Unpaid Internship Programs: Next on The Department of Labor’s Watch-List?

Many companies have a long-standing practice of engaging college students as unpaid interns. Indeed, many colleges require students to complete an internship as a prerequisite to graduating, and many companies hire former interns as entry-level employees after they graduate. Thus, these internship programs can provide benefits both to the interns and to the companies who engage them. What could be wrong with that? According to the U.S. Department of Labor, these arrangements could run afoul of the Fair Labor Standards Act (FLSA or the Act). And the Department of Labor's Strategic Plan for Fiscal Years 2011-2016 makes clear that it intends to devote significant resources in the coming years to ensuring that vulnerable workers, such as young workers and others not likely to file a complaint, receive all appropriate wages and overtime pay.

Under the FLSA, "employees" must be paid at least minimum wage for all regular hours worked, and nonexempt employees must be paid overtime for all hours worked in excess of 40 per week. Companies argue that unpaid interns are not employees, and therefore are not covered by the FLSA. But this argument is muddied by the Act's broad and vague definitions of employee (any individual employed by an employer) and employ (to suffer or permit to work). If an intern meets these definitions, then he or she could be covered by the FLSA and therefore entitled to wages.

To help companies determine whether their unpaid internship programs pass muster, the U.S. Department of Labor has released a fact sheet that articulates six criteria which must be met in order for an unpaid internship to be lawful in the for-profit sector. Nonprofit and public employers are subject to different treatment than for-profit, private employers. For example, public employers are permitted to have unpaid "volunteers" in certain circumstances, while private employers are not.

According to the Department of Labor, all six of the following factors must be satisfied for an individual to properly be treated as an unpaid intern, rather than as an employee, under the FLSA:

• 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;
• 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 receives no immediate advantage from the activities of the intern, and on occasion its operations may actually be impeded;
• the intern is not necessarily entitled to a job at the conclusion of the internship; and
• the employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

These factors were derived from a 1947 case, Walling v. Portland Terminal Co., 330 U.S. 148, in which the U.S. Supreme Court decided whether trainees are considered employees under the FLSA. Specifically, the Court considered whether individuals engaging in a week-long unpaid training program for rail yard brakemen were employees under the FLSA who should have been paid for their work. The Court held that the FLSA's broad definition of "employ" as to "'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." The Court further noted that the FLSA's definitions of employ and employee "cannot be interpreted so as to make a person whose work serves only his own interest an employee of another person who gives him aid and instruction."

Applying the factors identified in Portland Terminal Co. to interns, the Department of Labor's fact sheet explains that "[t]he more the internship provides the individual with skills that can be used in multiple employment settings, as opposed to skills particular to one employer's operation, the more likely the intern would be viewed as receiving training." By contrast, "if the interns are engaged in the operations of the employer or are performing productive work (for example, filing, performing other clerical work, or assisting customers), then the fact that they may be receiving some benefits in the form of a new skill or improved work habits will not exclude them from the FLSA's minimum wage and overtime requirements because the employer benefits from the intern's work." The Department of Labor also has noted that "[i]f 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 entitled to compensation under the FLSA."

In analyzing the Department of Labor's criteria, it is important for companies to recall that they constitute mere guidance, which courts can adhere to (or deviate from) as they see fit. Thus, although the Department of Labor takes the position that all six factors must be satisfied in order to avoid an employer-employee relationship under the FLSA, some courts do not take such a strict stance on the issue. Employers should note, though, that even those courts which deviate from the Department of Labor's criteria still adhere to the overarching ideas behind them, making it unwise for an employer to assume that a court will reject the Department of Labor's guidance altogether.

For example, some courts employ a "totality of the circumstances" test, under which the Department of Labor's criteria are considered to be relevant but not determinative. Other courts look to whether the individual or the company principally benefits from the work performed, while others have opted to adhere to the Department of Labor's criteria. Unfortunately, there is a dearth of case law offering concrete guidance to employers on the issue of treatment of unpaid interns. Thus, companies are navigating uncertain territory when they set out to determine whether their unpaid internship program passes muster under the FLSA. Additionally, it is important for companies to remember that its state's laws might impose even stricter requirements than the FLSA.

To determine the extent to which an unpaid internship program satisfies the Department of Labor's criteria, a company must carefully analyze all of the activities its interns engage in, and must evaluate the extent to which the company relies upon those interns in its daily operations. The more indispensable a company's interns are to its operations, the more likely it becomes that those interns will be considered employees under the FLSA who must be paid for their hours worked. Companies should conduct this analysis with the involvement of counsel to increase the possibility that its efforts will be protected from disclosure if the Department of Labor later comes calling.

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