Once upon a time, part of a young man or woman’s rite of passage into adulthood was a summer internship. In more recent times, such internships have sometimes become a stepping stone to something else–a lawsuit claiming that the erstwhile intern was really an employee who should have been paid at least the Fair Labor Standards Act (FLSA) minimum wage and, maybe, overtime, too. As a result, some employers have been feeling skittish about offering students unpaid internships.
The law in this area is in a state of flux. For now, this article will attempt to explain the two sides of the issue so that employers can make informed decisions about whether or not to offer unpaid internships in their workplaces. As the reader will see, there is no reason why unpaid internships need become a relic of the past.
The Basics
With some exceptions not relevant here, section 6 of the FLSA (29 U.S.C. 206) requires that each non-exempt employee who is engaged in commerce or in the production of goods for commerce, or who is employed in an enterprise engaged in commerce or in the production of goods for commerce, be paid at least the minimum wage for every hour worked. This would appear to foreclose the possibility of non-exempt employees working for free, even when doing so would be to the workers’ benefit, and even if they want to, since the Supreme Court has held that a worker may not waive his or her rights under the FLSA (Brooklyn Savings Bank v. O’Neil, 324 U.S. 697 (1945)). As the Supreme Court explained in Brooklyn Savings Bank, while the FLSA protects a worker’s private right to compensation, it also protects the public interest by preventing workers in general from being exploited. Thus, even when an individual worker says that he or she is willing to waive the right to compensation, courts generally won’t permit such a waiver because of the potential harm to the public at large and because is difficult to determine whether an employee’s waiver is truly voluntary.
Nevertheless, not all unpaid work is prohibited. The U.S. Department of Labor (DOL) has acknowledged that the FLSA applies only if an employee-employer relationship exists (see, e.g., Wage-Hour Opinion Letter No. FLSA2005-6NA dated August 26, 2005, citing Wage-Hour Opinion Letter dated July 18, 1996). Determining whether such a relationship exists can be complex and depends upon the economic realities of the whole activity, as disclosed by all the surrounding circumstances. Generally speaking, however, the U.S. Supreme Court has made clear that the FLSA does not cover an individual who “without promise or expectation of compensation, but solely for his personal purpose or pleasure, worked in activities carried on by other persons either for their pleasure or profit” (Tony and Susan Alamo Foundation v. Sec’y of Labor, 471 U.S. 290, 295 (1985);Walling v. Portland Terminal Co., 330 U.S. 148, 152 (1947)).
True interns are not “employees”
Based on the foregoing principles, DOL Wage and Hour Division (WHD) opinion letters have set forth certain circumstances under which a summer intern will be considered a trainee and not an employee entitled to compensation. Typically, a true intern is a student hired through a school program. DOL has stated that it will not consider students to be employees when they are involved in education or training programs that are “designed to provide students with professional experience in the furtherance of their education and training and are academically oriented for their benefit” (Wage-Hour Opinion Letter, Jan. 28, 1988). This would apply, DOL has stated, to students working through an internship program who gain practical work experience, benefit from increased job marketability and are substantially supervised. Similarly, DOL found, a program run by a university in which students worked without pay for a for-profit company to receive on-the-job experience did not create an employee/employer relationship. In a Wage-Hour opinion Letter dated May 10, 1983, DOL opined that students who received college credits for performing an “internship … which involves the students in real-life situations and provides the students with educational experiences unobtainable in a classroom setting” were not considered to be employees.
The common denominator among trainees who were not entitled to compensation was that the purpose of their internships was not to perform productive work. Among other things that DOL considered were the facts that:
the interns were actually receiving training,
they were not displacing regular employees,
they worked under close supervision, and
they did not provide immediate advantage to the employer; to the contrary, they may actually have slowed down or impeded the employer’s work (Wage-Hour Opinion Letter, Jan. 6, 1969).
In DOL’s Field of Operations Handbook, the relevant factors have been summarized since at least 1993 as follows:
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;
The internship experience is for the benefit of the intern;
The intern does not displace regular employees, but works under close supervision of existing staff;
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;
The intern is not necessarily entitled to a job at the conclusion of the internship; and
The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship. (FOH 10b11)
A student who meets all of these six factors of this test is not an employee and is not entitled to compensation.
