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"Unpaid Internships - Companies Need To Exercise Caution In Light Of Recent District Court Ruling"

On June 11, 2013, the viability of unpaid internship programs at for-profit corporations was dealt a resounding blow when the Honorable William H. Pauley III, U.S.D.J. of the Southern District of New York granted plaintiffs-former unpaid interns summary judgment on the issue of whether they were “employees” for Fair Labor Standards Act (“FLSA”) and New York Labor Law purposes.

On June 11, 2013, the viability of unpaid internship programs at for-profit corporations was dealt a resounding blow when the Honorable William H. Pauley III, U.S.D.J. of the Southern District of New York granted plaintiffs-former unpaid interns summary judgment on the issue of whether they were “employees” for Fair Labor Standards Act (“FLSA”) and New York Labor Law purposes.

In Glatt v. Fox Searchlight Pictures, Inc., No. 11-civ-6784, Plaintiffs Eric Glatt and Alexander Footman argued that their position as unpaid interns on the production and/or post-production of the Black Swan film should have been classified as employees covered by the FLSA and NYLL.  Further, Plaintiffs Glatt and Footman claimed that these positions did not qualify for the trainee exception to the FLSA established in Walling v. Portland Terminal Co., 330 U.S. 148 (1947).

In resolving the issue, the Court was guided by the six criteria set forth in the Department of Labor’s 2010 Fact Sheet #71.  In so doing, the Court rejected the application of the “primary benefits test” used by some Circuit Courts as urged by Defendants, finding that that test was unsupported by Walling, subjective and unpredictable.  On the other hand, the Court found that Walling supported the DOL factors and held that “[b]ecause they were promulgated by the agency charged with administering the FLSA and are a reasonable application of it, they are entitled to deference.”
           
The following are the six criteria established by the DOL for determining whether a for-profit corporation’s unpaid internship is exempt from the FLSA:
1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
2. The internship experience is for the benefit of the intern;
3. The intern does not displace regular employees, but works under close supervision of existing staff;
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; and
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
In analyzing these factors, the Court first held that the unpaid internship program at issue lacked the educational component because the unpaid interns merely learned the function of a production office, which was accomplished simply by being present, and therefore was no different than the experience of his paid co-workers.  Second, the Court held that the benefits of a resume listing, job reference and knowledge of the function of a production office were incidental and again these same benefits were received by paid co-workers.  Third, the Court held that the tasks performed by the unpaid interns were routine in nature and would have been performed by paid employees had the unpaid interns not been present.  Fourth, the Court held that the defendants obtained immediate advantages from the unpaid interns work because the unpaid interns performed work that would have otherwise been performed by paid employees as the work, while menial, was essential.  Fifth, the Court held that there was no evidence that the unpaid interns either thought they were entitled or were actually entitled to a job at the conclusion of the internship.  Sixth, although the unpaid interns understood they would not receive compensation for the internships, the Court held that “the FLSA does not allow employees to waive their entitlement to wages” and therefore held that this factor was not significant.
          
Based on the totality of the circumstances, the Court held that Plaintiffs Glatt and Footman were employees for FLSA purposes and had therefore been improperly classified as unpaid interns.

This holding has the potential for huge ramifications for companies who have unpaid internship programs.  If the Wage and Hour Division of the U.S. Department of Labor seeks to enforce minimum wage or overtime pay requirements, a company may face civil money penalties, criminal prosecution/penalties, fines, injunctions, and damages (including back wages and liquidated damages in an amount equal to back wages).  If instead the unpaid intern files a private cause of action, a company may face damages (including back wages, liquidated damages in an amount equal to back wages, attorney’s fees and court costs).  Even more concerning is the potential for an FLSA class action.  In fact, the law firm that represents the plaintiffs in the Glatt case is actively soliciting unpaid interns.  Given the recent success, it is likely that there will be more unpaid interns interested in a potential pay day.

Therefore, now is the time to re-evaluate unpaid internship programs to make sure that they are in compliance with the 6 factor test.  Otherwise, an unpaid internship program may prove very costly for the company.

  • Partner

    Michael Shadiack is the Chair of Connell Foley’s Labor and Employment Practice Group. Representing a broad spectrum of employers and management personnel in the private and public sectors, he provides litigation defense and ...

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