In a competitive job market, students and recent college graduates seek out unpaid internships as a way to obtain “real world” experience they cannot get in the classroom and to open doors to desired professions. Often, these are occupational settings where the chance to work in the field can substitute for the “insider” credentials that often determine who gets hired. For companies with budgetary constraints, unpaid internships can provide an opportunity to identify potential “talent” without incurring the expenses associated with adding to their head-count of employees.

There are of, course, labor law issues—most importantly, claims under the Fair Labor Standards Act (FLSA) and its state law counterparts—that employers with unpaid internship programs will need to address.

Federal Guidelines

The FLSA defines an “employee” as a person “employed by an employer” 1 and defines “employ” as “to suffer or permit to work.” 2 Although these definitions suggest a broad, encompassing statutory reach, they are not without limits. 3 For example, in Walling v. Portland Terminal Co. , a seminal Supreme Court case on the statutory treatment of trainees, the court held that an individual who “without promise or expectation of compensation, but solely for his personal purpose or pleasure, worked in activities carried on by other persons either for their pleasure or profit” is not an employee for purposes of the FLSA. 4

The Portland Terminal decision involved a training program sponsored by a railroad for prospective yard brakemen. For the trainees, the program provided an opportunity to learn the duties of railroad yard brakeman through observation and by working under the supervision of members of a yard crew (none of whom they displaced), with a view toward getting on a list of competent persons from which the railroad would draw when services were needed. The training was a necessary prerequisite to being placed on the list.

The Supreme Court agreed that the unpaid training program did not violate the FLSA because the trainee-plaintiff was not an “employee” of the railroad. With regard to the meaning of “employ” and “employee,” the court noted, “broad as [those terms] are, they cannot be interpreted so as to make a person whose work serves only his own interest an employee of another who gives him aid and instruction.” 5

The Portland Terminal decision undergirds the U.S. Department of Labor’s current “six-factor test” for analyzing whether interns must be paid the minimum wage and overtime under the FLSA for services provided to private sector employers. In April 2010, the Labor Department issued a “Fact Sheet” reiterating the six factors that had long been included in the Wage and Hour Division’s Field Operations Handbook, but setting forth in greater detail how the agency would weigh each of these factors:

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment;

2. The internship experience is for the benefit of the intern;

3. The intern does not displace regular employees, but works under close supervision of existing staff;

4. 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;

5. The intern is not necessarily entitled to a job at the conclusion of the internship; and

6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship. 6

In this “Fact Sheet,” the Labor Department advises: “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.” 7 Although it is far from clear that each of these factors is statutorily required to avoid employee status, that appears to be the agency’s view. 8

Recent Uptick in Litigation

Since September 2011, at least three purported class or collective action lawsuits have been filed in federal and state courts in New York alleging federal and/or state wage-hour violations on behalf of unpaid interns against high-profile companies including Fox Searchlight Pictures, Inc., The Hearst Corp., and Charlie Rose, Inc. 9 In July 2012, the lead plaintiff in the Hearst case, Xuedan Wang, filed a second wage-hour action, this time against Fenton Fallon Corp., the company for whom she worked as an unpaid intern just before joining Hearst. 10 While Wang’s suit against Fenton settled, those brought against Hearst, Fox Searchlight, and Charlie Rose are still pending.

Interest in Regulating

The recent uptick in lawsuits filed by unpaid interns reflects the Labor Department’s increased interest in regulating internship-training programs. In Solis v. Laurelbrook Sanitarium and School, Inc. , 11 the Labor Department sought to enjoin Laurelbrook Sanitarium and School, a private, not-for-profit boarding school, from violating various child labor provisions of the FLSA.

Laurelbrook operates a high school, boarding school, elementary school for children of staff members, and sanitarium (a 50-bed intermediate care nursing home) as facets of its overall education program. Laurelbrook students spend part of their day in academic classes and the remainder of their day in vocational training, e.g., assigned to the sanitarium kitchen and housekeeping departments, or providing services to patients of the sanitarium (provided they obtained the appropriate certification). Students do not earn or receive wages for any work they perform at the school.