Some courts have held that interns were not employees even when fewer than all six factors were met. In a very recent case,Schumann v. Collier Anesthesia, P.A. (2014 WL 2158505 (M.D. Fla. 2014), appeal filed, Case No. 14-13169 (11th Cir. 2014)), the court considered the six-factor test in rejecting student intern claims brought by former students in defendant Wolford College’s nurse anesthesia master’s degree program with the goal of becoming Certified Registered Nurse Anesthetists. While at Wolford, the plaintiffs participated as interns in a clinical training program supervised by the defendant, Collier Anesthesia, P.A., and it was based on that internship that they brought suit.
In Schumann, the court analyzed DOL’s six-factor test, but did not find it necessary to resolve every factor in favor of defendants in order for defendants to prevail. Rather the court used the six-factor test as a guide to determine whether the economic realities supported a finding of an employment relationship. In holding no such relationship existed, the court explained:
[T]he economic realities of this case establish that Plaintiffs were not “employees” of any Defendant, and therefore are not entitled to wage or overtime compensation. Plaintiffs were students enrolled in a master’s degree program at an accredited college. The graduation requirements for their master’s degree required participation in the internship, as did the accrediting body for the college. Plaintiffs were given the hands-on training required to obtain their nurse anesthesia master’s degrees and to sit for the CRNA certification exam. Each Plaintiff knew and acknowledged that he or she would not be paid for the internship, and each received course credit and a grade for the internship. The internship provided clear benefits to Plaintiffs, although the nature and extent of any benefit to Defendants is disputed. None of the Plaintiffs were entitled to, or thought they would be entitled to, employment at Collier upon completion of the internship.Thus, even though the Schumann court found that three of the six factors were not conclusively established in defendants’ favor, it granted summary judgment for defendants and held that the interns were not employees.
As noted, the interns in this case have filed an appeal. The U.S. Court of Appeals for the Eleventh Circuit has scheduled oral argument for the week of May 11, 2015. A decision presumably will come out sometime in the summer or next fall.
DOL’s “Fact Sheet #71″
In April 2010, DOL published a “Fact Sheet” entitled “Internship Programs under The Fair Labor Standards Act.” In that Fact Sheet, DOL reiterated the traditional six-part test quoted above for determining whether an employment relationship exists.
A Fact Sheet is not a regulation and has no legal effect, and issuance of Fact Sheets usually passes unnoticed. Fact Sheet #71, however, raised many eyebrows, in part because of the following sentence:
On the other hand, if the interns are engaged in the operations of the employer or are performing productive work (for example, filing, performing other clerical work, or assisting customers), then the fact that they may be receiving some benefits in the form of a new skill or improved work habits will not exclude them from the FLSA’s minimum wage and overtime requirements because the employer benefits from the interns’ work.
As noted above, DOL’s longstanding position was that an unpaid internship could include “actual operation of the facilities of the employer.” Thus, with this sentence, DOL, seemingly declared war on unpaid internships as they had been practiced for generations. If the quoted sentence from DOL’s Fact Sheet is a correct statement of the law, then an unpaid intern must be nothing more than an observer in the workplace; as soon as the intern performs any productive work, he or she must be paid.
Following on the heels of Fact Sheet #71, there was a “gold rush” of sorts as former interns began filing lawsuits against the workplaces where they had interned. Most likely, DOL’s Fact Sheet #71 was not the only factor causing the explosion in lawsuits by former interns. Perhaps, as more former interns saw their career hopes dashed during the “Great Recession” and the accompanying unemployment, a lawsuit gave hope of salvaging something from the internship experience. Also, FLSA lawsuits in general have been increasing in recent years. Whatever the catalyst, many employers have been spooked by this litigation explosion relating to their friends’ and competitors’ internship programs.
One industry particularly hard hit has been the entertainment industry. Before the current spate of lawsuits, many young people would have paid good money for a chance to be a gofer on the set of a prime time TV series or a box office blockbuster. More recently, some of those same young people turned around and demanded to be paid for the time they had spent on the set.
The interns in these lawsuits generally did not obtain their internships through academic programs and did perform productive work of some type during their internships, thus potentially distinguishing them from the interns in the Schumann case discussed above. In one currently pending case (Glatt v. Fox Searchlight Pictures Inc.), for example, the duties of one of the interns were described in a court filing as–
picking up and setting up office furniture at the beginning of the production; arranging lodgings in hotels and apartments for the cast and crew; compiling lists of local vendors; taking out the trash; taking lunch orders; answering and transferring phone calls; watermarking scripts; drafting daily call sheets; photocopying; making coffee; making deliveries to and from the film production set, rental houses, and payroll services; receiving packages and deliveries to the office; admitting guests into the office; breaking down, removing, and selling office furniture and supplies at the end of the production; internet research; and sending invitations to the “wrap party.”
