August 13, 2013

InternInternships have become an integral part of the education of American college students. According to a survey conducted by the National Association of Colleges and Employers (NACE), 63.2 % of the members of the graduating class of 2013 participated in some sort of internship, co-operative learning program (a program in which students alternate classroom time with time spent working), or both (see NACE article). NACE reports that this is the highest percentage since the organization starting tracking internships in 2007. Over half (56.3%) of those internships were in the private sector, with students working for for-profit businesses. The others were with non-profits or governmental agencies.

The internship trend gives students practical experience, a dose of the real world, and perhaps an entrée into a chosen profession. Recent developments, however, show a disturbing facet of the trend: many internships violate federal labor law. Specifically, an unpaid internship with a for-profit business could very likely be a violation of the federal Fair Labor Standards Act (FLSA), 29 U.S.C. § 201, et seq.

The issue of the legality of not paying your interns has received some attention in recent years. In 2011, Ross Perlin published a book Intern Nation: How to Earn Nothing and Earn Little in the New Economy, in which he claimed that unpaid internships threaten to destroy “what’s left of the ordered world of training, hard work and fair compensation.” Media outlets nationwide have given coverage to the issue (see, e.g., Steven Greenhouse, The Unpaid Intern, Legal or Not, N.Y. Times, Apr. 3, 2010, at B1). The increased attention was prompted in no small part by the U.S. Department of Labor’s 2010 announcement that it would step up enforcement of the FLSA as it applied to internships. Regulators in California and Oregon also announced that they would scrutinize the fairness of internships.

The news that caught the attention of many employers was an opinion filed on June 11, 2013, by Judge William H. Pauley III, of the U.S. District Court for the Southern District of New York, in the case of Glatt v. Fox Searchlight Pictures, Inc., 11-CV-06784. The case was a suit brought by former interns who worked for Fox Searchlight Pictures on the movies Black Swan and 500 Days of Summer. The interns claimed that they should have been paid for their time spent working on the two productions. Judge Pauley agreed that the plaintiffs performed the same functions as regular employees, and held that they were entitled to pursue claims under the FLSA. A motion to certify a class of interns as plaintiffs in the action was also granted.

But unpaid internships are not necessarily unlawful. There are, however, certain requirements that must be met in order for an internship to meet the requirements of federal law. Judge Pauley’s order followed guidelines issued by the U.S. Department of Labor to decide that the plaintiffs were covered by the FLSA. The court used the guidelines as a “totality of the circumstances” test for its decision. Under the guidelines, an intern with a for-profit business does not need to be paid if:

  • The internship provides training similar to an educational environment, even though it involves operation of the employer’s facilities. This could involve training in a setting that closely resembles a regular classroom.
  • The experience is for the benefit of the intern. This does not mean that the intern will gain general experience from performing productive work, such as general office operations. The more the internship provides skills that can be used in multiple employment settings, as opposed to skills particular to the employer’s operation, the more likely an intern will be viewed as receiving training.
  • The intern does not displace regular employees, but works under the close supervision of the employer’s existing staff. If the employer would have hired additional employees or required existing staff to work additional hours if the interns had not performed the work, the interns will be viewed as employees and entitled to compensation. On the other hand, if the employer provides job shadowing opportunities that allow an intern to learn certain functions under close and constant supervision, but the intern performs no or minimal work, the activity is more likely to be viewed as an education experience.
  • There is no immediate advantage to employer; in fact, the internship may actually impede the operations of the employer.
  • The intern is not necessarily entitled to a job at the end of the internship. Unpaid internships generally should not be used by the employer as a trial period for new employees.
  • The employer and the intern both understand that the intern is to be unpaid for his or her services.

The exception from the work-for-pay requirements is “necessarily quite narrow,” because the coverage of the FLSA is broad.

Applying the guidelines, Judge Pauley concluded that the plaintiffs were improperly classified as interns, and should have been paid for their work. The plaintiffs “worked as paid employees work, providing an immediate advantage to their employer and performing low-level tasks not requiring specialized training.” The benefits they may have received from their employment were just the results of working as for any other employer. The benefits did not come from a uniquely educational internship that was of little benefit to the employer. Although the plaintiffs understood when they started work that they would not be paid, Judge Pauley gave little weight to that factor, noting that the FLSA does not permit employees to waive the right to be paid. The plaintiffs were improperly classified as interns, and should have been paid.

Does Judge Pauley’s ruling mean that the unpaid internship is a thing of the past? If the internship is with a government agency or a non-profit, then the FLSA does not apply, and interns can continue to be a source of unpaid help. For internships with for-profit businesses, however, the rules are clear: an unpaid internship is not to be used as a way of holding payroll costs down. An intern who works like a regular employee must be paid, and they are entitled at least to the minimum wage.

The rules may be clear, but the practice will continue to be a murky one. A posting on the website notes that, while unpaid internships are often unlawful, they still provide some real benefits to the interns. A student who worked in an unpaid internship is somewhat more likely to receive a job offer than a student who did not work as an intern. Many students, when faced with the prospect of an unpaid internship or no internship, will take the choice that offers them the better employment prospects. In addition, interns might also be reluctant to become whistleblowers. A lot of industries are closely-knit communities, and a student who gets a reputation as a troublemaker could find him- or herself blacklisted by the trade (one commercial law instructor at a career college prefaces his discussion of internships with “If this causes trouble, you didn’t hear it from me.”). Furthermore, many employers strongly oppose the idea of paying interns, not for economic reasons, but for the sake of tradition. These employers view the unpaid internship as a rite of passage, and as just what someone has to go through in order to work in a given field.

Whatever the tradition or custom of an industry has been, the decision in the Fox Searchlight case should be a wake-up call to reluctant employers. Whatever happened in the old days isn’t going to be tolerated any more. Interns, too, may take the decision as permission to be more assertive in claiming their rights. Finally, the schools that require or promote internships can help by refusing to sponsor internships that do not meet legal requirements. The internship is evolving, and in order for the evolution to be painless, all parties need to participate.