The (Sort Of) Hired Help: Wage and Hour Implications of Hiring Unpaid Interns

By Amy Traub and Desiree Busching

On February 1, 2012, a former intern of the Hearst Corporations’ Harper’s Bazaar filed a class action lawsuit on behalf of herself and others similarly situated. The lawsuit alleges that the company violated the Fair Labor Standards Act (“FLSA”) and applicable state laws by failing to pay minimum wage and overtime to interns. The use of unpaid interns is a widespread practice, especially in the retail, publication, and real estate industries, as well as in Hollywood. In fact, in September 2011, a similar lawsuit was filed against Fox Searchlight Pictures, Inc., claiming that the company used unpaid interns so it could make the film “Black Swan” more cheaply.  As reported in the book Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy, internships save firms roughly $600 million every year. 

Aside from the prestige that may accompany an unpaid internship for a dream employer, recession markets lead many job seekers to try to get their foot in the door by interning without pay.  Similarly, companies often view unpaid internships as a win-win: they get additional staffing without increasing their budgets and can train them for possible future employment without incurring any costs, while the interns get field experience to help them land a paying job.  As the complaint against the Hearst Corporation asserts, “[u]npaid interns are becoming the modern-day equivalent of entry-level employees.” 

But as the recent complaints against the Hearst Corporation and Fox Searchlight Pictures, Inc. demonstrate, companies utilizing the services of unpaid interns must tread carefully or they could face significant wage and hour liability, especially in light of the increased focus on unpaid interns in the legal arena.   Federal and state wage and hour laws provide multi-factor tests to determine whether an intern is actually an “intern,” or if he/she should instead be classified as an “employee,” and thus entitled to compensation.

The U.S. Department of Labor (“DOL”), for example, uses the following six-factor test to determine whether such an individual qualifies as an “intern” under the FLSA:

  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.

If the above factors are met, then the intern is not entitled to minimum wage or overtime under the FLSA.  However, many states have their own wage and hour laws with additional factors to consider in determining whether a worker is an “intern,” and thus not entitled to compensation, or an “employee,” who must be paid in accordance with minimum wage and overtime laws. For example, New York utilizes an 11-factor test, and California, which also previously had an 11-factor test but departed from that precedent in April 2010, now employs a 6-factor test similar to that used by the DOL.

Therefore, in order to protect themselves from wage and hour liability for use of unpaid interns, employers must be sure to check both federal and state wage and hour laws, and should speak with counsel if they are unsure if interns are being assigned appropriate work or are otherwise classified appropriately under applicable laws.

DOL Provides Guidance For Unpaid Internship Programs Under The FLSA For For-Profit Employers

By Douglas Weiner and Brian Molinari

In the current economic downturn, competition for desirable positions of employment is keen. Ambitious job seekers may approach an employer asking for an unpaid position to gain experience, skills and contacts. While such a relationship may prove mutually advantageous, employers should remember that the DOL recently emphasized the FLSA’s compensation requirements apply to employees who are required or allowed to work. The terms “to suffer or permit to work” have been construed expansively in order to effectuate the broad remedial purposes of the Act.

Volunteering Does Not Mean Waiving

It has been determined that employees subject to the Act may not choose to “decline” the protections of the Act by performing activities characterized as “volunteer” services. Tony and Susan Alamo Foundation v. Secretary of Labor, 471 U.S. 290, 302 (1985). In that case, the Supreme Court was concerned that unless employees were barred on a general basis from “volunteering” to perform any services for their employers there would be potential for the coercion of uncompensated services, to the detriment of the purposes of the Act. The Court did not wish to allow the prohibition against employees waiving their protections under the Act to be circumvented by characterizing work as “volunteer” services, citing Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728 (1981) and Brooklyn Savings Bank v. O’Neil, 324 U.S. 697 (1945). Accordingly, covered and non-exempt individuals who are “suffered or permitted” to work must be compensated under the law for the services they perform for an employer. Thus, internships in the “for-profit” private sector will most often be viewed as employment, unless the test described below relating to trainees is met.

Fact Sheet #71: The Test For Unpaid Interns

Individuals who participate in “for-profit” private sector internships or training programs may do so without compensation, according to DOL, only under certain circumstances. Whether an internship or training program meets this exclusion depends upon all of the facts and circumstances of each such program.

The following six criteria must be applied when making this determination:

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.

If all of the factors listed above are met, an employment relationship does not exist under the FLSA, and the Act’s minimum wage and overtime provisions do not apply to the intern. 

Accordingly, employers must tread carefully when entertaining what is certain to be many offers from job seekers to work as an unpaid intern. Unless all 6 factors above support an unpaid internship, individuals working for “for-profit” employers typically must be paid at least the minimum wage and overtime compensation for hours worked over forty in a workweek.