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Unpaid Internships Under Legal Scrutiny

January 4, 2013

6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship. ⁶

In this "Fact Sheet," the Labor Department advises: "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." ⁷ Although it is far from clear that each of these factors is statutorily required to avoid employee status, that appears to be the agency's view. ⁸

Recent Uptick in Litigation

Since September 2011, at least three purported class or collective action lawsuits have been filed in federal and state courts in New York alleging federal and/or state wage-hour violations on behalf of unpaid interns against high-profile companies including Fox Searchlight Pictures, Inc., The Hearst Corp., and Charlie Rose, Inc. ⁹ In July 2012, the lead plaintiff in the Hearst case, Xuedan Wang, filed a second wage-hour action, this time against Fenton Fallon Corp., the company for whom she worked as an unpaid intern just before joining Hearst. ¹⁰ While Wang's suit against Fenton settled, those brought against Hearst, Fox Searchlight, and Charlie Rose are still pending.

Interest in Regulating

The recent uptick in lawsuits filed by unpaid interns reflects the Labor Department's increased interest in regulating internship-training programs. In Solis v. Laurelbrook Sanitarium and School, Inc. , ¹¹ the Labor Department sought to enjoin Laurelbrook Sanitarium and School, a private, not-for-profit boarding school, from violating various child labor provisions of the FLSA.

Laurelbrook operates a high school, boarding school, elementary school for children of staff members, and sanitarium (a 50-bed intermediate care nursing home) as facets of its overall education program. Laurelbrook students spend part of their day in academic classes and the remainder of their day in vocational training, e.g., assigned to the sanitarium kitchen and housekeeping departments, or providing services to patients of the sanitarium (provided they obtained the appropriate certification). Students do not earn or receive wages for any work they perform at the school.

Finding that the students at issue were "trainees" and not "employees" under the FLSA, the district court in Tennessee denied the Labor Department's request for an injunction and entered judgment for Laurelbrook. ¹² The court reasoned: "Although there is benefit to the school and sanitarium from the students' activities, the totality of the circumstances shows that the primary benefit is to the students, who learn practical skills about work, responsibility, and the dignity of manual labor in a way consistent with the religious mission of their school." ¹³ Even though the school earned some revenue from the sale of products made by students, the court found that the students did not displace workers and were working primarily for their own educational ?benefit. ¹⁴

On appeal, the Labor Department argued that the district court incorrectly applied Portland Terminal to the facts of the case. The Labor Department emphasized that "the determination that a trainee is not an employee for purposes of the FLSA is warranted only when all six Portland Terminal factors are met," and that proper application of these factors to the facts as a whole showed that Laurelbrook could not establish any of the factors with respect to its students working in its vocational training program. ¹⁵

The U.S. Court of Appeals for the Sixth Circuit disagreed with the agency, affirming the judgment of the district court and reasoning that the Labor Department's six-factor test was a "poor method for determining employee status in a training or educational setting" in that it was "overly rigid and inconsistent with a totality-of-the-circumstances approach[.]" ¹⁶ Further, the district court properly focused on which party received the "primary benefit" of the work performed by the students. Moreover, in the panel's view, although the school benefited from the students' activities, any such benefit was offset by the "tangible" and "intangible" benefits enjoyed by the students. For these reasons, in the Sixth Circuit's view, the students themselves received the "primary benefit" of the training programs.

In April 2010, the same month the Labor Department issued its more detailed "Fact Sheet" (but before the Sixth Circuit announced its decision in Solis ), Nancy Leppink, then acting director of the Labor Department's Wage and Hour Division, was quoted in The New York Times as stating, "If you're a for-profit employer or you want to pursue an internship with a for-profit employer, there aren't going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law." ¹⁷

Exploring the Factors

Is the Labor Department's six-factor test the correct test for internship programs sponsored by private employers? While the Labor Department insists that its six-factor test finds its basis in the Supreme Court's decision in Portland Terminal , and thus must be followed, in Solis , the Sixth Circuit ruled that the district court correctly downplayed the agency's six-factor test in favor of a "primary benefit" inquiry, holding that "the proper approach for determining whether an employment relationship exists in the context of a training or learning situation is to ascertain which party derives the primary benefit from the relationship." ¹⁸

The factors recited in the Labor Department guidelines were indeed aspects of the facts identified by the court in Portland Terminal in support of its determination that the trainees in question were not "employees" under the FLSA. But the court did not hold that such factors should be deemed exhaustive or dispositive for determining, in all contexts, whether unpaid "trainees" are "employees" for purposes of the FLSA. The Labor Department may therefore be overreading Portland Terminal in insisting that interns become employees simply because the employer derives some benefit from the interns' services. The employer in Portland Terminal may not have derived any immediate benefit from the training program—if we put to one side the benefit of securing a trained group of individuals from which it could draw staffing as needed. But Portland Terminal itself does not suggest that the presence of some benefit to the employer precludes a lawful unpaid internship program.

It should not be surprising that most internship programs provide some benefit to the employer, for many employers maintain such programs to derive such benefit. The presence of employer benefit should not override significant training, educational, and/or experiential benefits to the intern, particularly where the intern is receiving academic credit or even an educational stipend for their work, or where the internship is for a defined period. The point here is not to hamstring internship programs but to make sure they do not continue for indefinite periods of time on an unpaid basis.

Preventative Measures

The safest course is to pay interns the statutory minimum wage and overtime (where applicable). But for employers seeking to continue their internship programs on an unpaid basis, certain steps should be considered. A good first step is to assess whether a college or university might provide academic guidance for the program as well as academic credit for the experience. By linking up with an educational institution that provides credit for the internship and can certify to the educational components of the program, an employer can significantly reduce the likelihood that its unpaid internship program will be subject to challenge.

Second, care should be taken to organize an internship program around a learning experience. For example, the activities of an unpaid intern are more likely to be viewed as an educational experience where the employer provides the unpaid intern with job-shadowing opportunities or an opportunity to "rotate" through different departments of the company under the close and constant supervision of regular employees.

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