War of the Wages

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On June 11, 2013, Federal District Court Judge William Pauley ruled that unpaid interns working in the offices of Fox Searchlight Pictures should not have been considered “trainees” under the Fair Labor Standards Act (FLSA) or New York law, but rather classified as employees.  Classification as an employee would have required the interns to be paid minimum wage, at the very least, for their work.  As part of his ruling, Judge Pauley also granted class certification to a group of unpaid interns in New York who worked in several divisions of the Fox Entertainment Group.

The lead plaintiffs, Alex Footman and Eric Glatt, were employees of Fox Searchlight Pictures during the creation of the award-winning film “Black Swan.”  The tasks performed by the interns included making coffee, taking lunch orders, managing corporate expense reports, coordinating and making deliveries, conducting research, and performing secretarial work.  According to the complaint, Fox would have had to hire employees to perform these menial tasks if it were not for the free labor of interns.  Consequently, the plaintiffs claim, the use of interns served to keep the company’s production costs down.

Every year, internships are sought out by millions of college and graduate students across the country.  In today’s relatively weak job market, even recent graduates are filling unpaid intern positions.  Most often, interns are seeking any way to get their foot in the door of their target profession or industry.  Many accept these internships with the realization that they may not get paid, but instead will gain valuable experience and make invaluable connections with those who may hire them in the future.  However, as employers are operating on tighter budgets, internships have come to resemble free labor to the employer with little benefit to the intern.

Judge Pauley appears to be the first judge to definitively assert that employers cannot ask young adults to work in return for “on the job” experience. 

The “Black Swan” case has been followed by a number of lawsuits filed by unpaid interns.  One such lawsuit was filed by a former Harper’s Bazaar intern against Hearst Magazines in February of 2012.  The intern’s claim asserted that she regularly worked normal business hours without compensation.  The former intern sought to have the claim certified as a class-action comprised of a class of all unpaid interns who worked in the company’s magazines division.  However, in a recent setback to the collective action, a New York judge dismissed the interns’ class-action suit, saying they did not meet the definition of a class.  Thus, if the interns want to proceed, they will have to do so individually.  This poses as a major setback for the interns, because it would not be cost effective for an attorney to take on the case for an individual.

Judge Pauley appears to be the first judge to definitively assert that employers cannot ask young adults to work in return for the privilege of earning “on-the-job experience.” In his opinion Judge Pauley adopted a stringent, six-point test advocated by the Department of Labor to determine whether  an intern can legally work without  compensation.  Under the FLSA, individuals may not waive their statutory right to receive the minimum wage and overtime, even if they genuinely want to work voluntarily as an intern.  Instead, according to the Department of Labor (DOL), an individual is an intern, as opposed to an employee, only if:

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.

“They received nothing approximating the education they would receive in an academic setting or a vocational school.” 

The argument made by many companies in opposition was for a “primary benefit test” to determine whether an intern should be paid, specifically whether “the internship’s benefits to the intern outweigh the benefits to the engaging entity.”  Judge Pauley rejected this test, determining that such a test would be too subjective and unpredictable.  Judge Pauley wrote:

They worked as paid employees work, providing an immediate advantage to their employer and performed low-level tasks not requiring specialized training…The benefits they may have received–such as the knowledge of how a production or accounting office functions or references for future jobs–are the results of simply having worked as any other employee works, not of internships designed to be uniquely educational to the interns and of little utility to the employer.  They received nothing approximating the education they would receive in an academic setting or vocational school.

Furthermore, Judge Pauley stated that unpaid internships should be allowed only in very limited circumstances.

It is not clear whether the six-factor test applies to both private and public sector internship positions. 

It may be too soon for the millions of unpaid interns across the country to celebrate. Some circuits do not follow the six-prong test, and a higher court could over turn Judge Pauley’s decision.  Moreover, the decision has left some ambiguities in its wake, and it is not clear whether the six-factor test applies to both private and public sector internship positions.  However, some courts have suggested, without actually holding, that a more lenient test should be applied to internships in the non-profit sector.

Based upon the Fact Sheet provided by the DOL, public-sector employers do not have much to worry about in terms of unpaid internships; however, the private sector may see an overhaul of internship programs in the future.  Even though Judge Pauley’s decision may not stand, it would be smart for employers to review their internship programs to determine if they are operating in compliance with both FSLA and state regulations.  With the national publicity that these types of lawsuits are receiving, it is likely better for employers to be safe rather than sorry and begin paying their interns appropriately: up front instead of on the back end through a lawsuit.