In a competitive job market, students and recent college graduates seek out unpaid internships as a way to obtain "real world" experience they cannot get in the classroom and to open doors to desired professions. Often, these are occupational settings where the chance to work in the field can substitute for the "insider" credentials that often determine who gets hired. For companies with budgetary constraints, unpaid internships can provide an opportunity to identify potential "talent" without incurring the expenses associated with adding to their head-count of employees.
There are of, course, labor law issuesmost importantly, claims under the Fair Labor Standards Act (FLSA) and its state law counterpartsthat employers with unpaid internship programs will need to address.
The FLSA defines an "employee" as a person "employed by an employer" 1 and defines "employ" as "to suffer or permit to work." 2 Although these definitions suggest a broad, encompassing statutory reach, they are not without limits. 3 For example, in Walling v. Portland Terminal Co. , a seminal Supreme Court case on the statutory treatment of trainees, the court held that an individual who "without promise or expectation of compensation, but solely for his personal purpose or pleasure, worked in activities carried on by other persons either for their pleasure or profit" is not an employee for purposes of the FLSA. 4
The Portland Terminal decision involved a training program sponsored by a railroad for prospective yard brakemen. For the trainees, the program provided an opportunity to learn the duties of railroad yard brakeman through observation and by working under the supervision of members of a yard crew (none of whom they displaced), with a view toward getting on a list of competent persons from which the railroad would draw when services were needed. The training was a necessary prerequisite to being placed on the list.
The Supreme Court agreed that the unpaid training program did not violate the FLSA because the trainee-plaintiff was not an "employee" of the railroad. With regard to the meaning of "employ" and "employee," the court noted, "broad as [those terms] are, they cannot be interpreted so as to make a person whose work serves only his own interest an employee of another who gives him aid and instruction." 5
The Portland Terminal decision undergirds the U.S. Department of Labor's current "six-factor test" for analyzing whether interns must be paid the minimum wage and overtime under the FLSA for services provided to private sector employers. In April 2010, the Labor Department issued a "Fact Sheet" reiterating the six factors that had long been included in the Wage and Hour Division's Field Operations Handbook, but setting forth in greater detail how the agency would weigh each of these factors:
1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training that 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