Court Rules Unpaid Interns Should Have Been Paid Employees

Posted May 05, 2014

In June 2013, a federal district court in New York issued a decision regarding unpaid interns that should cause employers across the country to think about whether their interns are paid correctly. The rules surrounding unpaid internships aren’t new. The Department of Labor issued information for employers on this topic as recently as April 2010, but that information is based on existing rules. However, many employers may not be aware of these rules and how they affect hiring unpaid interns.

In this case, Glatt v. Fox Searchlight Pictures, Inc., the court ruled that unpaid interns at Fox Searchlight Pictures Inc. (Searchlight) should have been classified and paid as employees. The court ruled that Searchlight violated the Fair Standards Labor Act (FLSA) and New York state labor law when it didn’t pay two production interns for work done on the set of the movie “Black Swan.”

The court also certified a class action against Fox Entertainment Group, Inc. (FEG), allowing a similar lawsuit to proceed alleging that FEG violated New York state labor law when it didn’t pay its interns as employees. The class action will go forward on behalf of all individuals who had unpaid internships between September 28, 2008, and September 1, 2010, with one of several divisions of FEG.

If you use interns as part of your business, especially if they are unpaid, read below for information on the rules that apply to internship programs and the circumstances that led to liability for Fox Searchlight, which intends to appeal the case. Horst Insurance will monitor this litigation and keep you informed of future significant developments.

INTERNSHIP PROGRAMS UNDER THE FAIR LABOR STANDARDS ACT

The FLSA requires most employees, including interns, to be compensated for their services. Unpaid internships in the public sector and for non-profit charitable organizations are generally permissible. However, interns in the “for-profit” private sector generally must be paid at least the minimum wage and receive overtime compensation. There is a very limited exception to this rule for “trainees” who participate in an internship program for their own educational benefit.

According to the DOL, to qualify for the trainee exception, an unpaid internship must meet all these criteria:

  • The internship is similar to training that would be given in an educational environment (even though it includes actual operation of the employer’s facilities);
  • The internship experience is for the benefit of the intern;
  • The intern does not displace regular employees, but works under close supervision of existing staff;
  • The employer that provides the training receives no immediate advantage from the activities of the intern and, on occasion, its operations may actually be impeded;
  • The intern is not necessarily entitled to a job at the conclusion of the internship; and
  • The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

APPLYING THE INTERNSHIP RULES

In the Fox Searchlight case, the court ruled that the interns had been improperly classified as unpaid interns and should have been paid employees covered by the FLSA and New York state law. The court found that, considering the totality of the circumstances, the interns did not fall within the narrow “trainee” exception of the FLSA.

The court’s conclusion was based on its analysis of the six criteria described above, since the FLSA standard also applies to New York state law. Specifically, the court noted the following issues related to these interns:

  • The interns did not receive any formal education or training during the internship and did not acquire any new skills aside from those specific to the back office of “Black Swan.” They gained experience like their paid co-workers, not because the internship was engineered to be more educational than a paid position.
  • The benefits the interns received, such as resume listings, job references and an understanding of movie production offices, were incidental to working like any other employee and not the result of an internship structured to benefit them. However, the company received the benefits of their unpaid work.
  • The interns performed routine but essential tasks that would have been performed by regular employees. These tasks included things like obtaining documents for personnel files, tracking and reconciling purchase orders and invoices, organizing filing cabinets, making photocopies, answering phones and running errands.
  • Searchlight did not dispute that it received a benefit from the interns’ work and provided no evidence that the interns ever impeded work, which trainees would typically do.
  • There was no evidence that the interns were entitled to jobs at the end of the internship or thought they would be. The court did not elaborate on this point.
  • The court acknowledged that the interns understood they would not be paid for their work. However, the court discounted the importance of this factor because the FLSA does not allow employees to waive their entitlement to wages.

The court stated that the interns had essentially completed the work of paid employees—organizing filing cabinets, making photocopies, taking lunch orders, answering phones—which “provided an immediate advantage to their employer.” Any benefits the interns may have received resulted from having worked like any other employee, not as part of an internship program designed to be uniquely educational to the interns and of more value to them than to the employer.

This Horst Insurance Regulatory Update is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.