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Recent Court Cases May Have Implications for California Business Owners’ Unpaid Internship Programs

using computer.jpgAs the fall semester nears, and students begin looking for internships, the legality of unpaid internships will continue to be an important issue for business owners and employers. This summer, the U.S. District Court for the Southern District of New York struggled over two key issues that will affect the future of the legality of unpaid internships: (1) whether employers must classify entry-level “interns” as employees, thereby requiring that interns get paid at least minimum wage and overtime; and (2) whether class action treatment is appropriate for groups of interns.

First, in May of this year, the court in Wang v. Hearst Corporation held that interns at Hearst Corporation were not necessarily employees under the law. As a result, the jury would have to resolve that issue. The court also ruled that class treatment was inappropriate since the interns’ working conditions were not the same across the group.

However, the following month, in Glatt v. Fox Searchlights Pictures, Inc. the U.S. District Court for the Southern District of New York, came to an entirely different decision, finding that Fox Searchlight Pictures should have classified its interns as employees. More specifically, the court held that unpaid interns on the set of the movie “Black Swan” did not fall under the narrow “trainee” exception to the Fair Labor Standards Act ‘s (“FLSA”) minimum wage and overtime requirements. The court found that this was the case even despite the fact that the interns received academic credit for the internship. Additionally, the Glatt court granted class status to the group of interns.

These two cases bring to the forefront the legality of unpaid internships. At the federal level, the Department of Labor (“DOL”) sets out six criteria for when the “trainee” exception applies. If the trainee exception applies, the FLSA allows interns to work without pay. According to the DOL fact sheet, the trainee exception should be applied only in the following cases:

1. The internship is similar to training that would be provided in an educational environment, even though it may include the operation of the employer’s facilities;
2. The internship must be for the benefit of the intern;
3. The intern must not displace regular employees and must work under the close supervision of the existing staff;
4. The employer must derive no immediate advantage from the intern’s activities, and the employer’s operations may even be impeded by utilizing the trainees or students on occasion;
5. The trainee/intern must understand he or she is not entitled to wages for the services performed; and
6. The intern is not guaranteed a job at the end of the internships.

The California Division of Labor Standards Enforcement (DLSE) has historically followed federal interpretations of internship programs and applied the six criteria outlined by the DOJ above. At the same time, the DLSE has relied on five additional factors in determining whether unpaid internships are permitted. Although these factors are not binding, they do provide guidance for employers in developing internship programs that comply with California and federal law. These additional factors include:

1. The training the interns receive should be part of an educational curriculum;
2. The interns/trainees should not receive employee benefits;
3. The training received by interns should be general enough “so as to qualify the trainees or students for work in any similar business, rather than designed specifically for a job with the employer offering the program;”
4. The screening process for the internship program is different from the screening process for employees, and involves only “criteria relevant for admission to an independent educational program;” and
5. Advertisements or postings for internships should clearly describe the positions as educational or training-based rather than as employment.

Although Fox Searchlight Pictures has indicated it will file an appeal that will be heard by the Second Circuit Court of Appeals, these recent decisions may have a significant impact on businesses across the country, especially considering that the Second Circuit is one of the most influential federal appeals courts in the United States. California business owners should be aware of the risks of using unpaid interns and should review their internship programs to make sure they are compliant with both federal and California labor laws. If you have any questions or need assistance coming up with an internship program for your business, our Northern California business and employment law attorneys can help. You can contact one of our lawyers using our online contact form, or by calling us at 925-463-1073.

Sources:

Judge Rules That Movie Studio Should Have Been Paying Interns, by Steven Greenhouse, The New York Times

Unpaid-Intern Lawsuits Explained, by Eric Spitznagel, Bloomberg Businessweek

6 Legal Requirements For Unpaid Internship Programs, Forbes