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The In-House Advisor Published by Shepard Davidson & Renee Inomata

Using Unpaid Interns May be Illegal

Posted in Uncategorized, Wage & Hour, Worker Classifications

As summer approaches, many companies will face the tempting invitation from students to work “for free” as interns.  While some companies may consider jumping at the chance to enhance their workforce without incurring the costs of compensation, health insurance and other benefits of being an employee, as the U.S. District Court for the Southern District of New York just reminded the business community, having unpaid interns can be perilous if you don’t know – or if you ignore – the law.

Like many businesses, Fox Searchlight Pictures, Inc. hires a number of unpaid interns every year.  In 2011, however, several of their “interns” sued, claiming that they should have been paid for the hours they had worked performing routine tasks that would otherwise have been performed by regular employees in connection with the production of the film Black Swan.  On June 11, 2013, U.S. District Court Judge William H. Pauley III issued a ruling in which he agreed that two interns, Eric Glatt and Alexander Footman, were “classified improperly as unpaid interns and are ‘employees’…”  of Fox Searchlight.  Judge Pauley went on to say that these putative interns:

…worked as paid employees work, providing an immediate advantage to their employer and performing low-level tasks not requiring specialized training.  The benefits they may have received — such as knowledge of how a production or accounting office functions or references for future jobs — are the results of simply having worked as any other employee works, not of internships designed to be uniquely educational to the interns and of little utility to the employer. They received nothing approximating the education they would receive in an academic setting or vocational school.

As a result, the interns did not fall within the narrow “trainee” exception to the Fair Labor Standards Act (“FLSA”) that would have exempt them from compensation.  As I have written before, companies need to think twice before taking on interns on an unpaid basis.  The Department of Labor, as outlined in the FLSA Fact Sheet #71, offers the following test to determine whether a worker is a “trainee” (and can be unpaid), or an “employee” – who must therefore be paid:

  1. Receive training similar to that provided in an educational environment
  2. Be for the benefit of the intern, and not the employer
  3. Not displace regular paid employees
  4. Be closely supervised by existing staff
  5. Not be used for the immediate advantage of the employer (and in some cases, may impede the employer’s operations)
  6. Not necessarily be entitled to a job after the end of the internship
  7. Understand that the intern is not entitled to wages for time spent in the internship

What’s the big deal?  In Massachusetts, for instance, if a worker has not been paid for services rendered to a company as an employee, then the company – and its president, treasurer and any officers having management of the company, individually – are liable for payment of all wages for all work performed, plus the value of any benefits that the worker would have received had she been properly classified as an employee.  If legal action is commenced and the worker prevails, then the company – and its president, treasurer and any officers having management of the company, individually – are subject to mandatory treble damages, plus attorneys’ fees.  It even is possible that criminal sanctions could be imposed.  Further, if a company has multiple misclassified interns, a class action could ensue, which can be even more expensive as hungry plaintiffs’ class action attorneys (whose business model compels them to maximize settlement amounts) get involved.  Indeed, in the Fox Searchlight Pictures case, Judge Pauley ruled that the facts supported a class action.

So, before taking on a number of “unpaid interns,” in-house counsel should be sure that the business people – and even their own departments – have compared their potential “interns” to the FLSA test above and make sure that those who do not meet the requirements to be an unpaid “trainee” are appropriately paid.