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May 11, 2015

The unpaid intern trap

By: Paul Ebeltoft

So, it’s May. Your company has probably made all of its decisions about summer interns. Are you paying your interns under the Fair Labor Stands Act (FLSA) rules? If so, this article may be interesting but non-critical information. If you are one of the thousands of business places that offer unpaid internships, read on. Keep this article close. There are court rulings to be made that may affect your company’s program.

What’s the history?

Here is how the legal controversy developed. Almost 70 years ago, trainees were exempted by United States Supreme Court action from the minimum wage and overtime pay requirements of the FLSA. However, the court-crafted test to determine who is a trainee and who is an employee was somewhat fluid in its application, resulting in a hodge-podge of court rulings and administrative guidance in response to each situation that was litigated.

In April, 2010 the United States Department of Labor issued Fact Sheet #71 to help employers determine whether their interns must be paid the minimum wage and overtime for the services that they provide to for-profit private sector employers. Fact Sheet #71 says that your company may not have to pay interns, but only if six criteria are met.

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment. Here the government tells employers that the more an internship program is a classroom or an academic-like experience, the more likely it will meet this test. A university exercising some oversight over the internship experience and providing classroom credit is a plus as well.
  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. Here the government is saying that, if your company augments its workforce with interns or defers hiring because an intern is performing the work, the intern must be paid at least minimum wage and overtime, if earned.
  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. An internship where interns perform productive work for your company, even though, in doing so, the intern is learning new skills will not qualify as exempt from FLSA because your company receives benefit, however slight, from the work.
  5. The intern is not necessarily entitled to a job at the conclusion of the internship. The Department of Labor advises that the length of the internship should be fixed at the outset. It certainly cannot be an unpaid trial period for employment purposes.
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
If all these conditions are met, your intern is not your employee and the FLSA does not apply to the intern.

What’s the Issue?

The problem is that many think these rules set the bar too high for employers. Eric Glatt thought so too. He was an unpaid production intern on the movie Black Swan. He claimed he was asked to perform work that should have been done by other employees, meaning that at least rule #3, above, was not met. In Glatt et al. v. Fox Searchlight Pictures Inc. the courts will determine whether the 2010 rules will be set aside or whether a new, more company-friendly test for unpaid intern programs will be endorsed.

When the case was argued on January 30, 2015 at least a few judges on the Federal Second Circuit Court of Appeals seemed to agree with Glatt that the 2010 rules were violated. However, judges on the appeals panel also seemed to believe that the 2010 test makes it virtually impossible for companies to structure a compliant unpaid internship program. Judges appeared to agree with Fox Searchlight Picture’s lawyers, who argued that the test prohibits interns from performing any productive work at all. This, the lawyers claimed, is “antithetical to a meaningful internship.” They argued instead for the court to adopt a balancing test based upon whether the interns work is more for the benefit of the employer (and would need to be paid) or if the work benefited the intern more (in which event payment is not needed).

What are the implications?

We will have to await the Second Circuit’s ruling and then learn whether the decision will be accepted for appeal to the Supreme Court. However, some things are already clear. First, the 2010 internship rules are tough. The travel giant, Conde Nast paid $5.8 million to settle a class action lawsuit brought by its former interns. It shut down its internship programs right after the lawsuit was filed. Other cases have resulted in even larger settlements, and the effect seems to be that company-run unpaid internship programs are being shut down due to the increased risk. A ruling to set aside the 2010 rules may stop this trend.

Another consequence of the litigation is that colleges and universities may have to step up to the plate to assure that their programs meet standards. Higher education has played a large role in encouraging companies to create unpaid internship programs by touting them as for-credit academic experiences rather than employment. Even though college-credit internship programs have proliferated, some argue that there is little evidence in most of meaningful university oversight or significant university interest in what is actually being done by the intern. These critics claim that colleges are pocketing tuition dollars for internship credits but are bearing none of the responsibility for rule compliance. If the second circuit upholds the 2010 rules, many college-run internship programs will need to change to gain the confidence of business participants that a lawsuit will not follow.

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Reprinted with permission from an article submitted for publication in the May, 2015 Southwest Area Human Resource Association newsletter.