Unpaid Internships Under Scrutiny

The controversy surrounding unpaid internships is increasingly in the news. Reports of interns filing wage and hour class actions in, for example, The New York Times and PBS's NewsHour, have highlighted an often-unnoticed employer practice of using unpaid interns. Putting aside the debate as to whether unpaid internships actually help or harm the interns, employers should expect such relationships may be scrutinized by contingency fee lawyers and government agencies.

In the past year, there have been a number of lawsuits, including class actions, filed by unpaid interns. Recent plaintiff-friendly rulings suggest there will be more to come. For example, in Glatt v. Fox Searchlight Pictures, Inc.,1 a federal district court in New York ruled that unpaid interns used for the popular movie Black Swan should have been classified as "employees," and therefore subject to the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA) and New York law. The court found that the company had violated state and federal laws because the unpaid interns were "employees" routinely performing tasks that would have otherwise been completed by paid employees, such as answering phones, placing food orders, and assembling materials. Similarly, in Davenport v. Elite Model Mgmt. Corp., an unpaid intern brought a $50-million class action alleging that the modeling agency used unpaid interns to avoid paying wages and overtime to employees for performing otherwise compensable tasks, such as chaperoning models, updating portfolios, preparing modeling books, and other general administrative duties.2

The Fox Searchlight decision is poised to become persuasive authority across the country as more cases come to light. For example, unpaid interns have recently brought other high-profile lawsuits against Gawker Media LLC, Condé Nast, NBC Universal, Warner Music Group, Madison Square Garden, and the Hearst Corporation—just to name a few. Despite the fact that many of these cases arise out of the entertainment industry, the relevant rules and standards are applicable to any employer.

In addition to intern-related lawsuits, state and federal agencies also have stepped up their efforts to enforce wage and hour laws pertaining to unpaid internship programs. This heightened enforcement is based on the concern that, as the number of unpaid internships continue to rise, those who are most affected—students and recent graduates—are unable to speak up for fear of jeopardizing their chances at regular full-time employment. Such agencies are more frequently launching their own investigations and fining employers who are in violation of the law.

In the wake of Fox Searchlight, Elite Model, and other cases, it behooves employers with unpaid interns to fully understand the rules regarding who can—and who cannot—be classified as an unpaid intern. Employers who decide to use such interns must meet the following stringent, six-factor test developed by the Department of Labor (DOL):

  1. The internship must be similar to training that would be given in an educational environment, even though it includes the actual operation of the employer's facilities;
  2. The internship experience must be for the benefit of the intern;
  3. The intern should not displace regular employees, but instead work under the close supervision of existing staff;
  4. The employer providing the training should derive no immediate advantage from the activities of the intern and, on occasion, its operations actually may be impeded;
  5. The intern should not necessarily be 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 performing the internship.

Moreover, some states like California and New York consider additional factors when determining whether an individual is a legitimate unpaid intern. Employers in these states must meet both federal and state criteria to host a bona fide unpaid internship program. Importantly, these factors and any related wage and hour liabilities apply even if the individual "voluntarily" declines pay for the position. As such, an employer will not be insulated from risk just because the individual has consented to be an unpaid intern.

It is important to remember that an employer must establish that it has met all six DOL factors. The first two factors can be especially difficult to prove. For example, the DOL does not require classroom training for the first factor; however, internships must provide something beyond merely "on-the-job" training. Further, the position cannot provide benefits incidental to working in the office like any other employee. As discussed in Fox Searchlight, "resume listings and job references resulting from any work relationship, paid or unpaid" are not the type of "academic or vocational benefits" envisioned by the DOL. Moreover, the fact that unpaid interns receive academic credit does not shield an employer from future liability.

The liability risk associated with using unpaid interns may remain long after the intern has ended the relationship. For example, under federal law, the statute of limitations for wage and hour violations is two years, but sometimes can be as long as three years. Further, state law may impose an even longer limitations period. California's statute of limitations is three years, or four years if the violation is willful, and New York has a six-year statute of limitations for wage and hour violations.

Employers should also be aware that liability over misclassified interns may extend beyond wage and hour concerns. For example, if an intern is found to have been a misclassified employee, he or she could assert other potential employment claims under state and federal law, including claims for discrimination, harassment, and failure to accommodate a disability. While these laws would not generally apply to an unpaid intern because he or she would not be an "employee" within the meaning of the statutes,3 this changes once the intern has been found to be a misclassified employee. As such, employers should be aware of the various risks associated with intern misclassification.

Without a doubt, unpaid internships are now, more than ever, under the microscope. In light of the recent plaintiff-friendly developments mentioned above, many employers are opting to hire interns as employees and pay them at least the minimum wage to ensure compliance with the law, while others are opting to discontinue such programs altogether. Regardless, employers using unpaid interns should work with counsel to carefully review their intern programs to ensure legal compliance.

Wilson Sonsini Goodrich & Rosati is actively following developments around the country with respect to unpaid internships and all other aspects of employment and trade secret law.

1 Glatt v. Fox Searchlight Pictures Inc., 2013 U.S. Dist. LEXIS 82079 (S.D.N.Y. June 11, 2013).

2 Davenport v. Elite Model Mgmt. Corp., case number 13-cv-1061 (AJN), filed in the U.S. District Court for the Southern District of New York on February 15, 2013.

3 Wang v. Phoenix Satellite TV US, 2013 U.S. Dist. LEXIS 143627 (S.D.N.Y. Oct. 3, 2013) (finding that intern-plaintiff could not bring a sexual harassment claim under state or federal law because she was an unpaid intern and not an employee). In response to this case, the New York legislature has introduced legislation to avoid such a result, thus further highlighting the internship controversy.

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.

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