Update on employment of interns

Should interns be paid? A recent opinion from U.S. District Court for the Southern District of New York illustrates several interesting issues that should guide employers who are considering hiring unpaid interns.

The order in Glatt v. Fox Searchlight Pictures Inc., et ano. has probably generated attention because of its Hollywood connection. It does not develop new law; that step would more likely take place at the appellate level, if the case gets that far.

Nevertheless, the Glatt court covered some ground that deserves comment.

WERE THE INTERNS EMPLOYEES COVERED BY THE FLSA OR DID THEY FALL UNDER THE TRAINING EXCEPTION?

The intern may be an employee even if he or she agrees to work for nothing to gain experience.

The U.S. Department of Labor has set six criteria that must be met for a position to qualify as an unpaid internship. These six factors were distilled from the U.S. Supreme Court's 1947 decision in Walling v. Portland Terminal Co., which created a narrow exception to the broad coverage of the federal Fair Labor Standards Act (FLSA).The six factors indicate a training function rather than an employment function and should be the first step in reviewing your internship situation. They are as follows:

  • The internship, even though it includes actual operation of the facilities of the employer, is similar to training that 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.
  • The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

In Glatt, unpaid interns brought an action under the FLSA and similar New York and California state laws. These plaintiffs had worked on the production of the film Black Swan, performing various duties, including gofer tasks and more important project-related activities such as set work. They maintained that they should have been classified as paid employees.

The plaintiffs and the defendants moved for summary judgment on various issues, and the court opinion rules on those motions issue by issue.

The court examined each of the six factors and concluded that the plaintiffs were, in fact, employees covered by the FLSA. The court granted summary judgment to the plaintiffs on this issue.

The message: Before you decide to hire—but not pay—an intern, you should carefully consider these six criteria. You may very well save money by paying the intern minimum wage or above rather than risk a claim that might ultimately cost far more.

WHO WAS THE EMPLOYER?

If you think you can get around the minimum wage and overtime laws by forming a separate company to hire the interns, think again.

One defense in Glatt was that the defendants did not employ the interns in the legal sense of employment. The defendants had entered into contracts with production companies, and the production companies (which were not sued) hired the interns. In other words, Company A had a production agreement with Company B, and Company B hired the interns. Company A argued that it could not be the employer of the interns.

The court disagreed, drawing on a U.S. Supreme Court precedent that, under the FLSA, it should consider economic reality rather than technical concepts. The court found there was evidence that the defendants had the power to require the production companies to hire and fire employees. It also found evidence that the defendants supervised and controlled the employee work schedules, determined the rate and method of payment and maintained employment records.

The court examined other factors before determining that it could not rule out the defendants as employers. In the end, it overruled the defendants' summary judgment motions. The court determined that the defendants did not meet their burden of proof that they were not employers or joint employers of the interns under the FLSA.

The message: Creating a contract that separates Company A from Company B may not be enough to insulate Company A from liability to interns of Company B under the FLSA.

Facts and legal circumstances may differ from case to case and state to state. An employer should obtain legal advice before making decisions on internships.

—Jim Juliano
juliano@nicola.com