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“Unpaid internships are risky business for employers”

BizTimes Milwaukee Sean M. Scullen

It's summertime, which means it's intern time at many businesses. Many students and individuals eagerly seek even unpaid internships, particularly in this job market, as opportunities to get a foot in a door with an employer, obtain practical experience and to build their professional resumes in the process.

Employers often view interns as part of their recruiting pipeline. When considering an internship program, however, businesses should remember the old phrase, “There is no such thing as a free lunch.”

As seen in recent high-profile cases, employers who utilize unpaid interns face significant liabilities if the classification is challenged and interns are found not to be “trainees” who are exempt from federal and state wage and hour laws. Employers are often surprised to learn that there is significant risk that interns can be considered “employees” entitled to at least minimum wage and statutory overtime (for hours worked over 40 per week) under such laws if challenged.

Recently, unpaid internships have been targeted by the Department of Labor and employers are increasingly facing lawsuits over their use of unpaid interns. Under guidelines issued by the DOL, in order for an internship to be unpaid (and the intern considered a trainee and thus not an employee under the Fair Labor Standards Act), each of the following criteria must be satisfied:

  • 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 internship experience is for the benefit of the intern.

  • The intern does not displace regular employees, but works under close observation of existing staff.
  • The employer that provides the internship/training derives no immediate advantage from the activities of the intern; and on occasion the employer's operations may actually be impeded.
  • The intern is not necessarily entitled to a job at the completion of the internship.
  • The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Of these criteria, the most difficult to establish for employers is the fourth, as employers typically do receive some immediate advantage from the activities of the intern, which is true whether the intern performs menial tasks such as copying, filing, collating and similar general office tasks or assists with more sophisticated project work.

The DOL has specifically targeted the use of unpaid interns as a compliance focus and suggested that there are few circumstances in which a for-profit employer can have an intern who is not required to be paid under the law. And, while nonprofit employers have somewhat greater flexibility (for example, individuals who volunteer for charitable purposes are not considered employees and interns at health care institutions that provide training in connection with school credit are likely to be found to satisfy the DOL's criteria), they are not immune from potential liability. For example, even nonprofit employers cannot generally have unpaid interns performing work that would otherwise need to be performed by regular employees.

Recent cases reflect that employers are increasingly being sued over misclassification and courts are frequently coming down on the side of the interns. For instance, a federal court in New York last year issued a decision finding that the unpaid interns who worked on production for the film “Black Swan” were actually employees under the FLSA and New York's wage and hour law. Applying the DOL's criteria, the court concluded that the interns did not receive training similar to that of an educational environment and that they performed routine tasks that regular employees otherwise would have had to perform.

The court also rejected the employer's contention that those unpaid interns who received school credit for their internships necessarily met the “trainee” requirements on the basis that receipt of such credit alone did not change the overall nature of the internships. Although the case is on appeal, other courts have similarly found employers liable for misclassifying interns, even under less stringent standards.

The risks of misclassification include back pay (for up to three years), almost automatic double damages and the plaintiff's attorneys' fees. Further, employers with large unpaid internship programs face the scourge of a class action seeking back pay and other damages on behalf of a significant number of current and/or former interns, as is the employer in the Black Swan case.

The bottom line: unpaid internships must be closely scrutinized to ensure that the unpaid intern isn't simply an unpaid employee. Where a determination is made that an internship will be unpaid, the employer should at least have a written internship agreement/acknowledgement that addresses each of the DOL criteria. In most cases, however, employers are well advised to avoid the risk and simply pay their interns.     

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