No Unpaid Interns Need Apply: Why a Federal Court Got It Right in Finding Unpaid Interns to Really Be Employees

Posted in: Employment Law

Just last week, a federal court ruled that two unpaid interns who worked on a major motion picture were actually employees and thus, were legally entitled to compensation.  This case may be a watershed for many such interns, who toil away for long hours and receive little or no pay, hoping to get their foot in the door, and thus get a regular job.  And for unemployed adults, the court’s ruling means that they now need not compete with unpaid interns for a job.

As the U.S. economy ground to a halt, more employers cut their paid internship programs, and offered unpaid ones instead.  Young college graduates used to think that they had left the days of unpaid internships behind them when they received their diplomas, but with the recession, that changed.  Now they may face a string of unpaid internships that could last for months, or possibly years, as they seek out paid employment.

In this column, in addition to discussing the federal court’s recent ruling, I will also discuss why, even with more lawsuits sure to follow, unpaid internship programs will still exist.  Rather than abolish internship programs, employers will simply become more vigilant in ensuring that such programs have value to the intern, not just to the employer, or better still opt to pay young employees for their work—as interns or part time employees.  The federal court’s ruling may also end the practice of companies’ keeping people in endless intern limbo, unable to ever become regular employees.

Background: The Black Swan Lawsuit Against Fox Searchlight

Although the number of unpaid internships is difficult to track, the number appears to be growing.  For the past three years, in an annual survey of more than 30,000  college students conducted by the National Association of Colleges and Employers (NACE), nearly half of all interns surveyed have reported working without pay.  The 2013 Student Survey found that while paid internships increased the likelihood of an intern receiving a permanent job offer, unpaid interns fared differently.  They were only slightly better off than students who did no internship at all.  The median starting salary for a new graduate with paid-internship experience is $51,930, but only $35,721 for those who have completed an unpaid internship, the survey reported.  That’s a stark difference in pay.

That pattern was consistent across all academic majors, NACE researcher Edwin Koc reported.  A recent survey by the Institute on Education and the Economy at Columbia University’s Teachers College  also found that paid internships are stronger in all measures of internship quality compared to unpaid ones.  The inference we can take from these findings is that unpaid internships do little to benefit students’ employment prospects, and do not lead to future career benefits. And that may, in turn, provide evidence that employers are just seeking to recruit interns to take on some form of regular work in order to fill in for a shrinking or displaced work force.

Unpaid internships with for-profit employers are subject to more stringent labor guidelines.  The U.S. Department of Labor’s Fair Labor Standards Act (FLSA) prescribes standards for the basic minimum wage and overtime pay, affecting most private employment, and requires employers to pay covered non-exempt employees at least the federal minimum wage.  If overtime occurs, it is paid at one-and-one-half-times the regular rate of pay.

It is against this backdrop that law firms have begun to pursue suits against employers in industries that make frequent use of unpaid or low-paid interns—such as the publishing and entertainment industries.

Just last week, Fox Searchlight Pictures lost a key ruling in its long-running legal fight with former interns who had worked on 2010’s “Black Swan” and other movie productions.  New York-based U.S. District Judge William Pauley issued a summary judgment ruling holding that Fox Searchlight violated federal and state minimum wage laws by not paying its interns. Judge Pauley also certified a class action for interns who worked for Fox Entertainment Group, the parent of Fox Searchlight.

The case arises from a September 2011 lawsuit filed by former Fox interns Eric Glatt and Alexander Footman, who alleged that they performed menial tasks—such as retrieving lunch for other workers—that should have been assigned to paid employees of Fox Searchlight.  The former interns alleged that the internship program violated state and federal minimum wage and overtime laws.

Judge Pauley wrote in his ruling that Fox Searchlight should have paid the interns, reasoning as follows: “Considering the totality of the circumstances, Glatt and Footman were classified improperly as unpaid interns and are ’employees'” under New York labor law and the FLSA).

The federal FLSA includes six criteria for differentiating between an employee who is entitled to pay, and an individual who can be unpaid.  Under the federal criteria, an unpaid intern would need to derive a benefit from her work, and not displace a regular employee.  The determination of whether an internship or training program meets this exclusion depends upon all of the facts and circumstances of each such program.

Attorneys for defendant Fox Searchlight have argued, throughout the case, that independent companies hired and managed the interns who worked on its productions—not Fox Searchlight itself.  One such entity was Lake of Tears Inc., which handled production of “Black Swan.”  However, Pauley wrote in his Tuesday ruling that “Searchlight’s power to fire ‘Black Swan’ production staff was unbridled.”

After Glatt and Footman filed their lawsuit, two other former Fox interns also climbed on board: Eden Antalik, a corporate intern at Fox Entertainment Group; and Kanene Gratts, who worked on Fox Searchlight’s 2009 film “(500) Days of Summer.”  They asked the court to turn the lawsuit into a class action.  Judge Pauley noted that “Antalik has put forth generalized proof that interns were victims of a common policy to replace paid workers with unpaid interns.”  “Though there are disparate factual and employment settings,” he added, “the common issues of liability predominate over individual issues and defenses.”

Why the Judge’s Ruling Will Restore the Correct Balance in Internships: Education Over Free Labor

The judge’s ruling is a good thing.  Internships are meant to help cultivate a new generation of employees, and provide them with new skills and on-the-job training—not to create a situation where people work for free, with only dim prospects of employment at the end.  There are many gray areas here, but the U.S. Department of Labor (DOL’s) standards are clear:  At the end of the day, the internship should be primarily for the benefit of the intern, not that of the employer.

