Employers Beware: Unpaid Internships May be Costly

Potential employees facing a tight job market may be eager to offer their services in exchange for unpaid experience as a means of getting a foot in the door. This might be an opportunity for a company to provide training for prospective employees, or it might expose the company to liability for unpaid wages and overtime. Potential Financial Exposure -- Companies in the communications and entertainment industries have been haled into court recently to defend against individual and collective action claims by former interns seeking unpaid minimum wage and overtime. The claimants allege that the companies used unpaid interns to perform productive for which the interns should have been paid. A successful claimant in a wage claim can recover from an employer the amount of wages due, an equal amount as liquidated damages, and the claimant’s attorney’s fees and costs. Internships at For Profit Entities -- For profit entities can establish training internships without having to pay the participants, but they must ensure that the programs are truly training opportunities and not unpaid, entry level positions. Allowing an “intern” to provide productive work from which a company derives financial gain while the company provides only unpaid job experience for an intern’s resume is a recipe for significant monetary exposure to the company.Legal Standard for Unpaid Internships -- As early as 1947, the Supreme Court addressed the issue of whether voluntary trainees are entitled to protection under the Fair Labor Standards Act (“FLSA”). In Walling v. Portland Terminal Co., 330 U.S. 148 (1947), the court determined that participants in a weeklong program to train potential railroad porters were not employees. Recognizing that the FLSA’s definition of work is quite broad, the court held that “the definition of employee cannot be interpreted so as to make a person whose work serves only his own interest an employee of another who gives him aid and instruction.” 330 U.S. at 150. Since that decision, the Department of Labor and the courts have struggled with how to apply that standard. In response to the Portland Terminal decision, the Wage and Hour Division of the Department of Labor developed a six part test to determine when a trainee is not an employee entitled to protection under the FLSA. For a company to provide a training opportunity without the necessity of paying wages to the participants, each of the following six factors must be met:

  • Training must be similar to that offered by a vocational school;
  • Training is for benefit of trainees;
  • Trainees do not displace regular workers, but work under close supervision;
  • Employer derives no immediate advantage from program;
  • Trainees are not entitled to a job upon completion; and
  • Trainee and employer understand the trainees are not entitled to wages.

Federal trial and appellate courts have criticized this six factor test and many have opted for an individualized analysis identified as an economic realities test, a primary benefit test, or a totality of the circumstances test. Under each of those analyses, the courts have considered some or all the six factors, but have concluded that none is predominant, that the test cannot be applied mechanically, and that all six factors need not be present. Practical Recommendations -- Regardless of which test might control the analysis, employers should be very careful before implementing any unpaid internship program. Based on a review of court decisions approving unpaid internships, the following factors weigh in favor of success without financial exposure:

  • Program lasts days or weeks, but not months;
  • Training is general for an industry not specific to a company;
  • Program follows a training curriculum;
  • Company does not profit from the actions of trainees.

If you are interested in exploring how to establish an effective internship program, please contact any of the attorneys in our Labor and Employment Practice Group.

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