5/1/2012 Unpaid Internships Pose Legal Traps for Employers
The topic of unpaid internships has recently received significant attention in the news and from government agencies. In February 2012, the New York Times reported that a full-time unpaid intern in New York City filed a lawsuit against fashion magazine Harper’s Bazaar and its parent company Hearst Corporation alleging violations of federal and state wage and hour laws. On February 7, 2012, Minnesota Public Radio featured a debate over the legality of unpaid internships. On March 30, 2012, the U.S. District Court for the Southern District of New York dismissed a case where the plaintiffs, who were unpaid content providers (bloggers) to the Huffington Post, alleged deceptive business practices under New York General Business Law § 349 and that the Huffington Post was unjustly enriched. All of this excitement comes on the heels of the U.S. Department of Labor (“USDOL”) stepping up enforcement action over unpaid internships in the past few years. This article discusses when non-profit and government agencies can utilize unpaid interns. More importantly, this article discusses the very narrow circumstances under which private for-profit employers can utilize unpaid interns and explores the risks that employers face when doing so.
Applicability of the Fair Labor Standards Act to Internships
The federal wage and hour statute, the Fair Labor Standards Act (“FLSA”), 29 U.S.C. §§ 201 et seq., requires that covered, non-exempt employees be paid at least the federal minimum wage for each hour worked and receive overtime pay at one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a workweek. The FLSA broadly defines the term “employ” as to “suffer or permit to work.” 29 U.S.C. § 203 (g). It provides that “employee” means, “any individual employed by an employer. . . .” and goes on to exclude certain types of workers. 29 U.S.C. § 203(e)(1). Interns may qualify as employees unless an exemption is met. The USDOL distinguishes volunteer services provided to nonprofit and charitable organizations and government agencies from unpaid work performed for private for-profit employers. Both of these categories are discussed in more detail below.
Volunteer Work for Non-Profit and Government Agencies
The FLSA minimum wage and overtime requirements generally do not apply to volunteered services to nonprofit charitable organizations or government agencies; thus, unpaid internships in these agencies are generally permissible under federal law. According to the USDOL, “[t]he FLSA makes a special exception under certain circumstances for individuals who volunteer to perform services for a state or local government agency and for individuals who volunteer for humanitarian purposes for private non-profit food banks. [The Wage and Hour Division] also recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation for religious, charitable, civic, or humanitarian purposes to non-profit organizations. Unpaid internships in the public sector and for non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible.” U.S. Department of Labor Wage and Hour Division, Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act.
The state wage and hour statute, Minnesota Fair Labor Standards Act (“MFLSA”), Minn. Stat. §§ 177.21 et seq., provides similar exemptions. The definition of “employee” under the MFLSA does not include “any individual who renders service gratuitously for a nonprofit organization.” Minn. Stat. § 177.23, subd. 7(7). This exemption can be destroyed, however, if the employer reimburses the volunteer for expenses that are not itemized. Likewise, the definition of “employee” under the MFLSA does not include “any individual who serves as an elected official for a political subdivision or who serves on any governmental board, commission, committee or other similar body, or who renders service gratuitously for a political subdivision . . . .” Minn. Stat. § 177.23, subd. 7(8).
The USDOL has provided guidance in determining whether an individual is a volunteer under the FLSA. Some of the factors that the USDOL focuses on include:
• Whether the entity receiving the services is for-profit, non-profit, or a government agency;
• Whether any compensation is given to the volunteers, such as money, fringe benefits, services etc.;
• The amount of commitment by the volunteer (e.g., occasional, part-time, full-time services);
• Whether regular employees are displaced by the volunteers;
• Whether the volunteer services are of the kind typically associated with volunteer work; and
• Whether the volunteer services are performed free of coercion or pressure.
See, e.g., U.S. Dep’t of Labor, Wage and Hour Division, Opinion Letter FLSA2006-4 (Jan. 27, 2006); U.S. Dep’t of Labor, Wage and Hour Division, Opinion Letter FLSA2001-18 (July 31, 2001).
