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You can hire unpaid interns, but it’ll cost you

Unpaid internships are becoming increasingly popular career options for college students, but could violate labor laws.

It is no secret that unpaid internships have become a widely accepted practice across a variety of industries.  The number of unpaid internships has climbed in recent years, as job openings are becoming scarce for young people.  The National Association of Colleges and Employers found that 55 percent of the class of 2012 had an internship during their time in college.  The majority of them were unpaid.    The sheer number of people who take up unpaid internships creates the potential for a massive exploitation of unpaid labor performing menial tasks under the guise of “obtaining practical experience.”  This has prompted a number of lawsuits and federal inquiries into whether the companies who hire unpaid interns comply with the minimum wage laws.

Fox Searchlight, Inc. has been fighting off a lawsuit over the company’s unpaid internships for the past six years.    21st Century Fox, Inc. finally reached a settlement on July 13, 2016, in a class action brought by former unpaid interns who claimed they should have been paid for their work performed on the set of the “Black Swan” movie.  Under the settlement agreement, Fox must compensate former unpaid interns at the rate of $495 apiece, with three lead plaintiffs receiving awards ranging from $3,500 to $7,500.

The 2010 lawsuit alleged that the company violated minimum wage and overtime provisions of the Fair Labor Standards Act…

The case dates back to 2010 when Alex Footman and Eric Glatt, the lead plaintiffs, originally filed a lawsuit against Fox.  The 2010 lawsuit alleged that the company violated minimum wage and overtime provisions of the Fair Labor Standards Act (FLSA) when they required their interns to perform tasks that had little to no educational value without financial compensation.  Footman and Glatt argued that they should have been paid because they were essentially employees.

Eric Glatt is not a typical representative of the intern pool in a film industry.  Before he became an intern at “Black Swan,” he earned his MBA and was employed for years in the financial sector.  After the economic crisis hit in 2008, Glatt decided to venture into a film industry.  He had a passion for entertainment and took a file-editing course and received his certification.  He soon found out that “Black Swan” needed interns and was able to secure an internship in the film’s accounting department.  He handled timesheets, analyzed reimbursements, and delivered paychecks at the Black Swan set.

[T]he nature of work of a prospective intern must be similar to the training given in a vocational school.

Two months after the internship ended, Glatt saw an article published by The New York Times entitled, “The Unpaid Intern: Legal or Not.”   After reading the article, he realized the company violated minimum wage laws.  In order for a company that hires unpaid interns to comply with labor laws, the nature of work of a prospective intern must be similar to the training given in a vocational school.  Also, the employer may not derive immediate advantage from the intern’s work.

Judge Pauley dismissed a “primary beneficiary” test and applied a six-criteria test…

The case did not resolve until July 2013, when a federal district court judge in New York ruled that Fox Searchlight should have compensated two interns who worked on the movie set.  Judge William Pauley  of the United States District Court for the Southern District, agreed with the plaintiffs that Fox violated FLSA and provisions of New York Labor Law (“NYLL”) and issued an order granting Glatt and Footman’s motion for summary judgment.  Judge Pauley dismissed a “primary beneficiary” test and applied a six-criteria test promulgated by the Department of Labor (“DOL”).

According to the six-criteria test an internship may be unpaid if: (1) an internship is similar to training which would be given in an educational environment; (2) internship experience for the benefit of the intern; (3) the intern does not displace regular employees; (4) employer does not derive any immediate advantage from the activities of the intern; (5) intern is not entitled to a job at the conclusion of the internship; and (6) both parties understand that the intern is not entitled to wages for the time spent in the internship.  Judge Pauley concluded that Fox received benefits of the work completed by unpaid interns, the interns performed routine tasks that otherwise would have been performed by regular employees, and the company obtained an immediate advantage from Glatt and Footman’s work.

The District Court ruling had a powerful impact on other media and fashion companies with unpaid internship programs.

The District Court ruling had a powerful impact on other media and fashion companies with unpaid internship programs.  After Glatt and Footman challenged the legality of company’s unpaid internship program, more than 35 suits were filed on behalf of the unpaid interns challenging similar programs offered by various companies.

Fox Searchlight appealed the district court’s ruling and the United States Court of Appeals for the Second Circuit overturned it.  It eliminated the six-criteria test previously applied by Judge Pauley and replaced it with the “primary beneficiary” test.  The new test requires that the intern rather than the employer be the “primary beneficiary” of the internship.  The judges also introduced a new factor into consideration, whether the internship ties with the intern’s formal schooling.  This factor was largely irrelevant under the previous analysis of the issue.  “Among other things, the decision suggests a presumption that interns are enrolled in an integrated education program,” Glatt responded to the ruling.  “My work on ‘Black Swan’ was nothing of the sort, nor was it for my co-plaintiff, Alex Footman.”

In addition to advancing a new test to determine whether an intern can be unpaid, Judge John M. Walker Jr., writing for a three-judge panel, refused to certify the Fox interns’ suit as a class action, citing the difference of their claims.  This ruling effectively deters potential intern plaintiffs from bringing class action lawsuits against their employers in the future.  Since the case did not pass certification as a class action, it is remanded back to the District Court to determine whether Glatt and Footman will prevail based on the newly introduced “primary beneficiary” test.  The question at the district court level is whether the company benefitted more from the interns’ work than the interns themselves.

[E]mployers have to make sure that their unpaid internship programs comply with the educational development requirement.

The Second Circuit ruling had a major impact on the cases across the country filed on behalf of unpaid interns against their employers.  For example, following the ruling in Glatt v. Fox Searchlight, Hearst Corporation, publisher of Cosmopolitan, ELLE, and Harper’s BAZAAR filed a motion for summary judgment against the claims of their unpaid interns seeking back pay and overtime wages.  The company eventually settled the case for $5.8 million.

One of the major takeaways from Glatt ruling is that employers have to make sure that their unpaid internship programs comply with the educational development requirement.  The Second Circuit emphasized, “[t]he purpose of a bona fide internship is to integrate classroom learning with practical skill development in real world setting.”  This means that the duties and responsibilities of an unpaid intern must bear close relationship to the educational program the intern is enrolled at the time. That condition is seen as a kind of insurance policy, protecting interns against exploitation at the hands of their host companies.

The Fox Searchlight case is finally coming to an end with a proposed settlement.  But for companies, there is still a lot of confusion about the legality of unpaid internships. While Glatt’s lawsuit did much to advance conversations about fair wages and labor rights, it never really settled the more basic question of when it’s okay for businesses to employ unpaid interns.  Although the ruling came down mostly in favor of the employers, the fear of litigation and bad publicity has prompted some employers to modify their internship programs.  Fox Searchlight changed its practice and began paying its interns.  The Nation magazine decided to pay minimum wage to its interns.  However, Conde Nast has shut down its internship program altogether.

Olga Ivanushko, Senior Staff Writer Emeritus
About Olga Ivanushko, Senior Staff Writer Emeritus (13 Articles)
Olga Ivanushko is a 2017 graduate of Campbell Law School and served as a Senior Staff Writer for the Campbell Law Observer. Olga is originally from Belarus, but has lived in Hollywood, Florida, then Raleigh, North Carolina for the past 13 years. She earned BA in Political Science from the University of North Carolina at Chapel Hill. Between undergrad and law school Olga worked as a paralegal at a plaintiffs’ medical malpractice and personal injury firm in Chapel Hill, North Carolina. After her first year in law school, Olga interned at the North Carolina Medical Board. Olga now interns with the Honorable John M. Tyson at the North Carolina Court of Appeals.