Labor Standards Act (FLSA) and the New York Labor Law (NYLL). The judge also certified a class of interns to bring related state law claims, and conditionally certified a national class of interns under the FLSA against Searchlight’s parent company, Fox Entertainment Group (FEG). This ruling should serve as a warning to employers to review their current policies and practices on internships to ensure their programs are in compliance with federal and state law. This advisory discusses the recent ruling and offers suggestions for employers on how best to ensure compliance.

UNPAID INTERNS WERE “EMPLOYEES” UNDER FLSA AND NYLL

In Glatt v. Fox Searchlight Pictures Inc., 1 two former unpaid interns who worked on production of the film Black Swan in New York sued Searchlight claiming that they were “employees” covered by the FLSA and the NYLL.2 During their respective internships, the plaintiffs performed basic administrative tasks such as drafting cover letters, organizing filing cabinets and arranging travel plans. They also performed other menial tasks such as assembling furniture, answering phones and taking out the trash.

So were these unpaid interns actually “employees” in the eyes of the law? Under the FLSA, the term “employ” means “to suffer or permit to work.”3 Taken literally, few internships could avoid that broad definition. But courts have not applied the statutory test as broadly as the words might otherwise bear. Whether an intern is “employed” is determined on “a case-by-case basis by review of the totality of the circumstances.”4 And there are exceptions, relevant here is the “trainee exception,” first articulated by the Supreme Court in Walling v. Portland Terminal Co.5

Searchlight argued that the plaintiffs were not employees, citing Walling’s “trainee exception.” In Walling, a railroad held a week-long training course for prospective brakemen. The Court found the trainees were not covered under the FLSA because the railroad’s course provided the same kind of instruction as a vocational school in a manner that most greatly benefited the trainee. Moreover, the trainees did not displace any of the railroad’s regular employees and the railroad derived no immediate advantage from the trainees’ work. But Walling’s “trainee exception,” the district court explained, is a “narrow exception to an expansive definition.”6 Too narrow, indeed, to save Searchlight.

In rejecting Searchlight’s argument, Judge Pauley analyzed the case under the six factors articulated in a 2010 U.S. Department of Labor (DOL) fact sheet7 for determining whether a particular unpaid internship is permissible under the FLSA.8 The six criteria are: (1) the internship must be similar to training that would be given in an educational environment; (2) the internship must be primarily for the intern’s benefit; (3) the intern must work under close supervision of existing staff and not displace regular employees; (4) the employer must not derive any immediate advantage from the intern’s activities and its operations may actually be impeded; (5) the intern is not necessarily entitled to a job at the internship’s conclusion; and (6) the intern and the employer both understand that the intern is not entitled to wages.9

The district court concluded that the plaintiffs’ internships failed to meet four out of the six criteria. It gave little weight to the sixth criteria because the FLSA does not permit employees to waive their entitlement to wages. The court found that the plaintiffs received nothing approximating the education they would receive in an academic setting or vocational school. In addition, the court rejected Searchlight’s argument that the plaintiffs’ benefitted from the internships by making contacts in the industry and gaining experience to put on their resumes, determining those benefits were incidental to working in an office like any employee. It was also clear from the testimony that had the plaintiffs not performed the work for free, Searchlight would have had to hire additional paid employees. Under these circumstances, Searchlight clearly derived an immediate advantage from the plaintiffs during their internships. Thus, under the totality of the circumstances, the court held, on summary judgment, that the plaintiffs were employees of Searchlight and their unpaid internships violated the FLSA and the NYLL.

It will come as a surprise to many readers what Judge Pauley said about college credits. Predictably, Searchlight took the position that the fact that the interns received college credits for their experience created, in effect, a safe harbor. Not so. Judge Pauley explained: “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 NYLL.”10

UNPAID INTERNS CERTIFIED AS A CLASS

Another plaintiff in Glatt was an unpaid intern who worked for FEG, in Searchlight’s corporate offices in New York. She brought suit requesting class certification of her NYLL claims and conditional certification of a collective action under the FLSA. She claimed that she was part of a centralized unpaid internship program in which unpaid interns at FEG and its subsidiaries were subject to a single set of policies administered by a small team of intern recruiters with two FEG employees overseeing the internship program. She sought to certify all unpaid interns who participated in the program in a five-year period. The judge granted certification of the NYLL claims and conditional certification of the FLSA claims, finding the proposed class met the numerosity, commonality, typicality and adequacy requirements under the Federal Rules of Civil Procedure.

Although permitting class certification for claims brought by former unpaid interns is cause for employer alarm, Glatt is not the last word on the subject. Recently, another district judge in the Southern District of New York denied class certification for former unpaid interns working for various Hearst-owned magazines such as Esquire, Cosmopolitan and Marie Claire. In Wang v. Hearst Corporation, 11 Judge Baer denied certification principally on Rule 23(a) “commonality” grounds because Hearst’s 20 magazines lacked a uniform policy with respect to the contents of the internship programs, including interns’ duties, training and supervision. Thus, the evidence analyzed under the DOL’s six criteria would have to be individualized. Even if the plaintiffs could meet the “commonality” hurdle, the court noted that the barrier of “predominance” and “superiority” would be insurmountable: where a putative class lacks common questions of law or fact, it is virtually assured that whatever common questions do exist, they logically cannot predominate over individual questions.

CONCLUSION

We need not resolve whether these unpaid internship lawsuits are examples of “no good deed goes unpunished” or beneficial reactions to exploitative business relationships. The point for an employer—and its inside counsel—is that unpaid internships must be carefully structured and monitored.

The most straightforward response is to simply pay the interns in accordance with applicable law. The cost of such a program would be de minimis compared to defending a class action lawsuit, much less losing or settling one. But, in many instances paying interns is not an option. Union agreements, for example, might prohibit it.

If the program is to be unpaid, start with the DOL’s six criteria. Based on those criteria, the program should be developed with clear guidelines set out in a written policy.

But a prudent employer sponsoring an unpaid internship program should not rely solely on technical compliance. The raison d'être of any program must be to educate and benefit the interns, not lower corporate expenses. This beneficial mission, moreover, must be communicated to and accepted by the managers running the program. The combination of thoughtful design and scrupulous implementation should not only protect against losing a lawsuit by a disgruntled unpaid intern, but also greatly reduce the risk of even a frivolous suit.