According to court filings, this particular intern received only minimal training and “agreed to work for no financial compensation because he hoped that his internship would lead to paid employment in the film production industry.” Because he performed productive work, the former intern argued, he should be paid.
The primary benefit/primary beneficiary test
In the Glatt v. Fox Searchlight Pictures Inc. case just-mentioned, the trial court found that the unpaid interns were, in fact, employees entitled to be paid the minimum wage. In so holding, the court declined to adopt the defendants’ suggestion that the court apply a “primary beneficiary” test to determine whether the unpaid internship primarily benefitted the ostensible employer or the intern. In the court’s words, “a ‘primary beneficiary’ test is subjective and unpredictable” (293 F.R.D. 516, 532 (S.D.N.Y. 2013). The court observed:
Defendants’ counsel argued the very same internship position might be compensable as to one intern, who took little from the experience, and not compensable as to another, who learned a lot. Under this test, an employer could never know in advance whether it would be required to pay its interns. Such a standard is unmanageable. (Id.)
Instead, the court said that it would strictly follow DOL’s six-factor test. Under that test, the court found, the interns were employees. Regarding the first factor, for example, the court said:
Footman [one of the interns/plaintiffs] did not receive any formal training or education during his internship. He did not acquire any new skills aside from those specific to Black Swan ‘s back office, such as how it watermarked scripts or how the photocopier or coffee maker operated. It is not enough that Footman “learned what the function of a production office was through experience.” He accomplished that simply by being there, just as his paid co-workers did, and not because his internship was engineered to be more educational than a paid position. (Id. at 532-33)
In contrast, several courts have applied the primary beneficiary test and thereby given employers hope that the traditional internship model is still viable. In Solis v. Laurelbrook Sanitarium and School, Inc. (642 F.3d 518 (6th Cir. 2011), rehearing and rehearing en banc denied, July 6, 2011), the court said that whether an employment relationship exists in the context of a training or learning situation depends on who receives the primary benefitof the relationship. Factors such as whether the relationship displaces a paid employee and whether there is educational value derived from the relationship are relevant considerations to the extent that they support the “primary benefit” determination. In the Sixth Circuit’s words: “If a purported employer receives the primary benefit from a working relationship with a child, it is likely that the child is in competition with adults, whom the employer cannot employ without complying with the FLSA’s costly and burdensome requirements. If, however, a child receives the primary benefit of the work performed for a purported employer, and the child’s presence does more harm to the purported employer’s operations than good (or no good at all), it is unlikely that the child is competing with adults for the opportunity to hinder the employer’s operations.” That does not mean, however, that the interns may not do any productive work.
In its holding, the court rejected the school’s argument that vocational students, by definition, are never employees. But, the court also rejected DOL’s argument that its six-factor test for trainees should apply to student interns. The court said:
We find the WHD’s test to be a poor method for determining employee status in a training or educational setting. For starters, it is overly rigid and inconsistent with a totality-of-the-circumstances approach, where no one factor (or the absence of one factor) controls. Moreover, at least one court has found the test’s all-or-nothing approach inconsistent with prior WHD interpretations and opinions endorsing a flexible approach, thereby diminishing any persuasive force the test might be entitled to under Skidmore. Furthermore, the test is inconsistent with [the Supreme Court’s decision in Walling v.] Portland Terminal itself, which, as outlined below, suggests that the ultimate inquiry in a learning or training situation is whether the employee is the primary beneficiary of the work performed. While the Secretary’s six factors may be helpful in guiding that inquiry, the Secretary’s test on the whole is not.
In weighing the relative benefits received by the school and the students, the court said, it is proper to consider intangible benefits along with tangible benefits. In Laurelbrook’s case, those intangible benefits related to the school’s religious mission.
