August 17, 2018

Interns can be a great business commodity – they bring a fresh perspective, are highly motivated, and perhaps most importantly, work for free.  While unpaid internships can certainly add many benefits to your business, you may be unknowingly setting yourself up for future legal battles, which will cost you much more money than if you had paid the interns to begin with and treated them as regular employees.

Damages in internship lawsuits can run to high amounts.  In October of 2014, NBC Universal agreed to pay $6.4 million to settle a class action lawsuit brought by interns who alleged that it violated labor laws when it misclassified them as unpaid interns and deprived them of wages as well as benefits such as social security contributions and unemployment insurance.

More recently, in March of 2015 the media giant Viacom and its affiliates agreed to pay up to $7.2 million in settlement of a class action lawsuit brought by unpaid interns who worked at television networks in New York and Santa Monica.  The lawsuit was based on violations of both state and federal wage laws.  In January 2016, the amount of that settlement was finalized at a little more than $1.6 million.

The Changing Legal Requirements for Unpaid Internships

Unpaid internships are lawful in California under some circumstances, but there is very little guidance on this in California’s employment laws and court decisions.  The only statewide authority comes from California’s Division of Labor Standards Enforcement (DLSE), which has issued opinion letters on the subject.  In 2010, the DLSE adopted criteria used by the federal Department of Labor (DOL), derived from the Supreme Court opinion Walling v. Portland Terminal Co. (1947) 330 U.S. 148, to determine whether an intern is an employee.  As of this moment, that 2010 criteria is the standard which California employers must satisfy.  Unless all the criteria are met, the intern is legally an employee who must be afforded all protections under California’s wage and hour laws. Here are the six criteria that must be met for an unpaid internship:

1. The internship, even though it includes actual operation of the employer’s facilities, is similar to the training that would be provided in a vocational school;

   (Routine, everyday tasks such as photocopying or sorting paperwork do not qualify as vocational training.)

2. The internship is for the benefit of the intern;

   (Employers must be able to clearly state what benefit the intern will receive. Vague terms such as “experience” or “resumé building” are not acceptable.)

3. The intern does not displace regular employees, but works under their close observation;

   (Observing and assisting existing employees is acceptable; taking over tasks traditionally provided by paid assistants, such as making coffee or ordering catered meals, is not.)

4. The employer derives no immediate advantage from the activities of the intern, and on occasion the employer’s operations may be actually impeded;

   (If the internship allows the employer to hire fewer workers, save money on costs, or delegate personal tasks to the intern (such as picking up dry cleaning), then this criterion is not satisfied.)

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.

If any of these criteria are not met, then the intern is legally considered an employee and must be paid at least the minimum wage, be compensated for overtime, receive meal and rest breaks, and benefits such as social security contributions and unemployment insurance (unless the employer is a non-profit charitable organization where volunteers work without expectation of being compensated.)

However, the U.S. Department of Labor’s Wage and Hour Division rolled out new internship guidelines in January of this year.  These new guidelines are less rigid than the criteria above, and are easier for employers to comply with.  They were first suggested in a 2015 federal ruling, Glatt v. Fox Searchlight Pictures, Inc. (2d Cir. 2015) 811 F.3d 528, and were recently adopted by the Ninth Circuit (which includes California) in Benjamin v. B & H Educ., Inc. (9^th Cir. 2017) 877 F.3d 1139. Now, these new guidelines will be used nationwide in Department of Labor (DOL) opinion letters and rulings.  If California’s DLSE adopts these new federal guidelines, then the following seven factors, called the “primary beneficiary test,” will replace the six California criteria:

1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation.  Any promise of compensation, express or implied, suggests that the intern is an employee.
2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

This “primary beneficiary” test is similar to the old six criteria, but note that the new test is flexible, with each guideline beginning “The extent to which . . . .”  No single guideline is determinative, unlike the old six-criteria test.  The DOL noted in its updated “Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act” that now, “whether an intern or student is an employee under the [federal Fair Labor Standards Act] necessarily depends on the unique circumstances of each case.” Each guideline must be weighed, balanced, and considered under the totality of the circumstances.  A court may even consider relevant evidence beyond the seven guidelines to determine whether an unpaid intern should be classified an employee or not.

No California state court opinion has applied this new “primary beneficiary test” in an internship case yet, but it is expected that the test will soon be adopted by California’s DLSE and state courts.

What Should You Do?

First, become familiar with the above factors and always ensure you will be able to comply with each one before an intern starts working for you.  If you are not sure you can do this, then consider paying interns the minimum wage, limiting their work hours, and complying with all applicable employment laws as you would with any other paid employee.

Second, create a formal internship program with scheduled start and end dates, and maintain records of hours worked and any college or vocational school credits earned.

Third, closely supervise each intern and make sure that he/she is in fact receiving training and not performing work typical of an employee.

Last, and perhaps most important, execute a written agreement between you and each intern which clearly sets forth the details and goals of the internship, and includes the understanding that the intern will receive no wages for his/her work and that future paid employment is not guaranteed.

Need more information?
ESKRIDGE LAW may be contacted by phone (310/303-3951), by fax (310/303-3952) or by email (geskridge@eskridgelaw.net).  Please visit our website at eskridge.hv-dev.com.

This article is based on the law as of the date posted at the top of the article.　This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.