The tradition of hiring unpaid summer interns has a long, established history for many employers. The role of internships has expanded from an informal, summertime experience to workers looking to make a career change or get their foot in the door of an increasingly-tight labor market. These days, employers are using unpaid interns not just during the traditional summer internship season but year-round as well. There are rules in place by the government as to when employers can legally hire interns without pay.

Employers have the benefit of specific guidance issued in April 2010 by the U.S. Department of Labor ("DOL") which addressed the use of unpaid internships in the private sector. The DOL relied on a United States Supreme Court decision from 1947 and established these six necessary factors that employers should evaluate in connection with hiring unpaid interns:

  • The internship, even though it includes actual operation of the employer's facilities, is similar to training that would be given in an educational environment;
  • The internship experience is for the intern's benefit (not the employer's benefit);
  • The intern works under close supervision of existing staff, but does not displace regular employees;
  • The employer derives no immediate advantage from the intern's activities and, on occasion, the employer's 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 have an understanding that no wages will be paid.

Overall, the DOL pointed out that, at least in the private sector, internships will most often be viewed as employment unless an intern received training for their own educational benefit.

Along with the increased use of unpaid interns, there has also been an increase in litigation brought in both the entertainment and publishing industries by individuals who claim to have been misclassified as interns when they should have, instead, been classified as employees. This type of high-profile litigation has highlighted the broad ranging issues/land mines associated with employers using unpaid interns. The traditional problem area has been under the federal Fair Labor Standards Act ("FLSA") and/or any applicable state wage laws. The FLSA broadly defines the term "employ" to include any individual that an employer "suffers or permits to work". Therefore, all individuals whom an employer suffers or permits to work must be compensated for their services.

Classifying workers as unpaid interns who should actually have been classified as employees brings with it liability for unpaid wages and potentially unpaid overtime. Other penalties associated with improper classification of unpaid interns include liability for employee benefits such as health insurance, vacation pay, and sick time, as well as penalties for not making proper tax deductions and withholdings. A few recent examples highlight the multitude of potential problems:

  • Glatt v. Fox Searchlight Pictures, Inc.: A federal court in New York ruled on June 11, 2013 that unpaid interns working on the production of the film Black Swan were misclassified and, instead, should have been paid for their work as employees. These interns mostly engaged in low-level tasks such as organizing file cabinets, making photocopies, getting coffee, and running errands. The Court agreed that this work actually benefitted the employer and specifically noted that the company had other workers whom were being paid for performing similar tasks.
  • Henry v. Warner Music Group Corp.: A class action complaint was recently filed in New York state court alleging that a group of interns should have been paid for their work – which included answering telephones, making photocopies, and making deliveries. The complaint claims that this work was performed for the company's benefit (not for the benefit of the interns) and that the interns received no educational or vocational training.
  • Boyle v. Swann, Inc. et al.: A similar class action complaint was filed in Pennsylvania federal court under the FLSA contending that unpaid photographic interns working with the Pittsburgh Power arena football team should have been classified as paid employees. In the Boyle case, intern duties included planning and organizing marketing events and taking photographs at games. The lawsuit also alleges that interns were denied traditional employee benefits such as unemployment and worker's compensation benefits.

With this continued rise in intern-related litigation, now is a good time to review internship programs to ensure compliance with all six factors contained in the DOL's guidance. Additionally, practical considerations such as the following will be useful in evaluating the focus and intentions of company internship programs:

  • The focus of any unpaid internship program should be from a training or educational aspect rather than a production or operational aspect. In other words, interns should be learning an employer's business rather than actually performing work in the employer's business – especially work that would typically be performed by employees. Internship programs that are created in partnership with an educational institution and for which the intern received educational credit tend to create the type of educational training that is the hallmark of a true unpaid internship program.
  • Interns should not be displacing employees. If the intern is performing productive tasks for which the employer would otherwise be forced to hire an employee and pay wages, that intern is likely an employee entitled to compensation.
  • Consider having interns rotate through different departments instead of being assigned to one particular group for the entire internship period. Consider having departmental workshops/lunches to provide interns with detailed information regarding a specific part of your business.
  • Whether interns are college students or recent graduates, the length of any internship should be for a limited time period. For example, internships can be limited to a single academic semester.

Have a structured internship program with an orientation and periodic meetings to ensure that interns are benefiting from education/training. Assign formal mentors to interns and allow interns to shadow their mentors during the work day.