Non-profit organizations are, however, permitted to pay volunteers stipends or “expenses, reasonable benefits, a nominal fee, or any combination thereof, for their service without losing their status as volunteers.” 29 C.F.R. § 553.106(a). There is no definition of exactly what constitutes a “nominal fee” in the FLSA or regulations. The regulations provide that certain expenses may qualify as nominal, such as reimbursement for the cleaning and maintenance of uniforms for the volunteer services, reimbursement for out-of-pocket expenses such as cost of meals and transportation, reimbursement for tuition costs related to classes designed to teach the volunteers to perform the volunteer services, reasonable benefits provided by a public agency for whom volunteers perform services, and other nominal stipends. See 29 C.F.R. §§ 553.106(b)-(e). The regulations further provide that whether a stipend or fee will qualify as “nominal” will be determined only by “examining the total amount of payments made (expenses, benefits, fees) in the context of the economic realities of the particular situation.” 29 C.F.R. § 553.106(f).
As demonstrated above, both federal and state law permits the utilization of unpaid internships by government agencies and non-profit charities in many circumstances. (Employers should note, however, that directing an employee to perform volunteer work that is not truly voluntary must be compensated.)
Unpaid Internships With Private For-Profit Employers
Unlike non-profit and government agencies, interns in the for-profit private sector typically must be paid in accordance with the FLSA because they will often qualify as “employees” rather than “trainees.”
In Walling v. Portland Terminal Co., 330 U.S.148, 152 (1947), the U.S. Supreme Court held that individuals working for another for their own benefit without expectation of compensation may not be employees:
[T]he definition “suffer or permit to work” was obviously not intended to stamp all persons as employees who, without any express or implied compensation agreement, might work for their own advantage on the premises of another. Otherwise, all students would be employees of the school or college they attended, and as such entitled to receive minimum wages.
Id. Following the Court’s decision in Walling, the USDOL has recognized that there are some circumstances where an employer may not be required to compensate a “trainee” or an intern because no employment relationship exists under the FLSA. To determine whether an internship program meets the USDOL exclusion, the programs must meet all six of the following criteria, derived from the Walling decision:
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.
See U.S. Department of Labor Wage and Hour Division, Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act; see also 5 C.F.R. § 551.104 (applying the same factors above to “trainees”). Whether interns are employees under the FLSA will depend upon all of the circumstances surrounding their activities on the premises of the employer. Id. If all of the factors identified above are met, then the intern is not considered an employee under the FLSA and the minimum wage and overtime requirements do not apply to the for-profit employer.
For-Profit Employers Will Have Difficulty Satisfying the Six-Factor Test for Unpaid Interns
The USDOL six-factor test is extremely narrow and it can be difficult for internship programs satisfy the test. In 2010, Nancy J. Leppink, acting director of the USDOL’s Wage and Hour Division, warned that, “If you’re a for-profit employer or you 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 . . . .” As noted below, private for-profit employers will struggle to satisfy all of the six factors of the USDOL test:
1. Factor one considers how similar the internship is to an educational environment, as opposed to the employer’s actual operations. The more educational, academic, or classroom-like the internship experience is, the less likely the intern will be considered an employee. Some employers have tried to solve compliance issues under the FLSA by offering school credit to unpaid interns as a benefit to the intern. School credit alone, however, likely will not satisfy the USDOL test, because all six factors must be considered.
2. Factor two requires that the internship experience is for the benefit of the intern. If the intern’s services include tasks such as filing, performing other clerical work, or assisting customers, it is likely that the employer is benefiting from the internship experience, and thus considered an employee under the FLSA. This factor will likely be very difficult for an employer to satisfy.
3. Factor three focuses on whether the intern displaces regular employees. If the employer would have hired additional employees or required existing staff to work additional hours had the interns not performed the work, then the interns will be viewed as employees and entitled compensation under the FLSA.
4. Factor four requires that the employer derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded. This may be the most difficult factor for employers to meet because many of the tasks that interns are asked to perform will derive immediate advantages to the employer.
