Use Caution When Creating Unpaid Internships

06/11/2014 / John Kvinge

Internships provide an excellent opportunity for students to obtain hands-on experience and acquire practical skills from employers in their chosen field. An internship can also provide students with references and networking contacts that will help them obtain their dream job. However, for unwary employers, hiring unpaid interns can create unanticipated legal headaches. The problem is that some employers classify any temporary employee who is also a student as an intern, and frequently believe that they can pay interns a nominal stipend for a summers’ work, or nothing at all. The Department of Labor has a very narrow set of criteria for qualified unpaid internships, and has made enforcement actions against companies that do not comply a priority in recent years. This article examines the requirements for a legal unpaid internship, describes some recent enforcement actions, and provides some suggestions for employers looking to minimize the risk of a wage and hour law violation.

Your Intern Might Be an Employee
The United States Department of Labor and its state-specific counterparts have a very rigid set of criteria that must be met before an individual can be classified as an unpaid intern rather than an employee and therefore be exempt from the minimum wage laws. To be classified as an intern at a for-profit company, the following six things must be true:

  1. The internship must be similar to training which would be given in an educational environment;
  2. The internship 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 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.
The fact that an intern is receiving college credit for the internship can be a helpful factor to demonstrate that the internship meets some of these requirements, but it is not a guaranteed exemption from the minimum wage laws. Employers should also keep in mind that students are usually required to pay for any college credits they receive, such that an internship for credit might impose an even greater financial hardship, especially if the internship is unpaid.

Consequences for Non-Compliance
Two currently pending lawsuits illustrate some of the risks that employers face if their unpaid interns are actually misclassified employees. 

The first, Wang v. Hearst, involves an attempted class action brought by unpaid interns who worked at 20 different magazines owned by The Hearst Corporation, including Harper’s Bazaar, Cosmopolitan, and Esquire. Hearst recruited approximately 3000 unpaid interns between 2007 and 2013. While there were significant educational aspects of the internships, the interns were also tasked with running various errands, clerical work, and staffing events for the magazines. The case is currently on appeal before the Second Circuit, after the district court concluded that under the “totality of the circumstances” the interns were not entitled to summary judgment on the question of whether they were actually employees entitled to the benefits of the FLSA. The Department of Labor has filed an amicus brief strongly urging the Second Circuit to strictly apply the six factor test described above, rather than a “totality of the circumstances” test which would consider each internship as a whole. If the Second Circuit overturns the district court, Hearst may be facing a multi-million dollar class action lawsuit for back wages.

The second case, Glatt v. Fox Searchlight Pictures, Inc., involved interns who worked on the film Black Swan. The interns alleged that they were required to run errands, send mailings, and make travel arrangements without pay or any direct educational benefits.  In contrast to the court in Wang, here the district court found that the interns should have been classified as employees by referring to the Department of Labor’s six-factor test, and certified a class action for other unpaid production interns of Fox. After receiving the unfavorable ruling, Fox Searchlight appealed, noting the directly contrary result in the Wang case.  The Second Circuit is expected to issue an opinion regarding the proper test to be used sometime next year. 

Because of the prevalence of unpaid internships, and the uncertainty regarding their legality, several years of litigation regarding the proper classification of interns is extremely likely. Until the issue is conclusively settled through either a Supreme Court decision or new legislation, employers would be wise to have an attorney review their current program and evaluate any potential risks carefully.

Minimize Risk by Paying Minimum Wage
One of the easiest ways to minimize the risk of an FLSA violation is to pay interns the minimum wage, which is currently $7.25 per hour for most employers. In addition, if an intern is less than 20 years old, an employer may be allowed to pay a lower training wage, currently $4.90 per hour for the first 90 days of employment. The wage must increase to the full minimum wage after 90 days of employment or when the employee turns 20, whichever occurs first.