The  DOL cautions that the exception in federal law for internships is narrow because “the FLSA’s definition of employment is very broad.”  The DOL notes, as well, that “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 (this often occurs where a college or university exercises oversight over the internship program and provides educational credit for it). The more the internship provides the individual with skills that can be used in multiple employment settings, as opposed to skills particular to one employer’s operation, the more likely the intern would be viewed as receiving training.”

But, as the DOL cautions:  “On the other hand, if the interns are engaged in the operations of the employer or are performing productive work (for example, filing, performing other clerical work, or assisting customers), then the fact that they may be receiving some benefits in the form of a new skill or improved work habits will not exclude them from the FLSA’s minimum wage and overtime requirements because the employer benefits from the interns’ work.”  Furthermore, the DOL adds, “If the employer would have hired additional employees or required existing staff to work additional hours had the interns not performed the work, then the interns will be viewed as employees and entitled to compensation under the FLSA.”

The DOL’s six point test, , is not new or radical. It is based on the U.S. Supreme Court’s 1947 opinion in Walling v. Portland Terminal Co., which held that the FLSA’s definition of “to employ” as “to suffer or permit to work” does not include student participation in an educational or vocational training program, so long as the employer derives no benefit from the trainees’ work.  Some lawyers criticize the DOL test, however, as the notion that an employer will derive no benefit from an intern’s work is nearly impossible.  The DOL has provided interpretations to employers, however, that soften this rule.  A 2002 letter of advice from the DOL’s Wage and Hour Division to an unnamed nonprofit suggests the interpretation isn’t strict.  The definition depends on whether “productive work performed by the mentees would be offset by the burden to the employers [local businesses] from the training and supervision provided.”  In other words: Is your intern benefitting more from the work than you are?

So will the federal court’s decision mark the end of unpaid internships?  Not likely.  Colleges and universities will continue to partner with employers to offer legitimate vocational or professional training and placement programs.  Students will receive academic credit for such internships, and those who participate will often have to have both faculty and field supervisors who are responsible for ensuring that students are meeting learning objectives.  In those situations, students often benefit from specialized training and programs that are offered by a future employer, making the internship less about hours clocked, and more about exposure to what it’s like to work in the profession at issue.  It’s one thing to shadow a lawyer, editor, or mechanic.  It’s quite another to clock eight hours daily sorting mail and wading through piles of papers and filing them.

Creating more paid internships will also help with larger economic issues.  Socioeconomic inequalities may be exacerbated by unpaid internships since they either reduce or eliminate opportunities for applicants of disadvantaged backgrounds.  Unpaid placements close off opportunities for people with less means who cannot afford to take on unpaid work as a means to securing a job later.  Hence high profile but unpaid internships tend to favor the students/interns who come from affluent or relatively wealthy families and can afford to work for free.  Unpaid internships may contribute to recessions as well.  An increased supply of free labor tends to displace full-time workers and increase unemployment, which contributes to worsening economic conditions

But the federal court’s ruling does mean that the gates are now open for more lawsuits along these lines.  Thus, interns who toiled away without compensation, and whose claims are not barred by the statute of limitations may now go to court to sue to get some form of compensation.  The wages they are paid may not be high, but at least they will be better than nothing.

Just as the court handed down a verdict in the Fox Searchlight case, several new interns were poised to bring suit: Two interns at The New Yorker and W Magazine, respectively, sued parent company Conde Nast Publications on Thursday.  Lauren Ballinger, an intern at W Magazine for several months in 2009, and Matthew Leib, who had internships at The New Yorker in 2009 and 2010, alleges that Conde Nast violated  the FLSA.

According to news reports, Ballinger received $12 a day to organize accessories, run personal errands for editors, and make deliveries to vendors.  Leib got a flat rate of $300 to $500 for each three- to four-month internship, which included reviewing submissions to The New Yorker‘s “Shouts and Murmurs” section, and the glamorous tasks of responding to emails, proofreading, and opening mail.

Law firm Outten & Golden, which brought both the Conde Nast and the Fox Searchlight lawsuits, is identifying individuals who held unpaid internships during the past six years and is reviewing the conditions of their employment for possible wage-and-hour violations.  Accordingly, there may well be more internship lawsuits to come, especially as more and more interns learn of their legal rights.

One hopes that the lawsuits will put pressure on employers to be more realistic in offering internships—paying wages for jobs that are less about training and more about menial work, and structuring other programs as ones designed to groom future professionals.  But in the longer run, it will be unlikely for interns to want to always stand up and sue their employers—for fear that biting the hand that hired them will lead to negative repercussions.  This is where the DOL can play a more critical role, in enforcing its own laws and regulations.

Correction: The name of one of the plaintiffs in the Fox Searchlight case has been corrected from “Andrew” to “Alexander.

Posted in: Employment Law

One response to “No Unpaid Interns Need Apply: Why a Federal Court Got It Right in Finding Unpaid Interns to Really Be Employees

  1. Harry Skip Robinson says:

    If a person agrees to work without pay in exchange for on the job training, to me that is a contract and thus should be under predetermined elements of the contract for any benefits to the employee or costs to the employer. College graduates should be more then competent to negotiate such a contract. I have paid on numerous occasions for knowledge. Internships appear to be quite similar to paying for education, except the employee appears to have greater worth and thus does not have to pay any money in exchange for the knowledge. Unemployment and underemployment are perhaps the real issues here. We need more good paying jobs and employers will be forced to provide greater pay and incentives to attract competent employees.