Why and how using unpaid interns could end up costing you big time

Exploiting ‘cheap labor’ under the guise of an educational opportunity for eager young minds can backfire. Check out the federal guidelines—and California’s stringent standards—to be safe.

The scene is often played out in movies, TV shows and books: A young, haggard intern hurriedly fetches coffee, makes copies and run errands for her boss.

In exchange, she gets firsthand knowledge and exposure in a glamorous field, such as the fashion world, the movie business or the magazine industry.

The intern doesn’t receive a paycheck; her compensation is that she gets to be there at the office, witness real professionals working and, of course, add credibility to her resume. The employer, on the other hand, gets the benefit of her services while minimizing costs.

Although this scene is quite common in both movies and the real world, it is not necessarily in compliance with federal or California Wage and Hour laws. Employers who hire unpaid interns face potential legal troubles, including costly class-action lawsuits.

Lawsuits by unpaid interns are a growing trend

Recently, unpaid interns brought a class-action suit against Mary-Kate and Ashley Olsen’s entertainment company, Dualstar Entertainment Group. The complaint alleges that the interns working for the Olsen Twins’ fashion label, The Row, worked 50 hours a week, doing administrative tasks such as “inputting data into spreadsheets, making tech sheets, running personal errands for paid employees, organizing materials, photocopying, sewing [and] pattern cutting.” The interns claim that they should have been paid minimum wage and overtime pay for that work.

The lawsuit against Dualstar is just the latest in a growing trend.

For the past few years, we have seen a rise in class actions from former unpaid interns against companies with a long history of hiring unpaid interns.

  • In addition to Dualstar, another fashion brand, Donna Karan International, was recently hit with a class-action lawsuit by former unpaid interns.
  • In the entertainment sector, former unpaid interns have sued Fox Searchlight Pictures, Charlie Rose, Gawker Media, Elite Model Management, and Bad Boy Entertainment.
  • Similarly, the magazine industry has been under siege. Thousands of unpaid interns, who have worked at publications such as Vogue, Vanity Fair, W magazine, The New Yorker, and Harper’s Bazaar magazine, have sued their respective parent companies—Condé Nast and Hearst Corp.—for their failure to pay minimum wage and overtime when applicable.

Multi-million-dollar settlements

Some of these lawsuits have resulted in victories in the lower court as well as multi-million-dollar settlements for the unpaid interns.

For example, the district court in the Fox Searchlight Pictures lawsuit held that the interns working for the motion picture “Black Swan” were employees and should have been paid minimum wage. Fox Searchlight Pictures appealed the decision, however, and the Second U.S. Circuit Court of Appeals has vacated the lower court’s decision and remanded the case, ordering the district court to consider additional evidence when determining whether the interns or Fox Searchlight Pictures should be deemed the primary beneficiary of the relationship.

As for Condé Nast, although it does not concede any wrongdoing on its part, it has agreed to pay a class of unpaid interns $5.8 million to settle the wage and hour claims brought against it.

Consequently, employers implementing an unpaid internship program should take all steps necessary to ensure that their program is in compliance with federal and state wage and hour laws.

According to Dualstar’s press release, the company vehemently denies the wage and hour allegations and plans to vigorously defend the action. To successfully defend against the class-action suit, Dualstar must show that the individuals working for them were properly classified as “interns” instead of “employees.”

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The federal Fair Labor Standards Act requires that all employees be compensated with minimum wage and overtime pay, unless an exemption applies. Under the FLSA, there is an “exemption” that allows employers to hire unpaid interns as long as the internship is “for the benefit of the intern” and “similar to training which would be given in an education environment.”

A six-factor test if you are not paying interns

There are six factors to consider when determining whether an “intern” working for a “for-profit” employer is exempt from being paid minimum wage and overtime:

  1. The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school. Thus, if a company’s internship program is structured around a classroom or academic experience, as opposed to the company’s actual operations, it is more likely to be viewed as an extension of the intern’s educational experience.
  2. The training is for the benefit of the intern. This generally means that an intern is able to observe the practical application of what the individual learned in school to the workplace and such exposure will enhance the intern’s marketability in the industry.
  3. Interns do not displace regular employees but work under close observation. This has been interpreted to mean that any work performed by an intern that could be performed by an employee would not satisfy this factor. Thus, if an intern is performing tasks that would be performed by other paid employees—e.g., minor clerical, incidental, administrative work—the exemption would not apply. Occasional or incidental administrative work by an intern is acceptable, however, as long as such work does not unreasonably replace or impede the educational objectives of the intern and effectively displace regular employees.
  4. The employer that provides the training derives no immediate advantage from the activities of the interns. On occasion, the employers’ operations might even be impeded. The U.S. Department of Labor has indicated that when interns directly perform the main work of the business, the employer is likely to gain an immediate, economic advantage as a result. Isolated instances of otherwise compensable (e.g., clerical work), however, are considered to be de minimis and will not defeat the intern exemption. Moreover, use of supervisors’ time away from their work tasks, to train the interns, will provide some support for the exemption.
  5. Interns are not necessarily entitled to a job at the completion of the training period. This factor recognizes that a company may offer internship programs for assessing potential employees, but the unpaid internship should not simply be a trial period for individuals seeking employment. A company should also make sure that the application and criteria for acceptance to the internship are not intended or perceived as a mechanism for application and screening for actual employment subsequent to the completion of the internship. In addition, the internship must have an end date; it cannot last indefinitely.
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in training. The Labor Department has stated that payment of a stipend to the interns does not create an employment relationship, as long as it does not exceed the reasonable approximation of expenses incurred by interns involved in the program.

California’s five-step test

In California, a company has to meet additional requirements in order to properly classify an individual as an intern. California’s Division of Labor Standards Enforcement has stated that in addition to the six factors required by federal law referenced above, there are five more requirements to consider:

  1. The internship is part of an educational curriculum that requires the participation of a school or a similar institution;
  2. Interns cannot receive employee benefits, such as medical insurance and workers’ compensation;
  3. The training must be general enough so that the intern can work for any similar business, rather than just for a specific company;
  4. The screening process for the internship cannot be the same process used for regular employees; and,
  5. Advertisements for the internship must clearly indicate that the internship position is educational and not for paid work.

Failure to meet the above requirements means that the intern is legally an employee and must be paid minimum wage, earn overtime when applicable and receive all the other protections guaranteed to employees by federal and state employment laws.

It’s no longer safe to have unpaid interns

In light of the foregoing, companies should be aware that it is no longer as safe to hire unpaid interns, especially if the interns spend a substantial amount of their time performing tasks such as alphabetizing documents, picking up dry cleaning or functioning as a messenger. On the other hand, if an intern is substantially supervised and is performing tasks in accordance with educational objectives, there is more support for the unpaid internship.

Interns no longer see these unpaid internships as a “rite of passage.” Instead, unpaid interns have become more emboldened in pursuing lawsuits, especially against institutions that have long had unpaid internship programs.

To survive an era when unpaid interns are quick to file employment-related claims, which can result in costly litigation, employers should review their internship programs to ensure that they comply with federal laws. California businesspeople bear the additional responsibility of adhering to that state’s labor laws.

Companies interested in continuing their unpaid internship programs should contact an attorney with expertise in handling employment matters.

Louise Truong is an associate in the Orange County office of the law firm Buchalter Nemer. A version of this article originally appeared on TLNT.com.

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