A U.S. District Court in New York recently granted summary judgment to two unpaid interns holding that they were "employees" entitled to wages under the Fair Labor Standards Act (FLSA) and the New York Labor Law (NYLL). Glatt v. Fox Searchlight Pictures Inc., 2013 U.S. Dist. LEXIS 82079 (S.D.N.Y. June 11, 2013). Glatt has generated intense debate regarding whether internships should be paid, and has paved the way for other interns to file similar lawsuits.

Eric Glatt and Alexander Footman had worked on the film Black Swan (starring Natalie Portman) as unpaid interns. They, along with other interns, brought a putative class action under the FLSA and NYLL against Fox Entertainment Group Inc., and one of its subsidiaries, Fox Searchlight Pictures Inc. They claimed that they were misclassified as unpaid interns or trainees, and that defendants violated federal and state labor laws by not paying them wages.

The Glatt court noted that the U..S. Court of Appeals for the Second Circuit had not addressed the FLSA's trainee exception, and proceeded to decide the case applying the six criteria contained in a U.S. Department of Labor internship fact sheet. The internship fact sheet is based on the seminal U.S. Supreme Court case of Walling v. Portland Terminal Co., 330 U.S. 148 (1947). The six criteria to determine whether an internship may be unpaid are:

• The internship, even though it may include the actual operation of the employer's facilities, is similar to training which would be given in an educational environment.

• The internship benefits the intern.

• The intern does not displace regular employees, but works under close supervision.

• The employer derives no immediate advantage from 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.

• The employer and the intern understand that the intern is not entitled to wages for the internship.

The Glatt court applied this six-part test. As to the first factor, it noted that, while an unpaid internship does not require official classroom training, it "must provide something beyond on-the-job training that employees receive." The court observed that one of the interns did not receive any "formal training or education," and he did not acquire skills aside from those specific to Black Swan's back office, such as "how the photocopier or coffee maker operated."

As to the second factor, the court ruled that the defendants were the primary beneficiaries of Glatt's and Footman's internships because they received the benefit of work for which they otherwise would have paid employees. Notably, the court commented that the benefits the interns received, such as listing the experience on their résumés, job references and obtaining an understanding of how a production company work, were "incidental" and "not the result of internships intentionally structured to benefit" the interns.

The Glatt decision reveals that the third factor weighed heavily against the defendants because the interns displaced regular employees. The court found that the two interns performed "routine tasks that would otherwise have been performed by regular employees," such as organizing filing cabinets, making photocopies and running errands. One of the supervisors had stated that, if the intern had not performed the work, another member of his staff would have been required to work longer hours or he would have needed a paid production assistant.

For similar reasons, the court ruled that the fourth factor favored the two interns. Namely, the defendants obtained an immediate advantage from the interns' work as otherwise they would have had to pay another employee. The fifth factor was not extensively analyzed because there was no evidence that the interns were entitled to a job at the end of their internships (which would have weighed in favor of them being found to be employees).

The Glatt court's analysis of the sixth factor, whether the defendants and the interns understood that the interns were not entitled to wages, is unorthodox and sophisticated. Usually, as long as both parties knew that the internship was unpaid, the sixth factor favors finding that the intern was not an employee. Nonetheless, the court noted that the fact that the two interns understood that they would not be paid added little because: "The purposes of the [FLSA] require that it be applied even to those who would decline its protections. If an exception to the [FLSA] were carved out for employees willing to testify that they performed work voluntarily, employers might be able to use superior bargaining power to coerce employees to make such assertions, or to waive their protections under the [FLSA]. This protects more than the Plaintiffs themselves, because such exceptions to coverage would exert a general downward pressure on wages in competing businesses. It also protects businesses by preventing anticompetitive behavior. An employer is not to be allowed to gain a competitive advantage by reason of the fact that his employees are more willing to waive FLSA claims than are those of his competitor."

The court's reasoning on this point is enlightened in that it adheres to the spirit of the wage laws.

At the risk of oversimplifying the test used in Glatt, a rough rule of thumb to determine whether an internship should be paid is: does the employer view the "intern" as free labor? If yes, then the employer should restructure the internship to comply with the six-factor test, or reclassify the position as that of a paid employee. Importantly, if not all of the six factors are met, the intern is an employee entitled to wages and overtime.

A review of the reaction to Glatt reveals that there are two schools of thought on the issue. One side regrets the ruling and laments that companies will cease to provide valuable unpaid internships for individuals who are trying to get experience to showcase on their résumés as they seek employment later. The other side praises the decision because it finally acknowledges that many companies are taking advantage of mostly college students by having them perform mundane tasks — such as making copies or answering telephones — that companies would otherwise pay employees to perform.

In this period of high unemployment, we should remember that one of the purposes of wage and hour laws, such as the FLSA's overtime pay provision, is to encourage hiring by making it more expensive for employers to require employees to work longer hours. Accordingly, Glatt follows the spirit of wage laws because it condemns the practice of recruiting interns to avoid hiring new employees or avoid paying existing employees overtime. While it is true that it is valuable for those looking to enter a field to have an opportunity to gain experience through a legitimate internship, it is equally true that those individuals can get the same experience while at least earning the minimum wage.

Going forward, employers who ignore Glatt may find themselves involved in expensive litigation as more interns are seeking to sue their putative employers. Indeed, according to some reports, former interns who have worked at the New Yorker and at W magazine have already filed similar lawsuits. •