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How to Use Unpaid Interns the Right Way (and Keep Litigation at Bay)

(Update: On July 2, 2015, the Second Circuit Court of Appeals issued a decision addressing when an unpaid intern is an employee entitled to compensation under the Fair Labor Standards Act.  A blog post on that decision appears here.  In issuing that decision, the Second Circuit, which encompasses Connecticut, New York, and Vermont, declined to follow the U.S. Department of Labor’s 6-part test discussed below.)

Employers can’t seem to catch a break when it comes to wage-and-hour litigation.  Over the last decade, the federal courts have seen a 325% increase in wage-and-hour claims.  And now, as classes of paid workers across various industries are being depleted, the plaintiffs’ bar is pursuing wage claims on behalf of unpaid interns, by claiming that the interns were really employees who should have been paid for their work.

As is often the case, one law firm successfully targets an industry or pay practice and is quickly followed by other lawyers who seek plaintiffs to target other employers using copycat complaints.  The initial wave of unpaid intern lawsuits were filed in New York by the reputable law firm, Outten & Golden LLP, between late 2011 and the middle of 2012.  The cases are: Glatt et al. v. Fox Searchlight Pictures Inc., Civil Action No. 11 Civ. 6784 (S.D.N.Y. Sept. 28, 2011); Wang v. The Hearst Corporation, Civil Action No. 12 Civ. 0793 (S.D.N.Y. Feb. 1, 2012); Bickerton v. Charles Rose et al., Index No. 650780/2012 (N.Y. Cty. Sup. Ct. Mar. 14, 2012); and Wang v. Fenton Fallon Corp., Civil Action No. 12 Civ. 5188 (S.D.N.Y. July 3, 2012) (yes, this is the same Wang that sued Hearst months earlier).

In the past 6 months, the first copycat lawsuits have cropped up, signaling that employers really cannot afford to wait any longer to review their internship programs.

While many plaintiffs’ firms employ an industry-specific approach when it comes to wage-and-hour litigation (like the financial services and restaurant industries), that’s unlikely to be the case when it comes to intern litigation.  Outten & Golden has set up a website to solicit potential clients nationally, without any regard to industry, geography or status as a for-profit or non-profit entity.  And, while the first round of intern lawsuits focused on the film and media industries, the initial round of copycat lawsuits have already targeted other industries (such as education).  Naturally, any businesses that rely heavily on interns will be the most desirable, but certainly not only, targets of plaintiffs’ attorneys.

To avoid liability, businesses must comply with both federal and state laws.  In this post, we focus on the requirements at both for-profit and non-profit businesses.

Federal Law Requirements for Unpaid Internships

Under the federal Fair Labor Standards Act (FLSA), there is a 6-part test for unpaid internships at for-profits:

  1. the internship is similar to training that could 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 rather, works under close supervision of staff;
  4. the entity derives no immediate advantage from the intern (and, on occasion, the entity’s operations may actually be impeded);
  5. the intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. the intern has been notified, and understands, that he is not entitled to wages for time spent participating in the internship.

The U.S. Department of Labor (DOL) historically has taken the position that all six of these criteria must be satisfied for an individual to be considered an intern.  Some courts, however, have criticized the DOL’s position and have suggested that, although all six criteria should be considered, an individual may qualify as an intern under the FLSA even if not all of the criteria have been satisfied.  Regardless of whether all six of the criteria must be satisfied, the key to any finding of internship status is that the internship experience must predominantly benefit the intern, not the business, and have a significant educational component.

The 6-part test issued by the DOL was intended to provide guidance to for-profit employers, and the DOL noted as much in a fact sheet it issued in 2010 on the subject.  In a footnote in the same fact sheet, the DOL further noted that it “recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation for religious, charitable, civic or humanitarian purposes to non-profit organizations as volunteers.”  The DOL continued: “Unpaid internships . . . for non-profit charitable organizations, where the intern volunteers without expectations of compensation, are generally permissible.”  Although the DOL noted in the same footnote that it was reviewing the need for additional guidance on internships in the non-profit sector, the DOL has never expressly articulated an alternative test for non-profit employers.  In the absence of same, non-profit businesses should evaluate their internship programs using the DOL’s six-part test.  However, as is evident from the DOL’s own commentary, for non-profits, the question is broader than just whether a worker meets the legal definition of “intern.”  Non-profits also need to consider whether their workers meet the legal definition of “volunteer,” a topic to be discussed in a future post.

New York State Law Requirements for Unpaid Internships

In addition, businesses must comply with applicable state laws.  On top of the six criteria outlined above, New York’s Department of Labor considers the following additional five criteria at both for-profits and non-profits:

  1. any clinical training is performed under the supervision and direction of individuals knowledgeable and experienced in the activities being performed;
  2. the interns do not receive employee benefits, such as insurance, or discounted or free goods or services from the business;
  3. the training provided to the intern qualifies the intern to work in a similar business, rather than specifically for a job with the business offering the program;
  4. the screening process for the internship program is not the same as for employment, and involves only criteria relevant for admission to an independent educational program; and
  5. program advertisements are couched clearly in terms of education or training, rather than employment (although employers may indicate that qualified graduates of the program may be considered for employment).

These are stringent tests and, in most cases, New York businesses who engage interns are likely engaging employees who are entitled to minimum wage and overtime compensation.  Add defense costs, liquidated damages (now double any unpaid wages owed under both federal law and New York law), and payment of the intern’s attorney’s fees, and one may conclude that unpaid internships are  more costly in the long run than hiring entry-level workers and paying them minimum wage.  If that’s the conclusion your business reaches, you should also be sure to record the number of hours the intern spends at work to avoid overtime liability.  If payment is out of the question, however, and you operate a New York business, you need to ensure that each of the eleven factors listed above are followed carefully.