Summer's Coming! How to Handle Unpaid Internships

By Jeffrey Landes, Susan Gross Sholinsky, and Nancy L. Gunzenhauser

A hot topic for every summer – but particularly this summer – is the status of unpaid interns. You are probably aware that several wage and hour lawsuits have been brought regarding the employment status of unpaid interns, particularly in the entertainment and publishing industries. The theory behind these cases is that the interns in question don’t fall within the “trainee” exception to the definition of “employee” under the federal Fair Labor Standards Act (“FLSA”), as well as applicable state laws. If the intern does fall within this exception, he or she is not subject to wage and hour laws (such as minimum wage or overtime) and the unpaid internship is thus permissible.

Federal and New York State Factors

According to the U.S. Department of Labor (“DOL”), all six of the following factors must be met if an intern can be exempted from wage and hour laws under the “trainee” exception:

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. The more an internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience.
2. The internship experience is for the benefit of the intern. The intern should get more out of the internship than the employer.
3. The intern does not displace regular employees, but works under the close supervision of existing staff. If an employer uses interns as substitutes for regular workers or to increase its existing workforce during certain time periods, then they are more likely to be deemed employees.
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. The internship should be of a fixed duration, established prior to the outset of the internship, and should not be used as a “long-term job interview” for employment.
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship. The parties should enter into a written agreement on this point.

In addition, the New York State DOL has a five-factor test for whether an intern is not an employee.  According to the New York State DOL, all five of these factors must be met, in addition to the U.S. DOL’s six factors:

1. Any clinical training is performed under the supervision and direction of people who are knowledgeable and experienced in the activity. The intern should be supervised by a person in that field, not by an administrator or HR.
2. The trainees or students do not receive employee benefits. The intern should not be eligible for health care, vacation, or discounted services.
3. The training is general and qualifies trainees or students to work in any similar business.  It is not designed specifically for a job with the employer that offers the program. The training must be useful, transferable to any employer in the field, and not specific to that employer.
4. The screening process for the internship program is NOT the same as for employment and does not appear to be for that purpose. The screening only uses criteria relevant for admission to an independent educational program. There should be a separate application and selection process for interns and employees.
5. Advertisements, postings, or solicitations for the program clearly discuss education or training, rather than employment, although employers may indicate that qualified graduates may be considered for employment. It should be obvious that a job posting is for an internship and not for employment.

How Are the Courts Interpreting These Tests?

Several federal circuit courts of appeal have addressed this issue applying various tests. At least one court has used the “all or nothing” test, whereby all six U.S. DOL factors must be met if the interns will be considered “trainees.” Other courts have followed the “totality of the circumstances” test. These courts hold that the six factors are relevant to help determine whether an individual is a trainee, but are not “hard and fast” requirements. Still other courts have used an “economic reality” test, similar to that used in classifying employees and independent contractors under the FLSA. Yet another court created a “primary beneficiary” test, which asks whether the employer or employee is the primary beneficiary of the intern’s labor.

Courts in the Southern District of New York have generally followed the totality of the circumstances test in determining whether an intern is an employee or a trainee, but the scope of the analysis has differed. Currently there are two cases pending in the Second Circuit for a joint decision as to the proper analysis, among other issues. Even after the Second Circuit rules, the Supreme Court will likely weigh in on this topic. However, the Supreme Court recently denied a certiorari requested by a party to an intern case in the Eleventh Circuit.

Practical Considerations in Establishing a Compliant Unpaid Internship Program

• Even if an intern meets the test of being a “trainee,” who is not subject to the FLSA, interns in New York City (and perhaps in other jurisdictions to come) are afforded the same rights against employment discrimination as employees, under the applicable fair employment practices laws.
• When recruiting interns, use different postings, applications, and screening processes than when recruiting employees.
• When drafting an offer letter, ensure that the intern knows that he or she will not be paid, and is not entitled to a job at the end of the internship.
• Review your policies and other benefit plans (for example, vacation/sick leave, workers’ compensation) to determine if interns are included or excluded from coverage.
• Structure the unpaid internship to include shadowing and classroom learning, and if possible, have interns receive school credit. While receiving school credit is not determinative under any of the tests, it is one of the best indicators that the intern is not an employee.