December 09, 2013 Top Story

Employer Violates Labor Laws by Failing to Pay Interns

NY District Court ignores other circuits; holds unpaid interns are employees under FLSA

Daniel Elms

Employers with unpaid internship programs may need to reevaluate their policies after an unprecedented ruling from the U.S. District Court for the Southern District of New York. In Glatt v. Fox Searchlight Pictures Inc., the court held that unpaid interns who worked on the production of the movie Black Swan were employees subject to the protections of the Federal Labor Standards Act (FLSA) [PDF] and entitled to back pay. The court also certified a class action on the interns’ claims for violation of state labor statutes and conditionally certified a class action on the FLSA claims.

Searchlight Is a Joint Employer under the FLSA

The court first considered whether Fox Searchlight Pictures (Searchlight) was an employer of the interns, who were hired by related entities. "Employer" has a much broader definition under the FLSA than under traditional agency law. The FLSA defines "employ" as "to suffer or permit work," and joint employers can also be held liable.

After applying the formal control test and the functional control test, the court found that Searchlight exercised formal and functional control over the interns and deemed it a joint employer. It cited Searchlight's power to hire and fire interns and their supervisors, supervise and control work schedules, and determine the method of employment, as well as its maintenance of employment records for the interns and the fact that the interns worked exclusively on Black Swan.

Plaintiffs Do Not Fall under the "Trainee Exception"

The court next determined whether the interns were "employees" subject to the FLSA, or whether they were exempted under the "trainee" exception established by the U.S. Supreme Court in Walling v. Portland Terminal Company. Significantly, the court declined to apply the "primary beneficiary" test advocated by defense counsel, finding it "subjective and unpredictable." That test determines employment status by assessing whether "the internship's benefits to the intern outweigh the benefits to the engaging entity."

Instead, the court used the U.S. Department of Labor's (DOL) criteria for unpaid internships.

Those criteria are:

  • 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; 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.

The court concluded that the interns should have been classified as employees under the FLSA and paid for their time spent working for the company. The interns performed menial labor, such as filing documents, photocopying, running errands, answering phones, and other general clerical work that would have otherwise been done by a paid employee. Under the circumstances, the court held the interns essentially functioned as employees and provided an immediate advantage to their employer by replacing paid workers. Because they did not receive training or skills comparable to those conferred in an educational or vocational setting, and the benefits of resume listings and job references were incidental, the interns did not fall under the "trainee" exception to the FLSA. The court further commented that receipt of academic credit has no bearing on the validity of an unpaid internship program under the labor statutes.

Ultimately, the court certified a class action on the ground that "common issues of liability predominate over individual issues and defenses," though it also noted the "disparate factual and employment settings" of the various interns.

Uncertainty for Employers and Practitioners in Unpaid Intern Litigation

Glatt is the first case to rule that unpaid interns are employees subject to the FLSA, and it leaves a wake of uncertainty for employers and practitioners. The case highlights a split between the U.S. Courts of Appeals over the proper test for deciding whether interns are covered under the FLSA. Though the Second Circuit (the appellate court with jurisdiction over New York district courts) has not addressed this issue, the Fourth, Sixth, and Eighth Circuits [PDFs] apply the "primary benefits" test. The Tenth Circuit has held that the DOL factors can be considered but are not conclusive. The Eleventh Circuit also considered the DOL guidelines in an unpublished decision. Regardless of the test applied, all of these circuit courts concluded that the unpaid interns in those cases were not employees under the FLSA.

Some believe Glatt does not reflect the trend, but instead is an outlier—both because the district court put such a heavy emphasis on the DOL test, and because it ultimately determined the interns were “employees” under the FLSA. “Did they get it right? Probably not. I think if this issue proceeds all the way through appeal, the Second Circuit will ultimately adopt a policy that's more in line with the other circuits," says Kevin J. O'Connor, River Edge, NJ, chair of the Sound Advice Subcommittee of the ABA Section of Litigation's Employment and Labor Relations Law Committee. For example, he points out, “the Sixth Circuit called the DOL's test a poor method of determining employee status in training or education settings, and went over how it had been applied and interpreted differently in many different settings, even by the DOL itself."

Other Section leaders disagree, believing that the DOL guidelines are more appropriate andthat the proper result was reached in this case—that hardworking interns are paid. "The DOL guidelines aren't new. They are based on a much older Supreme Court case, and I think it's the better approach. It is intended to narrow the circumstances in which the trainee exception can be used," says Jocelyn D. Larkin, Berkeley, CA, cochair of the Class Actions and Derivative Suits Committee. "In some ways, the case is unremarkable. It states that if somebody works, you have to pay them for the work they do," she adds.

Regardless of which test the Second Circuit decides to apply, the bigger question is whether the Glatt court got it right when it certified a class of interns with varied roles and responsibilities, according to O'Connor. "The DOL test is pretty fact-specific, and it's not clear whether these are the type of claims that are conducive to class certification," he says.

Defendants have petitioned the U.S. Court of Appeals for the Second Circuit for leave to appeal. The appeal is still pending.

Advice to Employers

"Any employer that has an unpaid intern program needs to consult with an attorney who knows this area," advises O'Connor. First and foremost, he urges employers to make sure they are not hiring interns to replace paid employees. He also recommends structuring internship programs to focus on education and training (rather than production or operations), rotating interns through different departments, and limiting the duration of the internship.

Renee Choy Ohlendorf is an associate editor for Litigation News.

Keywords: employment, interns, wage and hour, Federal Labor Standards Act

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