Unpaid Interns: The Litigation Risk Employers Can't Ignore

Unpaid Interns: The Litigation Risk Employers Can't Ignore

Unpaid internship programs are a time-honored institution for many employers, providing benefits to the interns and the company or institution alike. But a recent and burgeoning trend of lawsuits by interns alleging that they are employees under the federal Fair Labor Standards Act (FLSA) and/or state wage-and-hour laws who must be paid at least minimum wage has left many employers questioning whether an unpaid internship program is worth the risk. This article discusses recent significant cases addressing the issue, and suggests ways in which employers can increase the likelihood that an unpaid internship program will pass muster.

The FLSA requires that “employees” be paid at least minimum wage for all regular hours worked, and that nonexempt employees be paid overtime for all hours worked in excess of 40 per week. Proponents of unpaid internships argue that interns are not employees, and therefore need not be paid in accordance with the FLSA. But the FLSA’s broad and vague definitions of “employee” (“any individual employed by an employer”) and “employ” (“to suffer or permit to work”) give interns ammunition in arguing that unpaid internships are unlawful under the act.

The U.S. Department of Labor (DOL) takes the position that an intern may be properly unpaid only if each of the following factors is satisfied: (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. Unfortunately for employers, the requirement that the employer derive no immediate benefit from the intern’s activities makes the standard difficult to meet.

Defendants in lawsuits filed by unpaid interns run the gamut, and include operators of sports teams, event venues and media outlets; motion picture companies; publishing companies; medical coding companies; talk show hosts; colleges and universities; modeling agencies; music production companies; record labels; and television networks. And employers are not immune from suit simply because their interns are college students who receive academic credit for the internship.

While unpaid interns have filed many lawsuits since 2010, few instructive decisions have been rendered. Recent conflicting opinions from the U.S. District Court for the Southern District of New York in the cases of Wang v. Hearst, 2013 U.S. Dist. LEXIS 92091 (S.D.N.Y. June 21, 2013), and Glatt v. Fox Searchlight Pictures, No. 11-6784 (S.D.N.Y. June 11, 2013), precipitated a consolidated appeal to the U.S. Court of Appeals for the Second Circuit, and many employers are waiting for that decision with baited breath, in hopes that it will provide much-needed guidance in this murky area of law.

In Wang, an unpaid intern for publishing giant Hearst sought to bring a collective action on behalf of all unpaid interns at Hearst Magazines dating back to 2006, contending that they were employees under the FLSA and the New York Labor Law (NYLL). The court denied the plaintiff’s request for partial summary judgment and class certification. Analyzing the totality of the circumstances, rather than adhering to the DOL’s six-factor test, the court determined that genuine issues of fact precluded summary judgment. Although the court looked to the totality of the circumstances, it did note that the DOL’s six factors offer an analytical framework and should not be ignored.

In Glatt, the plaintiffs similarly moved for summary judgment on the issue of their employee status under the FLSA and NYLL. The court applied the DOL’s six-factor test and held that the interns were employees, because their work was similar to that of paid employees, they performed tasks that did not require specialized training, and they provided an immediate advantage to the employer. As noted above, it remains to be seen how the Second Circuit will decide the consolidated appeals in the Wang and Glatt cases.

Some courts, including the Sixth Circuit, have eschewed the DOL’s test, finding it to be inconsistent, overly rigid and ill-equipped to determine employee status in a training or educational setting, as in Solis v. Laurelbrook Sanitarium and School, 642 F.3d 518, 525 (6th Cir. 2011). The Solis court found that students at a boarding school who spent time volunteering at a school-owned sanitarium were not employees, because the students (rather than the school) primarily benefited from the arrangement. The court also noted that the students did not displace regular workers, that instructors spent time supervising students that otherwise would have been spent doing productive work, and that services would be unimpeded if the students were not present.

The Eleventh Circuit recently applied the “economic realities” test in determining whether an unpaid intern was an employee, focusing on whether the intern’s work economically benefited the company, in Kaplan v. Code Blue Billing & Coding, Case No. 12-12011 (11th Cir. Jan. 22, 2013). That case centered on unpaid interns in the medical coding field who received academic credit for the internship and who were required to complete an internship in order to graduate, and the court held that no employer-employee relationship existed. The court also summarily noted that the DOL’s six-factor test was satisfied.

These conflicting approaches, combined with some circuits (like the Third Circuit), which have offered no guidance, leave employers in a state of uncertainty with respect to whether their unpaid internship program would withstand challenge. Add to that stew the growth of anti-internship groups—such as the “Fair Pay Campaign,” which reaches out to college students in an effort to organize campaigns against unpaid internships—and employers face a perfect storm of litigation risk.

Companies and institutions offering unpaid internships should carefully analyze their programs to ensure that they are providing interns with valuable training that is not specific to the company/institution’s own operations, but rather is of general application within the industry. Additionally, individuals supervising interns should avoid assigning them any work if doing so would take work away from a paid employee. It is also helpful for the company/institution to be able to show that its interns actually impede operations; for example, records should be kept of the time paid employees spend supervising and/or mentoring interns that usually would be devoted to the employees’ regular job duties. Finally, all interns should sign an acknowledgment that they are not employees, that the internship is unpaid, and that a job is not guaranteed at the conclusion of the internship. Such acknowledgments are not a silver bullet, however, as they would not provide an exemption or constitute an effective waiver of an intern’s rights under the FLSA.

Ultimately, the legality of unpaid internships is likely to make its way to the U.S. Supreme Court. A comment in a 2012 decision, Christopher v. SmithKline Beecham, 132 U.S. 2156 (2012), regarding the exempt status of certain pharmaceutical representatives might provide insight into how the high court would decide whether the DOL’s heightened concern in recent years about unpaid internships is warranted: “While it may be possible for an entire industry to be in violation of the FLSA for a long time without the Labor Department noticing, the more plausible hypothesis is that the department did not think the industry’s practice was unlawful.” Resolution of the question could be years in the offing, however, leaving employers in the unenviable position of deciding whether unpaid internships are worth the risk.

Emily Miller is an associate attorney in Cozen O’Connor’s labor and employment group.

LOAD MORE
Practice Area(s):