If Your Unpaid Interns Are Productive and Valuable, You Could Be in Trouble

Fox searchlightUnpaid internships have been a dicey proposition for employers for almost as long as the Fair Labor Standards Act has been on the books.

For the first several decades since Congress adopted the law in 1938, the disputes were largely about employer training and apprenticeship programs and whether those trainees who weren’t paid were employees. If they were, they had to be paid and they were subject to other wage and hour rules.

These days, the issues almost all are about corporate internship programs, and whether the college students — and recent alums — have to be paid. If your company pays, even if it’s just minimum wage, you have nothing to fear from the Department of Labor’s Wage and Hour Division.

For everyone else — and that’s a fairly significant one-third of all internships — this week’s decision against movie company Fox Searchlight should give you reason to evaluate the nature of your program and how it is actually being administered by supervisors.

It’s all well and good to declare in your internship materials that you provide training, hands-on experience doing real work, regular evaluations, and the like. But if the interns’ direct supervisors turn them into mere gophers, provide little or no training, and have them fill-in for regular employees who leave, you have a potential lawsuit in the works, even if the students say nothing.

As every college recruiter can attest, students will do almost anything to snare a coveted internship. The Internship may be silly and over the top in a lot of ways, but not in its portrayal of the near desperation of Google’s intern hopefuls. Google, unlike Fox, pays its interns and has them working on real projects, treating them as the full employees they all hope to one day be.

The pay and the duties are what got Fox into trouble, and what formed the basis of the court’s decision against the company. The two production interns who sued Fox, said their work on the movie Black Swan involved fetching coffee, doing janitorial cleanup, moving furniture, answering phones, and other, similarly menial tasks often working 10 or more hours in a day.

Ruling in favor of the two interns, New York federal court Judge William Pauley wrote, “Considering the totality of the circumstances, (the two interns) were classified improperly as unpaid interns and are ’employees’.”

department of laborIf he hadn’t gone a step further, the case would have been another footnote in the ongoing battle between unpaid interns and employers who take advantage of students’ desperation for internship resume credits. But Pauley broke with a number of previous court decisions using a U.S. Department of Labor test derived from a 65-year-old case to decide whether the Fox interns were employees.

The DOL says if all of the following conditions apply, then an intern is not an employee and doesn’t have to be paid:

  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.

What’s remarkable about this test, and its application in the Fox case, is that almost no other courts have accepted it when applied to white-collar college student interns. The National Association of Colleges and Employers — and many college internship coordinators — complain the criteria is too limiting.

In a position paper issued in 2010, when the DOL promulgated its rules, NACE said,

While the DOL standards are a matter of law, they were originally created for vocational training programs. NACE has recommended to the DOL that it reconsider and revise the FLSA criteria to ensure they “account for the incredible diversity of students, higher education institutions, and employing organizations involved in such programs.”
More specifically, NACE called on the DOL to revise its fourth point, and, in essence, adopt the test that other district courts and at least one federal court of appeals has, which is the “primary benefit” test. Wrote NACE:
…students want to engage in projects and tasks that contribute to the professional work of the organization. This means that the employer does benefit from the work of the intern while, at the same time, it provides a meaningful experience that allows for the application of academic knowledge.

The “no immediate advantage” test dates back to a U.S. Supreme Court decision in 1947 involving the training of railroad brakemen. Since then, several courts of appeal have refused to apply it, instead adopting what has come to be called the “primary beneficiary” test.

Pauley flatly rejected using the test, insisting “a ‘primary beneficiary’ test is subjective and unpredictable” because an employer would have a hard time knowing in advance whether the intern or the company would wind up with the most benefit. The “no immediate advantage” test is simpler to apply and provides a more limited exception to the FLSA than the other test.

A spokesman for 20th Century Fox told The Los Angeles Times, “We are very disappointed with the Court’s rulings. We believe they are erroneous, and will seek to have them reversed by the [U.S. 2nd Circuit Court of Appeals] as quickly as possible.”

Regardless of what that appeals court decides, the U.S. Supreme Court is doing to have to resolve the unpaid internship controversy. In the meantime, recruiters who handle internship programs need to take a hard look at both the structure of their unpaid program, and how they are actually managed. Not only do you need to alert the line supervisors of your interns to the specific DOL criteria, but speak with the interns about the work they do, the hours they spend on the job, and what they are learning and from whom they are learning.