Finding that the students at issue were “trainees” and not “employees” under the FLSA, the district court in Tennessee denied the Labor Department’s request for an injunction and entered judgment for Laurelbrook. 12 The court reasoned: “Although there is benefit to the school and sanitarium from the students’ activities, the totality of the circumstances shows that the primary benefit is to the students, who learn practical skills about work, responsibility, and the dignity of manual labor in a way consistent with the religious mission of their school.” 13 Even though the school earned some revenue from the sale of products made by students, the court found that the students did not displace workers and were working primarily for their own educational 
benefit. 14

On appeal, the Labor Department argued that the district court incorrectly applied Portland Terminal to the facts of the case. The Labor Department emphasized that “the determination that a trainee is not an employee for purposes of the FLSA is warranted only when all six Portland Terminal factors are met,” and that proper application of these factors to the facts as a whole showed that Laurelbrook could not establish any of the factors with respect to its students working in its vocational training program. 15

The U.S. Court of Appeals for the Sixth Circuit disagreed with the agency, affirming the judgment of the district court and reasoning that the Labor Department’s six-factor test was a “poor method for determining employee status in a training or educational setting” in that it was “overly rigid and inconsistent with a totality-of-the-circumstances approach[.]” 16 Further, the district court properly focused on which party received the “primary benefit” of the work performed by the students. Moreover, in the panel’s view, although the school benefited from the students’ activities, any such benefit was offset by the “tangible” and “intangible” benefits enjoyed by the students. For these reasons, in the Sixth Circuit’s view, the students themselves received the “primary benefit” of the training programs.

In April 2010, the same month the Labor Department issued its more detailed “Fact Sheet” (but before the Sixth Circuit announced its decision in Solis ), Nancy Leppink, then acting director of the Labor Department’s Wage and Hour Division, was quoted in The New York Times as stating, “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.” 17

Exploring the Factors

Is the Labor Department’s six-factor test the correct test for internship programs sponsored by private employers? While the Labor Department insists that its six-factor test finds its basis in the Supreme Court’s decision in Portland Terminal , and thus must be followed, in Solis , the Sixth Circuit ruled that the district court correctly downplayed the agency’s six-factor test in favor of a “primary benefit” inquiry, holding that “the proper approach for determining whether an employment relationship exists in the context of a training or learning situation is to ascertain which party derives the primary benefit from the relationship.” 18

The factors recited in the Labor Department guidelines were indeed aspects of the facts identified by the court in Portland Terminal in support of its determination that the trainees in question were not “employees” under the FLSA. But the court did not hold that such factors should be deemed exhaustive or dispositive for determining, in all contexts, whether unpaid “trainees” are “employees” for purposes of the FLSA. The Labor Department may therefore be overreading Portland Terminal in insisting that interns become employees simply because the employer derives some benefit from the interns’ services. The employer in Portland Terminal may not have derived any immediate benefit from the training program—if we put to one side the benefit of securing a trained group of individuals from which it could draw staffing as needed. But Portland Terminal itself does not suggest that the presence of some benefit to the employer precludes a lawful unpaid internship program.

It should not be surprising that most internship programs provide some benefit to the employer, for many employers maintain such programs to derive such benefit. The presence of employer benefit should not override significant training, educational, and/or experiential benefits to the intern, particularly where the intern is receiving academic credit or even an educational stipend for their work, or where the internship is for a defined period. The point here is not to hamstring internship programs but to make sure they do not continue for indefinite periods of time on an unpaid basis.

Preventative Measures

The safest course is to pay interns the statutory minimum wage and overtime (where applicable). But for employers seeking to continue their internship programs on an unpaid basis, certain steps should be considered. A good first step is to assess whether a college or university might provide academic guidance for the program as well as academic credit for the experience. By linking up with an educational institution that provides credit for the internship and can certify to the educational components of the program, an employer can significantly reduce the likelihood that its unpaid internship program will be subject to challenge.

Second, care should be taken to organize an internship program around a learning experience. For example, the activities of an unpaid intern are more likely to be viewed as an educational experience where the employer provides the unpaid intern with job-shadowing opportunities or an opportunity to “rotate” through different departments of the company under the close and constant supervision of regular employees.

Moreover, employers should document the terms and conditions of the unpaid internship at the outset so that student-trainee expectations line up with the program’s objectives. The duration of an internship is also an important factor. Employers should be careful to limit unpaid internships to a defined period like a summer or an academic term. Employers should also issue internal guidelines and train managers to be sensitive to the legal requirements for an unpaid internship. Under the present Labor Department approach, benefit to the employer may be determinative.

