The Potential Hidden Cost of Unpaid Internships

By: Rachel D. Gebaide, Timothy C. Haughee & Hallie B. Fisher

June 25, 2013

In an uncertain economy, unpaid interns are especially appealing to employers.  However, the recent ruling by a federal district court should leave employers wary about using unpaid interns.

In Glatt v. Fox Searchlight Pictures, Inc., two unpaid production interns were hired to work on the set of the major motion picture Black Swan. Although the plaintiffs benefited from the internship – they gained valuable work experience, resume listings, and job references – the court held that the defendant/employer, Fox Searchlight Pictures, Inc., violated the Fair Labor Standards Act by failing to compensate the interns because the interns’ duties were consistent with those of paid employees.

Prior to the Glatt decision, the U.S. Department of Labor had issued the following guidelines to assist employers in determining whether an employee can be properly classified as an unpaid intern under the Fair Labor Standards Act:

  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.

The Glatt court essentially adopted these guidelines, with a few minor clarifications and modifications, to determine that the Black Swan interns were entitled to compensation for their work.

With regard to the first factor, employers who hire unpaid interns should ensure that the internship provides unpaid employees with training similar to what they would receive in an educational environment.  This training should go beyond the training and education that regular employees receive.  In Glatt, the production company’s position was weakened by the fact that the interns did not receive formal training during their internship and that the educational value the interns gleaned from their experience was attributable to their mere presence in the work environment, rather than from a program tailored to provide educational value.

To comply with the second factor, employers should structure unpaid internships to benefit the interns more than the employers.  Although the Black Swan interns in Glatt received benefits – resume listings, job references, and work experience – the court held that the benefits were incidental to any work relationship and not as a result of a structured internship program.  Ultimately, the court concluded that the production company benefited more from the relationship than the interns.

Employers should also exercise caution when hiring unpaid interns whose duties are the same or similar to those of paid employees.  When analyzing the third factor, the Glatt court considered the testimony of the interns’ supervisors who admitted that if the plaintiffs had not been interns, they would have had to hire paid employees to do their work.  Additionally, when one of the interns reduced his hours, a paid employee was hired to cover his duties.  This, the court reasoned, demonstrated that the duties of the unpaid interns were consistent with those of an actual, paid employee.

In Glatt, the court looked unfavorably on the fact that the production company was not impeded in any way – and in fact benefited significantly – from the interns’ presence.  Therefore, employers should also take caution when hiring unpaid interns whose presence serves only to benefit the employer, particularly when the employer’s operation is not impeded by the intern in any way. Again, if an employer receives only benefits from an intern’s presence, the employer will be challenged to justify why the intern should not be paid.

Employers should also consider whether unpaid interns will ultimately be offered employment.  However, the mere fact that an unpaid internship is not designed to lead to an offer for permanent employment (which was the case in Glatt) will be insufficient, without more, to defeat an unpaid intern’s claim.

Unpaid internships are permitted in a limited number of situations where the unpaid intern, rather than the employer, receives the primary benefit from the internship.  Employers should be cautious when hiring unpaid interns whose duties are similar to those of paid employees and whose presence benefits primarily the employer.  Employers should also re-evaluate their unpaid internship programs if they are not specifically designed to be educational in nature.

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