Note that Solis v. Laurelbrook Sanitarium and School involved a vocational school, not an employer-based program. However, the same primary benefit test has been applied in workplace settings as well. For example, in Demayo v. Palms West Hosp., LP (918 F.Supp.2d 1287 (S.D. Fla. 2013)), a case involving a for-profit hospital and surgical center, the court found that the totality of the circumstances established that the “economic reality” was that the extern in a surgical technology program was not an employee, but a trainee. The extern understood she would not be compensated for her work and was not guaranteed a job at the end of her externship; in fact, the organization that accredited the externship program prohibited compensation as a requirement of the fulfillment of a student’s externship credits. Moreover, the extern received hands-on training, participating in over 185 surgical procedures (she was only required to participate in 125), without conferring a substantial benefit to the hospital. For example, the hospital did not reduce facility staffing levels or payroll. The hospital spent time monitoring the extern and providing feedback on her work, and there was evidence that the extern impeded the hospital’s operations by demanding facility employees’ time and resources to explain procedures, fill out evaluation forms, and decontaminate sterile fields accidentally contaminated by the extern. Because the extern received the primary benefit of the arrangement, no employment relationship existed.
Note that the primary benefit test is not a panacea for employers. Even under the primary benefit test, interns were found to be employees entitled to compensation in Marshall v. Baptist Hospital, Inc. (473 F. Supp. 465 (M.D. Tenn. 1979),rev’d on other grounds, 668 F.2d 234 (6th Cir. 1981)), a case that predates the current spate of litigation. There, the court found that the training was not a proper internship because it was “deficient.” Instead of placing students with employed radiology technicians who would instruct students on proper X-ray procedures and supervise their performance, the program often assigned students to areas of the hospital staffed only by other students. And, even those students assigned to areas generally staffed by technicians often found themselves working alone or with other students, as the technicians were frequently reassigned to areas where they were needed most. Students staffed the chest X-ray rooms and frequently performed portable X-rays by themselves. Students often performed functions that relieved technicians and other employees from such duties. Students also displaced radiology technicians in more substantive ways. For instance, chest X-rays were the most common procedures at the hospital, at one time constituting nearly 40% of all procedures performed, and virtually all chest X-rays were performed by the students, whom the hospital did not pay. Additionally, students worked shifts assigned originally to employed technicians. The record was clear that were it not for the students’ performance of essential tasks, the hospital would have had to hire more employees or require its regular employees to work overtime. Under those circumstances, the primary beneficiary of the students’ work was the hospital, not the student. As the court noted, “Had the training program been found to be educationally sound the court might nevertheless have concluded that the bulk of the benefit inured to the trainees, but because the trainees were shortchanged educationally the court finds that the hospital was the primary benefactor from the relationship between it and the trainees.”
Conclusion
There is no telling where this will all lead. Employers who conduct traditional internship programs that primarily benefit the student interns certainly have viable legal defenses. Employers who wish to offer internships would be well advised to obtain copies of the Wage-Hour opinion letters discussed above so they can claim good faith reliance on DOL’s official pronouncements. And, employers should make sure that there internship programs are structured to satisfy the six-factor test in the Field Operations Handbook and also the primary benefit test. In particular, employers would be well-advised to partner with academic institutions that will grant academic credit to the interns for their summer or other internship experiences. If that is not possible or practical, employers should design their internship programs to provide training similar to training which would be given in an educational environment.
With all these precautions, there is no guarantee that employers won’t be sued and won’t have to expend a disturbing amount of time and money on defending themselves. On the other hand, the thought that FLSA lawsuits may forever change the way a generation of workers is trained also is disturbing. Simply put, employers have to make a business decision weighing their fear of a lawsuit against the factors that normally impel them to offer summer internships to students.
Ultimately, the Supreme Court may have the last word, though it did refuse to hear an FLSA intern case in 2013. Notably, the Supreme Court continues to harshly criticize the current DOL leadership for using court briefs and documents that don’t have regulatory force – not unlike Fact Sheet #71 discussed above — to change decades-old DOL policies reflected in Wage-Hour opinion letters. The fact that internship programs have existed for so long virtually unnoticed by DOL and the courts suggests they may be proper. As the Supreme Court said in an FLSA case,Christopher v. SmithKline Beecham Corp. (132 U.S. 2156 (U.S. 2012)), “[W]hile it may be possible for an entire industry to be in violation of the FLSA for a long time without the Labor Department noticing, the more plausible hypothesis is that the Department did not think the industry’s practice was unlawful.” This and other statements by the Supreme Court and lower court decisions such as those discussed above may give employers the courage to not eliminate bona fide internship programs entirely. Of course, employers who are taking advantage of young people to do what really is compensable work, cannot take solace in these words, nor should they be able to.
Shlomo Katz is a member of the litigation department at Brown Rudnick LLP, where he focuses on government contracts/procurement and commercial law and litigation, wage and hour law and construction law. He has significant experience in preparing, negotiating and litigating contract claims and bid protests.
