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An Unpaid Internship Can Be an Expensive Proposition

An Unpaid Internship Can Be an Expensive Proposition
August 2012

For years, the symbiotic relationship between companies and unpaid interns was routine. Employers in industries ranging from fashion to finance “hired” inexperienced individuals (typically students or recent graduates) for internships. The interns would work long hours and perform varied tasks (from running errands to assembling product and most things between) that would enable them to “learn the business,” provide a new line item on their budding resumes, and create relationships to enable them to get paying jobs in the future. It was, in essence, a rite of passage. Although they worked alongside paid employees, and often performed tasks required of the paid employees, they were not paid, and they did not (outwardly) complain about their arrangement.
 
Unfortunately for employers, in many cases unpaid interns are entitled to wages for the hours they work, and even more problematically, are beginning to file and participate in lawsuits to get what they are owed. Each day, employers see the effects of workers and their attorneys aggressively pursuing unpaid wages under federal and state wage and hour laws, and are well-advised to re-think the “that’s the way it has always been around here” mentality towards unpaid interns.
 
What Are Interns Anyway?
 
Interns are individuals who are offered unpaid training through school or company programs, which are designed to provide professional experience in furtherance of their education and training and are oriented for the intern’s benefit. Contrary to what many employers think, simply labeling someone as an unpaid “intern” does not automatically make them so. Whether interns are considered “employees” under the FLSA depends on the circumstances surrounding their activities, not their classification by a company. Employers without formalized internship programs (particularly small and mid-sized companies), should be especially aware of the misclassification hazard.
 
The federal Fair Labor Standards Act of 1938 (FLSA) provides that a non-exempt employee must be paid at least minimum wage for all hours worked, and premium pay (“time and a half”) for all hours actually worked in excess of 40 per week. State laws generally follow the same framework. Under the FLSA, interns at for-profit employers in the private sector are covered employees (and must be paid at least minimum wage) unless the internship satisfies all 6 of the following factors:

  • The internship experience is for the benefit of the intern.
  • The intern does not displace regular employees, but works under close supervision of existing staff.
  • 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.
  • The intern is not necessarily entitled to a job at the conclusion of the internship.
  • The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Here are three illustrative rules of thumb to help explain the test:

  1. Generally, the test will be satisfied if the intern (as opposed to the employer or business) derives the benefit from the training or education provided from the internship. Most frequently, this will be the case where an intern is receiving educational credit for the program, and the internship is, essentially, an extension of the classroom experience that provides skills to be used in multiple employment settings. Interns will not satisfy the test if they are required to perform productive work or otherwise engage in the operations of the employer for the employer’s benefit –– even if they simultaneously benefit from learning a new skill or method. 
  2. If the employer is using interns to perform work generally performed by paid employees –– either as a way to avoid hiring new employees, avoid having to pay overtime to existing employees, or simply to get some extra hands on deck during vacation or other periods, it will not satisfy the test. 
  3. An intern who trains under close supervision by other employees (e.g., work “shadowing”) and performs little or no work on their own likely satisfies the test, while an intern left to work on their own or under the same general level of supervision as paid employees, likely does not. 

The Potential Consequences
 
Employers who are found to have violated the FLSA by failing to pay an employee must pay all the wages owed plus 100% of the wages as a penalty (a total of twice the wages actually owed). To make matters worse, many employers fail to keep accurate (if any) records of the hours worked by interns, which makes it very difficult to disprove an intern’s allegation as to how many regular and overtime hours they worked. To make matters even worse, the federal law requires that an employer must pay the attorney’s fees of an employee (intern) who prevails in a lawsuit. Very often, the attorney’s fees greatly exceed the unpaid wages themselves.
 
How Can Employers Protect Themselves?
 
First and foremost, employers must be aware that “unpaid internships” are not synonymous with “free labor” –– whether they involve students on school breaks or out of work individuals looking for work experience and training. Despite that there are relatively few FLSA cases involving unpaid interns (especially as compared to overtime or minimum wage claims for paid employees), there are a growing number of lawsuits (including collective and class actions) filed over the past year –– even in just the past few months.
 
Although many employers believe that interns will not “make waves” because it will prevent them from ever working in the industry, the failure to pay interns carries a real risk, particularly in the “Occupy Wall Street” era where these recent lawsuits signal that more interns may be willing to fight for their wages –– even if only a couple of thousand dollars –– on principle in addition to any economic incentive.
 
Second, employers should view this as an opportunity to review their practices to ensure they are complying with the law. At a minimum, businesses should review their internship programs to ensure that interns are offered an educational and training experience –– rather than being required to perform menial or clerical tasks that benefit the employer. Here are some tips:

  • Have a written understanding that an internship is unpaid.
  • Prepare specific written goals, focusing on training and experience for the benefit of an intern.
  • Have an intern work under close supervision by one or more employees.
  • Avoid long periods of independent work by an intern.
  • Do not have interns perform work to benefit the employer as a substitute for paid employees.
  • Rotate interns through different departments and tasks.
  • Have an intern submit weekly records of training and education achieved.
  • Prepare written evaluations focusing on the intern’s understanding, skill set, and progress. 

Is This the Death of Internships?
 
Probably not, although the buzz about internships already had made many employers and interns stand up and take notice. While many employers undoubtedly will continue to take their chances and play the odds, others will avoid the risk and eliminate interns and others simply will pay interns minimum wage for their hours worked. The bottom line is that employers entering into unpaid internships should do so with their eyes wide open, because their interns are better educated and have more information and advocates at their disposal than ever before. 

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"An Unpaid Internship Can Be an Expensive Proposition" also appeared in The Giggle Guide (www.thegiggleguide.com).  Re-production or re-printing in part or whole is strictly prohibited without the expressed written permission of Phillips Nizer LLP.