Long a staple of college summer jobs, unpaid internships with for-profit employers are drawing increasing scrutiny from state and federal regulators. As recently reported in the New York Times (Apr. 2, 2010), the acting Director of the U.S. Department of Labor’s (DOL) Wage and Hour Division, Nancy J. Leppink, has issued a warning to businesses considering unpaid internships: “If you’re a for-profit employer or want to pursue an internship with a for-profit employer, there aren’t going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law.”

Based on a Supreme Court decision from the 1940s, DOL takes the position that unpaid internships with for-profit employers are lawful only if all six of the following criteria are met:

• The interns receive training similar to that which would be given in a vocational school;
• The training is for the benefit of the interns;
• The interns do not displace regular employees but work under close supervision;
• The employer derives no immediate advantage from the interns’ activities, and on occasion, the employer’s operations may actually be impeded;
• The interns are not guaranteed a job following the internship; and
• The employer and the intern understand that the intern will not be paid.

See e.g., WH Opinion Letter FLSA2004-5NA (May 17, 2004) (citing Walling v. Portland Terminal Co., 330 U.S. 148 (1947)). However, at least one federal court of appeals has rejected DOL’s all-or-nothing approach and held that no one factor is dispositive, and that courts must look at the totality of the circumstances. See Reich v. Parker Fire Protection Dist., 992 F.2d 1023 (10th Cir. 1993).

California regulators, meanwhile, have recently revised their criteria for evaluating unpaid internships. In a lengthy opinion letter issued on April 7, 2010, the California Division of Labor Standards Enforcement (DLSE) abandoned its former 11-factor test in favor of the six factors used by DOL. It is unclear from the letter whether DLSE requires that all six factors be met, but its application of those factors appears generally similar to DOL’s interpretation. The letter can be found at http://www.dir.ca.gov/dlse/opinions/2010-04-07.pdf.

Under either standard, employers must be mindful that unpaid internships are likely to be unlawful if the interns perform more than a minimal amount of productive work for the benefit of the employer. One way to avoid compliance issues is to pay interns at least the minimum wage. Otherwise, private-sector employers face potential wage and hour liability if their unpaid interns turn out to be more benefit than burden.