Legal Trends: Is Your Unpaid Internship Program Lawful?

Recently, employers such as Hearst Corp., "The Charlie Rose Show" and Fox Searchlight Pictures have been named for allegedly violating the Fair Labor Standards Act (FLSA) and state labor laws by failing to pay interns who assumed significant work responsibilities. These cases should serve as a wake-up call to all employers that use unpaid interns.

Employers using unpaid interns are well-advised to review and update their internship programs and policies to comply with federal and state standards. To avoid liability, employers can protect themselves with a clear understanding of what classifies an employee as a "trainee," what the requirements set by the U.S. Department of Labor (DOL) mean and how to structure internships.

Recent Rash of Cases

In the Hearst Corp. case, a former intern for Harper's Bazaar claims that the publisher violated state and federal wage law by having her work as many as 55 hours per week without pay. The plaintiff claims interns "are a crucial labor force" for the fashion magazine. She said she spent her time coordinating deliveries of samples, recording the contents of sample trunks and processing reimbursement requests—activities she claims she should have been paid for. Hearst officials told the press that the company's internships are educational and conform to legal requirements. Nonetheless, the court has allowed the case to proceed on a class basis.

A former intern for "The Charlie Rose Show" alleged, in proposed class action, that the PBS talk show violates New York state labor law by using interns to perform productive work without paying wages. The named plaintiff, Lucy Bickerton, alleges that she regularly worked 25 hours a week or more for the show without pay in the summer of 2007, performing tasks such as conducting research to prepare Rose for guest interviews, assembling press packets, escorting guests through the studio, breaking down the interview set after daily filming, and cleaning the green room—tasks she believes she should have been paid for.

The Fox Searchlight complaint alleges that the media company violated the FLSA and New York state labor law by using unpaid interns during production of the 2010 film "Black Swan." The plaintiffs claim that Fox Searchlight has been able to cut production costs with a stream of unpaid interns who work as production assistants and bookkeepers and who perform secretarial and janitorial work. An unpaid intern on the 2008 film "500 Days of Summer" recently sought to join the Fox Searchlight case, and the group has asked the court to expand the putative class of unpaid interns by adding the parent Fox Entertainment Group.

Employers get into trouble when they view unpaid internships as a way to accomplish work tasks rather than as educational programs aimed at assisting students. Employers should remember the basic rule that they must pay all employees minimum wage and overtime pay under the FLSA and state wage and hour laws.

Indeed, many employers are surprised to learn that the FLSA does not provide an exception for "student interns" per se. Instead, the DOL provides a narrow exception to the definition of employees for "trainees" and has recognized that student interns may qualify as trainees; if student interns qualify, employers are not required to pay them minimum wage or overtime.

Who Qualifies as Trainees?

In structuring unpaid internship or trainee programs, employers must heed the significant requirements the law imposes to qualify someone for this unpaid category. The DOL has set forth six mandatory requirements for someone to be considered an unpaid trainee:

The training, even though it includes the operations of the employer, is similar to that given in a vocational school. The closer the internship resembles an educational program, the easier it is for an individual to qualify as a trainee under the FLSA. For example, the DOL found that a marketing internship met this criterion when the internship was structured like a college marketing course, complete with a program description, an outline, a syllabus and assignments. In this case, the DOL noted that the internship provided students with real-life educational experiences that could be obtained only outside of a classroom yet would be similar to a marketing class offered by the school.

Consistent with learning objectives in most school classes, an employer should structure internships to provide the intern with an individual training program or tailor an intern's tasks toward an educational goal. Further, the employer should ensure that the student receives ongoing instruction and close onsite supervision throughout the internship. Oversight ensures that productive work the intern generates for the employer is offset by the burden that employer faces in training and supervising the intern.

To qualify as unpaid interns, these individuals must genuinely be acting for their own benefit.

The training is for the benefit of the trainees or students. DOL officials look for internships that increase the intern's chances of being hired in the job market or situations where students receive academic credit toward graduation. Unpaid interns who fall into the category of "trainees" rather than "employees" frequently perform tasks that are useful only for training purposes and that provide little to no benefit to the employer.

Courts typically place a good deal of weight on this factor. If the employer is the primary beneficiary, the DOL will consider the intern an employee under the FLSA who is entitled to its protections. The emphasis on this factor makes sense in light of the rationale for allowing employers to forgo paying qualified trainees: Although the FLSA requires an employer to pay anyone whom it causes to "suffer to work," the act does not prevent individuals from engaging in activities purely for their own benefit. Thus, to qualify as unpaid trainees or interns, these individuals must genuinely be acting for their own benefit. Thus, in considering this factor, courts look favorably at programs that afford participants academic credit. The courts construe credit as an immediate benefit to interns.

The trainees or students do not displace regular employees but work under their close observation. An employer should not expect or entrust an intern to do the same work as regular employees. Further, an employer should not hire an intern to assume the job duties of a recently departed employee. The presence of a student at the worksite cannot result in an employee being laid off, an employer not hiring a worker the employer would otherwise hire or an employee working fewer hours than the employee would otherwise work.

In evaluating whether an intern is considered an employee, the DOL measures the amount of supervision provided to the intern. Thus, employers should adopt a policy that sets up strict supervision of interns and assigns a mentor. Employers should also train intern supervisors to actively participate with the interns.

The employer that provides training derives no immediate advantage from the activities of trainees or students, and on occasion operations may actually be impeded. The requirement that the employer derive no immediate advantage from the intern expands the requirement that the intern not displace regular employees. If the employer is the primary beneficiary of an internship, for example, and the employer reduces costs or accomplishes necessary tasks through the intern, the DOL will consider the intern an employee under the FLSA. If the intern is the primary beneficiary of the experience, the DOL is much more likely to consider the intern a trainee under the FLSA.

This doesn't mean that interns can perform no work related to the business. In many cases, interns benefit because they participate in business tasks that relate to a field of study. Instead, whether an employer derives no immediate advantage depends on whether the value that the employer would receive from the productive work is offset by the employer's burden from the training and supervision it provides. The standard of judgment is based on net gain to the employer. So when a student benefits more from an internship than the company does, this element is satisfied.

The DOL recommends documenting the training, monetary benefits and costs an intern brings to the company. The intern should not be responsible for doing significant "actual productive work." If an intern accomplishes any productive work, it should be insubstantial in nature and secondary to the training.

Trainees or students are not entitled to a job at the end of the training. To ensure that the intern has no expectation of employment, the DOL recommends that an employer draft a written agreement with the intern stating that the intern should have no expectation of employment and should not presume any guarantee of employment after the internship. Though an employer should make it clear that an intern is not entitled to a job at the conclusion of the internship, employers should not be discouraged from offering jobs to interns.

The employer and trainees or students understand that trainees or students are not entitled to wages for the time spent in training. Before beginning the relationship, employers should draft a written agreement stating that payment for the intern's services is neither intended nor expected during the internship.

Structuring an Internship

Finally, in evaluating their internship policies, employers must take into account state laws. Many states have stricter tests for unpaid interns than the federal standards.

A couple of years ago, then-acting administrator of the DOL's Wage and Hour Division Nancy Leppink told The New York Times that there were not many circumstances in which for-profit employers could offer unpaid internships and still comply with the law. Before continuing or starting an internship program, employers should seriously analyze whether the program represents one of the exceptional circumstances in which an unpaid internship complies with the law.

Offering students an internship to gain hands-on work experience is a beneficial opportunity for everyone, if executed properly. To ensure a positive outcome for both parties, keep the six requirements in mind when creating internships.

The author is a partner at Haynes and Boone LLP in San Antonio.