Unpaid internship programs have become almost a prerequisite for many individuals entering the workforce today.  However, due to the recent wave of class action lawsuits by unpaid interns asserting claims under the Fair Labor Standards Act (“FLSA”), many employers have been questioning whether to continue their internship programs.  These lawsuits have become so pervasive that there is a website created and run by a law firm dedicated to filing such lawsuits.  Some of the defendants in recent class actions include Viacom, Sony, Fox Searchlight, Hearst Corporation, NBC Universal, and Madison Square Garden Company.

FLSA claims by unpaid interns have long been governed by the decades-old U.S. Supreme Court case of Walling v. Portland Terminal Co.  Wallington concerned an unpaid apprentice program where individuals would work for the railroad for free to learn the necessary skills for a full time position.  The intention of this program was to eventually hire the apprentices as full time employees.  The Court held that because the employer received no “immediate advantage” from any work done by the trainees, the trainees were not employees under the FLSA.  Based on this case, the Department of Labor (DOL) published a set of guidelines for determining whether an unpaid intern was an employee as defined by the FLSA.  Under these guidelines, an intern need not be compensated if:

1. 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;

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

3. The intern does not displace regular employees, but works under close supervision of existing staff;

4. 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;

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.

These guidelines have been the impetus for the recent wave of litigation in this area, as they impose a very strict standard – particularly the test that requires that the employer derive no immediate advantage from the activities of the intern.  Fortunately for employers, however, federal courts have signaled a bit of a departure from the strict guidelines published by the Department of Labor in this area.

For example, in the case of Glatt v. Fox Searchlight Pictures and Fox Entertainment Group, a class action suit was filed on behalf of all unpaid interns who worked on the film Black Swan or at Fox corporate headquarters.  The Second Circuit Court of Appeals, which is based in New York, stated in its decision that the DOL guidelines carry little weight, as they were merely an interpretation of the Supreme Court’s decision in Portland Terminal.  The Court then held that the proper question in unpaid internship cases under the FLSA is whether the intern or employer is the primary beneficiary of the relationship.  The Court stated that the following factors should be considered in the “Primary Beneficiary Test”:

The extent to which:

1. The intern and the employer clearly understand that there is no expectation of compensation;

2. The internship provides training that would be similar to that which would be given in an educational environment;

3. The internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;

4. The internship accommodates the intern’s academic commitments by corresponding to the academic calendar;

5. The internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;

6. The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern;

7. The intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

In the case, the Second Circuit concluded that class interns were the primary beneficiaries of the relationship with Fox and therefore not employees under the FLSA, which was a departure from the way many of these cases had been decided.  Moreover, it appears that the Second Circuit’s departure from the DOL’s strict guidelines may be the beginning of a new standard for unpaid intern lawsuits.  In September, the Eleventh Circuit in Schumann v. Collier Anesthesia, P.A. cited the flexible framework in Glatt as the proper standard for unpaid intern lawsuits under the FLSA.

Prior to the Second Circuit’s decision in Glatt, few would second guess an employer’s decision to shut down an unpaid intern program due to the potential liabilities associated with it.  However, employers may want to reconsider this decision in light of the more practical analysis applied in Glatt.  To mitigate the risk of an FLSA suit, employers with unpaid interns still need to exercise caution, and still should audit their programs using the Primary Beneficiary test promulgated in Glatt, at the very least.  Also, bear in mind that the Glatt decision is only binding in the Second Circuit, and the law in this area is very much unsettled in many of the other circuits.  If you are considering establishing one of these programs, or feel that review of an existing program is appropriate, consulting with competent counsel is advised.