5. Factor five considers whether the intern is entitled to a job as the end of the internship. If so, it is more likely that the intern will be considered an employee under the FLSA. This factor can be difficult to satisfy for employers that wish to use internship programs as a “proving ground” for new workers just finishing school or entering the workforce.
6. Factor six considers whether the employer and intern agree that the intern will not be entitled to wages for his or her services. Employers should not depend on this factor alone, however, because even if the intern agrees not to be paid the intern may still be considered an employee under the FLSA and entitled to wages.
Uncertainty at the Appellate Court Level
For the reasons noted above, private for-profit employers will have difficulty satisfying the USDOL six-factor test in many circumstances. On a somewhat positive note, however, the appellate courts interpreting the FLSA have not consistently followed the USDOL six-factor test for determining a worker’s status. Some courts have explicitly criticized the test. Others apply an “economic realities” test or look at the primary beneficiary of the work performed.
While the appellate court decisions which analyze the USDOL six-factor test provide some hope that private for-profit employers may be able to utilize unpaid interns, the state of the law for Minnesota employers is somewhat unsettled on this point. On at least one occasion, the Eighth Circuit Court of Appeals (which covers Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota) has not strictly followed the USDOL six-factor test in determining whether a student worker such as an intern is an employee under the FLSA. In Blair v. Wills, 420 F.3d 823 (8th Cir. 2005), the Eighth Circuit focused on the “economic reality” of the plaintiff’s working arrangements, rather than the six-factor test. See id. at 829. The Eighth Circuit held that the student was not an employee under the FLSA where chores performed were “an integral part of the educational curriculum” and were primarily for the students’ benefit rather than the employer. Id. The court noted that although the work performed by the students may have defrayed certain costs for the employer, looking at the totality of the circumstances, the evidence did not show that the student was an employee under the FLSA. Because the Blair case involved a student performing chores in the school setting, and did not involve unpaid interns in the traditional workplace setting, it is unclear whether the Eighth Circuit would apply the six-factor test, as opposed to the “economic reality” test, to unpaid interns.
Similarly, not all federal appellate circuits apply the USDOL six-factor test to unpaid interns, trainees, or student workers and the six-factor test has come under some criticism outside of the Eighth Circuit. This lack of uniformity regarding the application of the USDOL six-factor test among the appellate courts presents another obstacle for private employers that wish to utilize unpaid interns, beyond interpreting the six-factors alone.
For-profit companies may be tempted to implement unpaid internship programs because they can be cost-effective for the employer and beneficial for student interns in gaining real-world skills. Given the difficulty of meeting the USDOL six-factor test, however, coupled with the uncertainty about the legality of utilizing unpaid interns under the MFLSA, Minnesota private for-profit employers face substantial legal risk when utilizing unpaid interns. Misclassifying interns as trainees rather than employees can expose a company to claims for unpaid minimum wages and overtime pay, liquidated damages in an equal amount, and an award of attorney’s fees and costs under the FLSA.
If a Minnesota private for-profit employer chooses to adopt an unpaid internship program despite these risks, the employer can reduce the potential for liability under the FLSA by following these recommendations:
· Working with educational institutions to offer school credit for completion of internships;
· Implementing structured and formal training sessions for interns that are academic in nature;
· Working with the intern to set specific goals and tailoring the internship program to meet the intern’s objectives rather than performing productive work dictated solely by the employer;
· Refraining from allowing unpaid interns to conduct filing, clerical, or other administrative work;
· Avoiding the displacement of other employees through the use of unpaid interns;
· Continuing normal hiring processes for new employees while the interns are being utilized;
· Consciously impeding the company’s operations for the benefit of the interns by offering special training sessions by skilled employees who take time away from their normal duties;
· Developing written internship agreements under which the individual acknowledges that he or she is not entitled to a job at the end of the internship and there is no expectation of compensation;
· Avoiding hiring of interns immediately after the conclusion of his or her internship;
· Requiring interns to complete the employer’s normal application, interview, and screening process if the employer wishes to consider the intern for regular employment;
· Avoiding the application of the company’s employee handbook and work rules to interns; and
· Maintaining detailed itemized records of all expense reimbursements to unpaid interns.