To satisfy Labor Department concerns, managers should be reminded that unpaid interns will be joining their department to learn and not as much to supplement the regular work force. Narrow production work, which requires limited discretion and repetitive tasks, may be a legitimate part of the learning experience, but assignments given to unpaid interns need to be something more than just menial tasks. Managers who will interact with unpaid interns on a daily basis should think of ways to enhance the interns’ experience by providing unpaid interns with general skills that are transferable to any employer in the field.

Conclusion

Unpaid internships can provide valuable door-opening and skill-enhancing opportunities for students and recent graduates, but such programs must be carefully designed to avoid legal pitfalls, especially in view of the increasing scrutiny of the federal and state labor departments and the emergence of a number of private collective or class action lawsuits.

Samuel Estreicher is the Dwight D. Opperman Professor of Law at New York University School of Law and of counsel to Paul Hastings. Allan S. Bloom is a partner at Paul Hastings and co-chair of the firm’s employment law department in New York. Lauren B. Palais , an associate at the firm, assisted in the preparation of this article.

Endnotes:

1. 29 U.S.C. §203(e)(1).

2. 29 U.S.C. §203(g).

3. Tony & Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 295 (1985).

4. Walling v. Portland Terminal Co., 330 U.S. 148, 152-53 (1947).

5. Id. at 152 (holding that the FLSA “was not intended to penalize railroads for providing, free of charge, the same kind of instruction at a place and in a manner which would most greatly benefit the trainees”).

6. U.S. Department of Labor, Wage and Hour Division, “Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act” (April 2010), http://www.dol.gov/whd/regs/compliance/whdfs71.pdf.

7. Id. (emphasis added).

8. The New York State Department of Labor adds five additional criteria to the federal agency’s six-factor test to determine whether interns must be paid minimum wage and overtime under New York law. See New York State Department of Labor, “Fact Sheet: Wage Requirements for Interns in For-Profit Businesses” (April 2011), http://www.labor.ny.gov/formsdocs/wp/P725.pdf.

9. Glatt v. Fox Searchlight Pictures, Inc., Case No. 11-6784 (S.D.N.Y); Wang v. The Hearst Corp., Case No. 12-00793 (S.D.N.Y.); Bickerton v. Charlie Rose and Charlie Rose, Inc., Index No. 650780/2012 (N.Y. Sup. Ct.).

10. Wang v. Fenton Fallon Corp. and Dana Lorenz, Case No. 12-05188 (S.D.N.Y.).

11. Solis v. Laurelbrook Sanitarium & Sch., Inc., No. 1:07-CV-30, 2009 U.S. Dist. LEXIS 60413 (E.D. Tenn. July 15, 2009), aff’d, 642 F.3d 518, 525 (6th Cir.), reh’g denied, No. 09-6128, 2011 U.S. App. LEXIS 14678 (6th Cir. July 6, 2011).

12. Laurelbrook Sanitarium & Sch., Inc., 2009 U.S. Dist. LEXIS 60413.

13. Id. at *17-18.

14. Id. at *18 (“That the school earns some revenue from the sale of wood pallets made by students—just like students at nearby public schools perform activities for which the schools earn money—does not transform the vocational program into a commercial enterprise.”).

15. Brief of Appellant-Petitioner at 21, Solis v. Laurelbrook Sanitarium & Sch., Inc., No. 09-6128 (6th Cir. Feb. 3, 2010) (emphasis in original).

16. Solis v. Laurelbrook Sanitarium & Sch., Inc., 642 F.3d 518, 525 (6th Cir. 2011), reh’g denied, No. 09-6128, 2011 U.S. App. LEXIS 14678 (6th Cir. July 6, 2011).

17. Steven Greenhouse, The “Unpaid Intern, Legal or Not,” N.Y. TIMES, April 2, 2010, at B1.

18. Laurelbrook Sanitarium & Sch., Inc., 642 F.3d at 525-26, 529. While most courts hold that the Labor Department’s six-factor test is entitled to substantial deference, a number of other courts have held that not all six factors need be met. Others apply a “primary beneficiary” or “totality of circumstances” assessment.