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Unpaid Internships Face Legal Scrutiny

July 2, 2013

The recent trend by private sector employers is to rely on unpaid college interns is facing increased legal scrutiny. On June 11, 2013, a federal judge in New York issued a decision in Gratt v. Fox Searchlight Pictures, in which he found unpaid college interns working for a film production company were employees under the Fair Labor Standards Act (“FLSA” or “Act”). The FLSA protects employees by mandating minimum wage and overtime for individuals covered by the Act. Because the judge found that the interns were employees under the Act, the film production company is required to pay them minimum wage and overtime.

The case has drawn significant interest due to the large numbers of unpaid interns performing work in the private sector. Currently, it is estimated that the private sector saves somewhere on the order of $600 million annually by relying upon unpaid interns to perform work that otherwise would require the hiring of paid employees. In fact, more than half of all college intern programs are unpaid and half of all internships are within the private sector.

The FLSA broadly defines who is an employee under the Act, however, in 1947, the U.S. Supreme Court recognized a limited exception for certain training programs provided by private sector employers in which the intern performs work that serves only his or her own interest. This exception grew out of a case in which a trainee at a railway company sued for minimum wage. The U.S. Supreme Court found that the training program was excluded from the FLSA as it provided skills to the trainee and no appreciable benefit to the employer, whose operations were, in fact, somewhat impeded by the need to supervise the trainee.

Recognizing this exception, the U.S. Department of Labor has outlined a six-factor test to determine whether an internship with a private-sector employer is excluded under the Act. The test is whether: (1) the internship 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 and works under the close supervision of existing staff; (4) the employer receives no immediate advantage from the activities of the intern and may have its own operations impeded by the intern; (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.

“If all of the factors listed above are met,” the U.S. Department of Labor explains, “an employment relationship does not exist under the FLSA, and the Act’s minimum wage and overtime provisions do not apply to the intern.”

Applying these factors to the interns for the film production company, the New York federal judge found that two of the plaintiffs had established that they were employees under the FLSA. His decision rested, in part, on the fact that the interns simply performed basic administrative assistant duties, which would otherwise be performed by paid employees. Because he found that their internship did not meet the six-factor test outlined by the U.S. Department of Labor, the plaintiffs were entitled to the protections of minimum wage and overtime.

This decision is likely not the last in this area. Over the last year, there have been several lawsuits filed by former interns against private sector employers. These lawsuits include individuals who worked as interns for Harper’s Bazaar, “The Charlie Rose Show” and Hamilton College in New York State. In each case, the plaintiffs are alleging that they were improperly classified as interns, rather than employees, by a private sector entity, in violation of FLSA. More lawsuits are likely as this issue gains more attention.

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