Employers Beware: Unpaid Internships May Result in Labor Law Violations

In the throes of summer internship season, the Honorable William H. Pauley, III, of the United States District Court for the Southern District of New York, issued a recent opinion that will leave many employers revisiting their unpaid internship programs.

In the case of Glatt, et al. v. Fox Searchlight Pictures Inc., Case No. 11 Civ. 6784 (WHP) (S.D.N.Y. June 11, 2013) (a copy of the decision is available HERE), several unpaid interns who worked on the movie Black Swan sued their former employers, Fox Searchlight Pictures Inc. and its parent, Fox Entertainment Group, Inc. (collectively, “Fox”), for violations of the Fair Labor Standards Act (“FLSA”) and the New York Labor Law (“NYLL”), amongst other claims.  The thrust of the claim was that Fox had violated the FLSA and NYLL by wrongfully classifying the plaintiffs as “unpaid interns” as opposed to “employees” entitled to wages.

After determining that Fox Searchlight and Fox Entertainment were both the interns’ “employers” under the FLSA and NYLL, the Court analyzed the “employee” issue by examining whether the interns were protected by the FLSA and NYLL, or, alternatively, whether they fell within a narrow exception for “trainees” established in the United States Supreme Court decision of Walling v. Portland Terminal Co., 330 U.S. 148 (1947).  The Walling case held that an individual who qualifies as a “trainee”, and whose work essentially serves his/her own interests instead of those of the employer, is exempted from the FLSA’s protections.  The test for determining whether a worker qualifies for the “trainee” exception established by Walling was later set forth by the United States Department of Labor (“DOL”) in Fact Sheet #71 in April 2010.  (Fact Sheet #71 is available HERE.)  Pursuant to that test, an internship may be unpaid, based upon a totality of the circumstances, if:

1. the internship provides training similar to that obtained in a vocational school setting;
2. the purpose of the internship is to benefit the intern;
3. the intern does not displace any regular employee;
4. the employer does not enjoy any immediate advantage from the intern’s work;
5. there is no entitlement to a job at the internship’s conclusion; and
6. both the employer and intern understand that the intern is not entitled to wages.

 Because the FLSA and NYLL definitions of “employment” are practically identical, the Glatt Court used this “trainee” test to assess the interns’ status under both statutes.

Under the DOL “trainee” factors, the Court concluded that it was likely that the interns received no formal training or education during their internship with Fox, and the “benefits” that they experienced (i.e. job references, resume building) were no different than those of any other Fox employee who worked on the Black Swan production and received wages.  The tasks that the interns were responsible for – including running errands, answering phones, taking lunch orders and organizing files – would have to have been performed by a regular employee if the interns had not performed them, thus satisfying the “displacing of regular employees” factor.  These tasks also provided Fox with an immediate advantage from the work performed.  In favor of Fox, there was no evidence that the interns had any expectation of a job at the conclusion of their internships.  Additionally, while the interns understood they would not be paid for their services, the Court noted that the FLSA, as a matter of public policy, does not permit an employee to waive an entitlement to wages.  Based upon a totality of the circumstances, the Court found that the interns were improperly classified as unpaid interns, and that they were “employees” protected by the FLSA and NYLL.

The Glatt opinion is instructive of the potential pitfalls of unpaid internship programs and offers a prime opportunity for employers to re-evaluate and potentially modify their programs in order to avoid running afoul of applicable labor laws such as the FLSA.