Unpaid Internships – Worth the Risk?

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Over the past few years, the number of college undergraduates and recent graduates engaging in unpaid internships has grown dramatically.  One expert estimates that there are between 1 and 2 million internships each year, and that in about half of these the interns are unpaid or paid less than the minimum wage. Another source estimates that up to 30 percent of college undergraduates do an unpaid internship at some point during their education.

There are several reasons for this increase.  Even assuming that many such internships are well-designed and executed to stay within the law, it cannot be denied that some firms would find that they simply cannot resist having eager young aspirants willing to work for nothing – especially in these economically-parlous times. The aspirants, too, often desperately seek these positions because they are generally thought to be essential résumé ingredients, especially in some of the so-called “glamour” industries, such as fashion, films, and publishing.

Until very recently, the firms who utilize such programs have almost always found that there is no real price to pay—either for the interns’ time and work or to the regulators because this issue has historically been well down the priority list of the Wage and Hour Division. That may, however, be changing, not only because of a new emphasis by the Department of Labor, but also because private lawsuits under the Fair Labor Standards Act (“FLSA”) offer rich rewards to imaginative and energetic plaintiffs’ lawyers.  This change could also, perhaps, be due to fewer young people who can afford to go without income for an extended time and are willing to sue to get paid.

The Wage and Hour Division’s current guidance, Fact Sheet #71, lists six criteria to be used in analyzing whether an internship is properly classified as unpaid, all of which must be satisfied:

     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.

Some courts have been loath to apply these criteria, relying instead on what they have called a “primary benefit test.”  Under this test, the question is whether the employee/intern is the primary beneficiary of the work being performed. The application of this test, by its nature somewhat hazy and ambiguous, has resulted in unpredictable and inconsistent results.

The sea may, however, be changing, shifting to the somewhat less employer-friendly standard set out in Fact Sheet #71. A number of lawsuits seeking payment of back wages under the FLSA have recently been filed, most in the “glamour” industries, and almost all seeking certification as class or collective actions.  In the most significant decision in these cases so far, Judge William H. Pauley III of the Federal District Court in Manhattan found that former interns working on film production crews for Fox Searchlight Pictures were in fact employees and not properly classified as unpaid interns. Judge Pauley extensively and carefully analyzed the facts before him in the light of the criteria established by the Wage and Hour Division and found that these interns were entitled to be paid.  Just as significantly, the judge certified the claims of one of the interns as a class action under New York law and conditionally certified the case as a collection action under the FLSA. This, of course, multiples the potential damages many times and, for this reason, makes it worth the plaintiffs’ lawyers’ time and effort.

Well, you may say that this is just one case and one judge. True enough, but it is a persuasively-written opinion by a judge on an influential and high-profile court in a case involving a high-profile industry and defendant.  Because of the “easy pickin’s” and high potential returns, the cases are attractive to plaintiff’s lawyers, and the issue is being pushed by the administration. All of this augurs trouble ahead for those who have unpaid internship programs. Unless these programs are carefully planned and administered, they are fraught with potential pitfalls.  The usual cost of litigation of these cases is exacerbated by the fee-shifting provisions in the FLSA (loser, if the employer, pays) and by the almost certain imposition of liquidated damages, thereby doubling the back wage amount.

If your business is in the sights of those who bring these cases, you should assess what you are doing very carefully and decide whether saving a few bucks on an intern is really worth it.