If your company currently works with unpaid interns or is thinking about implementing an unpaid internship program in the future, you may wish to seek legal advice regarding the legality of your program and assistance in structuring your program to minimize the risk of litigation. You may contact any of the Trepanier & MacGillis P.A. employment law attorneys regarding questions about unpaid internships or other employment law matters.
About the Authors:
Trepanier & MacGillis P.A. attorneys Craig W. Trepanier and Kelly M. Fiege focus their practices on employment law, commercial litigation, and business law. Craig may be reached at 612-455-0502 or email@example.com. Kelly may be reached at 612-455-6238 or firstname.lastname@example.org. The attorneys at Trepanier & MacGillis P.A. routinely represent employers and employees in wage and hour matters, including employee misclassification, FLSA overtime litigation, and disputes over unpaid wages, commissions, and bonuses.
 See Are Unpaid Internships Exploitative?, MPR News (Feb. 7, 2012). The debate featured two authors of an on-going debate in The New York Times. See, e.g., David Lat, Why Mess with a Win-Win Situation?, The New York Times (Feb. 4, 2012); Ross Perlin, These Are Not Your Father’s Internships, The New York Times (Feb. 6, 2012).
 The definition of “employee” in the FLSA exempts such individuals:
(4) (A) The term “employee” does not include any individual who volunteers to perform services for a public agency which is a State, a political subdivision of a State, or an interstate governmental agency, if—
(i) the individual receives no compensation or is paid expenses, reasonable benefits, or a nominal fee to perform the services for which the individual volunteered; and
(ii) such services are not the same type of services which the individual is employed to perform for such public agency.
(B) An employee of a public agency which is a State, political subdivision of a State, or an interstate governmental agency may volunteer to perform services for any other State, political subdivision, or interstate governmental agency, including a State, political subdivision or agency with which the employing State, political subdivision, or agency has a mutual aid agreement.
(5) The term “employee” does not include individuals who volunteer their services solely for humanitarian purposes to private non-profit food banks and who receive from the food banks groceries.
29 U.S.C. § 203(e)(4), (e)(5).
 See Minn. R. 5200.0230 ("Gratuitous service is voluntarily donated work performed by a person who receives for it no monetary compensation or other valuable consideration. The individual may be reimbursed for out-of-pocket expenses needed to perform the services, but only if these expenses are itemized. The acceptance of an expense allowance (that is, a gross sum provided with no itemized list of expenses) makes the individual nonexempt. See Minnesota Statutes, section 177.23, subdivision 7, clause (7).").
 The USDOL has taken the position that if the employer is directing an employee to volunteer, that time is subject to the FLSA minimum wage and overtime requirements. See 29 C.F.R. § 785.44 (“Time spent in work for public or charitable purposes at the employer’s request, or under his direction or control, or while the employee is required to be on the premises, is working time. However, time spent voluntarily in such activities outside of the employee’s normal working hours is not hours worked.”).
 For example, the Sixth Circuit has criticized the USDOL six-factor test as being overly rigid and inconsistent with the totality-of-the-circumstances approach. See Solis v. Laurelbrook Sanitarium and School, Inc.,642 F.3d 518, at 525 (6th Cir. 2011) (“We find the [Wage and Hour Department’s] test to be a poor method for determining employee status in a training or educational setting.”). Instead, the Sixth Circuit adopted a “primary benefit” test, focusing on which party received the primary benefit of the work performed. Id. at 525-26. Other circuits have also adopted the “primary benefit” test. See, e.g., McLaughlin v. Ensley, 877 F.2d 1207, 1209-10 & n.2 (4th Cir. 1989) (“We do not rely on the formal six-part test issued by the Wage and Hour Division.”); Donovan v. Am. Airlines, Inc., 686 F.2d 267, 272-73 (5th Cir. 1982). These courts often do, however, still consider other factors similar to the USDOL six-factor test, such as employee displacement and derived educational value. See Solis, at 526; Donovan, at 273.