How your company classifies unpaid interns may have lasting effects which reach well past the summer months. Indeed, the days of sending unpaid interns to the corner coffee bar or asking them to pick up dry-cleaning are numbered. In fact, a recent lawsuit filed by former unpaid interns may curtail the use of such internships at for-profit businesses, as the threat of potential for liability for improperly classifying interns under the “trainee exception” of the Fair Labor Standards Act (“FLSA”) is becoming more tangible to companies—and plaintiff-friendly lawyers.

GLATT V. FOX SEARCHLIGHT PICTURES, INC.

In June of this year, the United States District Court for the Southern District of New York held that individuals working for Fox Searchlight Pictures, Inc. on the set of Black Swan, had been improperly classified as unpaid interns. Glatt v. Fox Searchlight Pictures Inc., 11 Civ. 6784 (WHP), 2013 WL 2495140 (S.D.N.Y. June 11, 2013). Specifically—and through the utilization of the six criteria set out in the U.S. Department of Labor Fact Sheet, infra—the court found that:

Considering the totality of the circumstances, [the interns] were classified improperly as unpaid interns and are “employees” covered by the FLSA […] They worked as paid employees work, providing an immediate advantage to their employer and performing low-level tasks not requiring specialized training. The benefits they may have received—such as knowledge of how a production or accounting office functions or references for future jobs—are the results of simply having worked as any other employee works, not of internships designed to be uniquely educational to the interns and of little utility to the employer. They received nothing approximating the education they would receive in an academic setting or vocational school. This is a far cry from [Walling v. Portland Terminal Co., 330 U.S. 148, 67 S. Ct. 639 (1947) (seminal “trainee exception” case)] where trainees impeded the regular business of the employer, worked only in their own interest, and provided no advantage to the employer. [The Interns] do not fall within the narrow “trainee” exception to the FLSA's broad coverage.

As a result of this misclassification, the Glatt interns were entitled to compensation under the FLSA and its New York counterpart. This becomes more important especially when approximately half of the internships taken by recent graduating seniors were unpaid. In fact, the results of the National Association of Colleges and Employers’ (NACE) Class of 2013 Student Survey show that 52.2 percent of internships were paid and 47.8 percent were unpaid. More than half of these internships were performed at for-profit, private-sector organizations (56.3 percent). The remaining internships were undertaken at non-profits (28.1 percent) and state, local, or federal government agencies (15.7 percent).

The Glatt decision is quickly becoming a breeding ground for new FLSA lawsuits. In fact, days after Glatt was decided, the same law firm representing the unpaid interns against Fox Searchlight Pictures, Inc. filed a similar suit on behalf of unpaid interns against Condé Nast Publications, a worldwide publisher. Considering the holding in Glatt, employers should carefully outline their unpaid internships to ensure more educational benefits are offered to the interns than utilitarian benefit to the employer.

THE LAW - GENERALLY

While the FLSA is completely devoid of a definition for “intern,” it does define the term “employ” very broadly as including to “suffer or permit to work.”  29 U.S.C. § 203(g).  According to the United States Department of Labor (Wage & Hour Division), “[c]overed and non-exempt individuals who are ‘suffered or permitted’ to work must be compensated under the law for the services they perform for an employer.”  U.S. Dep't of Labor Fact Sheet # 71 (April 2010) (“DOL Fact Sheet”).  In fact, the U.S. Supreme Court has held that the term “suffer or permit to work” cannot be interpreted so as to make a person whose work serves only his or her interest an employee of another who provides aid or instruction.  Thus, simply because individuals of all experience levels are applying for unpaid internships in order to just get their feet in the door, for-profit employers must tread carefully.

“Internships in the ‘for-profit’ private sector will most often be viewed as employment, unless the test described below relating to trainees is met.”  Thus, the Department of Labor is on record as stating that interns in the “for-profit” private sector who qualify as employees (not trainees) typically must be paid at least the minimum wage and overtime compensation for hours worked over forty in a workweek.

THE TEST - UNPAID INTERNS

While there are some circumstances under which individuals who participate in “for-profit” private sector internships may do so without compensation, the determination of whether an internship or training program meets this exclusion depends upon all of the facts and circumstances of each such program.

The following six criteria—as highlighted by the DOL Fact Sheet—must be applied when making this determination:

  • 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 intern; and on occasion its operations may actually be impeded;
  • The intern is not necessarily entitled to a job at the conclusion of the internship; and
  • The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

TO ENSURE COMPLIANCE, CONSIDER THE FOLLOWING

According to the DOL Fact Sheet, if all of the factors listed above are met, an employment relationship does not exist under the FLSA, and the Act’s minimum wage and overtime provisions do not apply to the intern. This exclusion from the definition of employment is necessarily quite narrow because the FLSA’s definition of “employ” is very broad.

To ensure compliance with the FLSA and reduce potential liability, employers should consider the following with respect to structuring unpaid internships:

  • Structure your internship program around a classroom or academic experience. Teach tangible skills that go beyond on-the-job training.
  • Contact your local college or university and inquire as to whether it can offer academic credits for your unpaid interns.
  • Limit the time period of the unpaid internship from the outset. Never utilize unpaid internships as a trial period for individuals seeking employment at the conclusion of the internship period.
  • Provide job shadowing opportunities which allow an intern to learn certain functions under the close and constant supervision of regular employees; however, significantly reduce or prohibit the work the intern performs.
  • Take the time to train/supervise your unpaid interns. An employer may demonstrate that it received no advantage from an unpaid intern’s work by evidencing that its own benefit was obstructed by efforts to help train, educate, and supervise the intern.
  • Refrain from employing interns to perform routine or menial tasks.  

Remember, if an intern is used as a substitute for regular workers or augments an employer’s existing workforce during specific time periods, these interns should be paid at least the minimum wage and overtime compensation for hours worked over forty in a workweek.