Unpaid Internships May Cost Your Business Dearly In The Long Run

by McNees Wallace & Nurick LLC
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Summer has finally arrived. While many of us will soon become consumed with pool parties, backyard barbeques, and well-deserved vacations, a new crop of summer interns is just beginning their first endeavor in the working world with the hope of making a lasting impression on prospective employers in their chosen fields.

According to various surveys, the number of internships nationwide has climbed significantly over the last two decades. Approximately half of all college graduates report participating in some form of internship during their high school or college careers. Anywhere between 25% and 50% of these internships are unpaid. However, it is becoming an increasingly risky proposition for employers to take on unpaid interns. In fact, in just the past few days, Warner Music Group, Atlantic Records, and media giant Condé Nast have all been sued by former interns who claim that they should have been compensated for their internships. These latest lawsuits come on the heels of a sweeping New York federal court decision finding Fox Searchlight Pictures liable for violating minimum wage laws for failing to pay interns who worked on the 2010 movie Black Swan.

At the heart of these cases is whether the unpaid interns should have actually been classified as employees of the business. If so, the interns would be entitled to wages and overtime pay under the Fair Labor Standards Act (“FLSA”). While there are no bright line rules, the Department of Labor has developed a six-factor test to determine when an intern should be considered entitled to wages under the FLSA. Under these factors, an employer does not violate the FLSA by failing to pay wages to an intern only if: 

  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;
  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;
  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;
  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.

Since most employers do not structure internships as formal training programs, few internship programs actually meet the test. Indeed, as the court in the Black Swan case concluded, the fact that interns on the movie did not receive any formal training or education during their internship, did not acquire any new skills, and were essentially performing routine office tasks that would otherwise be performed by paid workers weighed in favor of finding the interns to be employees of Fox Searchlight and, hence, entitled to wages. Particularly troubling for employers, the court went on to state that unpaid internships should only be allowed in extremely limited circumstances and the fact that an intern is receiving educational credits for the internship through a college or university does not absolve the employer from paying wages when the test is not met.

While it remains to be seen whether the Black Swan decision is a signal that the sun is setting on the use of unpaid interns in the corporate world, employers should certainly proceed with caution if they intend to utilize unpaid interns this summer and beyond. In addition to engaging competent legal counsel, employers who wish to implement an unpaid internship program should also consider the following best practices to limit any argument that interns should have been paid as regular employees:

Ask at the Outset Who Primarily Benefits from the Internship Program. Not surprisingly, courts often tend to see this as the most important factor in the test. If it appears that an intern is simply around to provide free labor that would otherwise be performed by a paid employee, there is a very good chance that a court would find that the intern is entitled to wages for their services. The focus of a compliant internship program should be on providing interns with successful learning opportunities that build transferable skills unique to a specific industry and are aligned with specific learning objectives.

Create Program Materials for the Interns. While a compliant internship program does not necessarily need to mimic the curricula developed in college-level courses, there should be some academic or educational component incorporated in all internships. This would normally include written materials that cover specific learning objectives, shadowing experiences, experiential learning opportunities and traditional classroom learning.

Assign a Mentor to Each Intern. An appropriate mentor can be a valuable resource and wealth of knowledge to an intern. In addition, having a mentor supervise the work of an intern lessons the likelihood that the person will be perceived as having a level of autonomy that would threaten their status as an intern.

Get It in Writing. All employers should require interns to sign a written agreement that clearly spells out the purpose of the internship and the business’s expectations for the intern. The agreement should also make clear that interns do not have any expectation of employment at the end of the internship and are not entitled to wages for their time spent as an intern.

Select Interns Based on Scholastic Achievement. Interns should be selected based on their scholastic achievement and demonstrated willingness to learn. Employers that use an intern selection process that is substantially similar to the hiring process for new employees may threaten intern status.

Don’t Forget About Child Labor Laws. When hiring interns, employers must also be aware of the child labor laws that exist in their state. For example, Pennsylvania’s child labor law requires everyone under the age of 18 to have an employment certificate before they can work and restricts the number of hours and industries in which a minor may work. Ohio has a similar law. These laws apply equally to a properly classified unpaid intern and a paid employee.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McNees Wallace & Nurick LLC | Attorney Advertising

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