Every summer, eager students beat down company doors, offering to do whatever is needed—for free—so they can include experience and a reference on their resume. But, a recent slew of lawsuits by unpaid interns has caused employers to re-evaluate whether to utilize interns and, if so, whether interns should be classified as employees.
Note to employers: The unpaid internship can become an expensive trap for the unwary.
In New York, unpaid interns filed separate class action lawsuits against Fox Pictures and Hearst Corporation alleging misclassification under the wage and hour laws and claiming back pay. In Glatt v. Fox Searchlight Pictures Inc., the court ruled on summary judgment that the named plaintiff interns were “employees” and thus were covered by federal and state wage and hour laws. The court also agreed to certify a class of former interns. In Wang v. Hearst Corporation, the court took a contrary position by denying the interns class certification and refusing to hold on summary judgment that they qualified as “employees” under the federal and state wage law. The two lawsuits are presently on appeal in tandem, awaiting a decision from the 2nd Circuit Court of Appeals. Other unpaid intern cases over the last two years alleging misclassification include lawsuits against Charlie Rose (of PBS), Conde Nast Publications, MTV Networks/Viacom, NBC Universal, and most recently Howard Stern (of Siruis XM Radio).
Another intern case out of New York raised additional questions about the rights of interns to be protected against civil rights violations even if they are non-employees. In Wang v. Phoenix Satellite Television, a trial court dismissed a former intern’s harassment claims, holding that she was not an employee under the New York law. As a result, the New York City Council recently voted 50-0, and the mayor signed into law, a bill that prohibits employers from discriminating against unpaid interns. Oregon’s legislature passed a similar law in June 2013 that extends employee protections against discrimination, sexual harassment, and retaliation to both paid and unpaid interns. Washington, D.C. extended similar protections to interns, and legislation has been proposed to do so in California and New Jersey.
How should an employer determine whether an intern should be paid?
The courts apply various tests to determine whether an intern qualifies as an employee subject to minimum wage and overtime requirements. Some courts apply an “economic realities” test. Other courts apply a “primary beneficiary” or “primary benefit” test evaluating who—the employer or the intern—primarily benefits from the internship. Still other courts follow the U.S. Department of Labor’s (USDOL) six-factor “totality of the circumstances” test.
The USDOL test is the most conservative approach for employers and offers the least risk. If the internship satisfies all six factors, the individual is not an employee and is not entitled to compensation. The six factors are:
1. The internship must be similar to training that would be given in an academic or vocational education environment, even though the internship includes actual employer operations.
Employers cannot just provide one-off or even once-a-day training sessions about certain segments of their business to satisfy this factor. Rather, the internship must actually be structured to function like an ongoing training. It is helpful, but not always dispositive, where an intern earns college credit, where the college or university exercises oversight over the program, or where the learning experiences provide the intern with skills that can be used in multiple environment settings (not just the specific employer’s operations). Kaplan v. Code Blue Billing & Coding, Inc. (students completing an unpaid externship as part of degree program were not employees).
2. The internship must be for the intern’s benefit.
It is not enough for the intern to benefit by giving him/her the opportunity to put the company’s name on his/her resume. Interns must benefit through practical experience and learning. USDOL’s guidance also illustrates this requirement in the converse, explaining that if interns are engaged in the employer’s operations or performing productive work for the employer, then most likely this is more for the benefit of employer (not the intern) even if the intern gains a new skill by doing the employer’s work.
3. Employers should gain no immediate advantage from interns.
Similar to the previous factor, the burden of administering the program and supervising the student interns should outweigh any incidental benefit provided to the employer. Indeed, occasionally an employer’s operations might be impeded by the internship; if not, there is a strong likelihood that the internship benefits the employer more than the intern.
4. Regular employees must not be displaced by interns. Instead, the intern must work under the close supervision of existing supervisors and staff.
The student intern should shadow regular employees. Interns should not step into the place of an employee to directly perform the main work of the business. A good test is to ask if the employer would have hired new employees or required existing staff to work additional hours had the interns not performed the work—if the answer is yes, then the interns should be paid for their work. In addition, supervisors of interns must commit significant amounts of time to mentoring, teaching, and critiquing the activities of the interns.
5. The intern is not necessarily entitled to a job at the end of the internship program.
To meet this factor, the internship should have a fixed duration that has been established before the internship even begins. In addition, employers should not attempt to use unpaid internships as trial periods for individuals who are seeking (and at times have an expectation of) full-time employment.
6. All parties must understand that the intern is not entitled to wages for any time spent in the internship program.
Again, the best way to ensure that everyone understands that the internship is not paid is to enter into, and have interns sign, an intern agreement.
Employers should strongly consider having interns sign an internship agreement. (In fact, an internship agreement is now required in Oregon for both paid and unpaid interns.) The intern agreement defines the intern-employer relationship and can help employers to demonstrate to potential litigants or the court (if necessary) that all of the USDOL factors have been met.
We recommend including the following in an internship agreement:
Define the educational environment and the vocational and learning objectives of the internship. This may resemble a college syllabus or teaching guide; it should not look like a standard job description.
Describe how the internship program is structured. For example, explain who will be supervising the intern, how learning objectives will be accomplished, how interns will be evaluated or graded for purposes of receiving academic credit, how long the internship will last, etc.
Specify the benefits to the intern. For example, state that the intern is receiving college credit or restate the educational or vocational objectives the internship will provide.
List all six USDOL factors above and require the intern to initial or acknowledge those factors.
Other important information and best practices
Whether an intern should be paid or unpaid is often a close question. With that in mind, keep in mind the following best practices:
Begin with the assumption that any person performing any job or task for you should be classified as an employee. Never assume that an individual may lawfully volunteer or perform work for you without being covered by the wage and hour laws, especially if you’re a for-profit business.
Unless other statutory exceptions and exemptions apply (for example, a state equivalent of the federal “student learner” exception, 29 C.F.R. §§ 519.1 et seq. & 520.500 et seq.), the intern will usually qualify for overtime and minimum wage requirements.
The intern agreement recommended above or other written agreements do not provide automatic protection, but they can help in a close case. They also clearly set expectations by telling the intern that the internship will not be paid and will not necessarily lead to employment. Work with your legal counsel to help you draft an internship agreement.
When in doubt, classify the individual as an employee entitled to at least minimum wage and overtime.
• DWT’s two previous advisories on this topic in 2011 and 2013.
• USDOL’s Fact Sheet #71
• A 2006 USDOL Opinion Letter addressing the six-factor test in the context of university externs