Cozen O’Connor: High Profile Decision Deals Blow to Unpaid Internship Programs [Labor & Employment Alert]

High Profile Decision Deals Blow to Unpaid Internship Programs

Labor & Employment Alert

June 14, 2013

Many companies with unpaid internship programs have been closely watching a case filed by unpaid interns who worked on the film Black Swan, and this week, the outlook turned grim. The U.S. District Court for the Southern District of New York ruled that two of the named interns in the case were employees of Fox Searchlight Pictures (Fox) under the Fair Labor Standards Act (and the New York Labor Law) who should have been paid for the hours they worked. The opinion can be found here.

In reaching this decision, the court relied upon six criteria enumerated by the U.S. Department of Labor to determine whether an internship may lawfully be unpaid. Those criteria are:

  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;
  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.

Fox argued that this test should not govern, instead urging the court to apply a “primary beneficiary” test to determine whether “the internship’s benefits to the intern outweigh the benefits to the company.” The court rejected this argument, and then applied the six-factor test in a manner that should inspire all companies with unpaid interns to closely examine their program.

Training Similar to an Educational Environment. The court began its analysis by noting that “[w]hile classroom training is not a prerequisite, internships must provide something beyond on-the-job training that employees receive.” The court then analyzed the training each intern in question received. While the record was “inconclusive” for one intern, the other was found not to have received any formal training or education through the internship, and did not “acquire any new skills aside from those specific to Black Swan’s back office.” And while he learned about the “function of a production office,” he did so simply by virtue of being present, just as would be the case for any paid employee. Thus, this factor weighed in favor of employee status.

Whether the Internship Experience Is for the Benefit of the Intern. The court’s analysis of this factor is perhaps the most troubling for employers, because the court concluded that benefits to the interns in the form of “resume listings, job references, and [gaining] an understanding of how a production office works” were not sufficient to tip the scale in favor of the employer. These benefits are not enough, the court concluded, because they are “incidental to working in the office like any other employee.” For an employer to prevail on this factor, the court indicated that the benefits to the intern must be “the result of internships intentionally structured to benefit them.” Because the court found no such intentionally structured benefit, this factor weighed in favor of employee status.

Whether the Interns Displaced Regular Employees. The interns in question were found to have “performed routine tasks that would otherwise have been performed by regular employees,” such as obtaining documents for personnel files, tracking and reconciling purchase orders and invoices, drafting cover letters, making copies, organizing files, running errands, assembling office furniture, arranging travel plans, answering telephones and making deliveries. In finding against Fox on this factor, the court relied on a supervisor’s deposition testimony that if one intern had not performed the work, another staff member would have done so, or the company would have needed to enlist a paid production assistant or an additional intern. The court also noted that when the other intern in question reduced his schedule from five to three days per week, the company hired another part-time intern. Thus, this factor weighed in favor of employee status.

Whether the Employer Derives an Immediate Advantage from the Intern’s Work. Fox did not dispute the fact that it obtained an immediate advantage from the interns’ work. And the court noted that although their work was “menial,” it was also “essential.” This factor therefore weighed in favor of employee status.

Whether the Intern Is Entitled to a Job at the Conclusion of the Internship. The court made short work of this factor, simply noting that “there is no evidence that [the interns] were entitled to jobs at the end of their internships or thought they would be.”

Whether the Parties Understand that the Intern Is Not Entitled to Wages. This factor “adds little,” the court noted, because “the FLSA does not allow employees to waive their entitlement to wages.” Thus, the fact that the parties understood that the interns would not be paid was deemed to be meaningless.

The court’s application of this six-factor test reveals that unpaid internship programs must be carefully structured and monitored to ensure that the experience is an educational one for the intern, that the program offers more benefit to the intern than it does to the company, and that the interns do not displace regular employees in any way.

This decision will no doubt inform similar suits that already have been filed by unpaid interns across the country, and may galvanize others to turn to the courts for compensation. Unless and until Congress steps in to clarify this issue, unpaid internship programs are likely to remain under fire for years to come.

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If employers have any questions or concerns, they should contact a member of Cozen O’Connor’s Labor & Employment Department for more information about this decision.