This is the latest in a series of columns by O’Melveny & Myers attorneys, focusing on key legal issues specific to a variety of U.S. industries.
Numerous companies have a longstanding practice of bringing on interns who are interested in pursuing a career but lack the qualifications to be hired for an employment position. Jobs at these companies are often in high demand, with far too many interested applicants for the size of the workforce the industry can sustain.
Internship programs can give interested individuals an introduction to an industry they would otherwise be unable to obtain, while providing companies an opportunity to get to know the interns, who might later seek employment at the company. As a result of an ever-growing number of lawsuits, however, companies are being forced to consider whether their internship programs are worth the risk.
On Nov. 12, 2013, the U.S. Supreme Court declined to review an Eleventh Circuit decision, Kaplan v. Code Blue Billing & Coding, Case No. 13-179, in which the court concluded that medical billing and coding students who completed externships after finishing their course work were not employees for purposes of the Fair Labor Standards Act.
The Eleventh Circuit explained in Kaplan that “whether an employer-employee relationship exists under the FLSA” depends upon “the ‘economic realities’ of the relationship, including whether a person’s work confers an economic benefit on the entity for whom they are working.” The plaintiffs argued that their externships lacked formal structure and required them to perform repetitive work that conferred very little educational benefit. The court disagreed, noting that the defendants’ staff spent time away from their regular duties training the plaintiffs and supervising and reviewing their work. “Even viewing the evidence in the light most favorable to Plaintiffs, Plaintiffs caused Defendants’ business to run less efficiently and caused at least some duplication of effort.”
While the Eleventh Circuit’s decision was a victory for employers, its reasoning suggests that internship programs are increasingly a lose-lose proposition for employers. On the one hand, a company can apparently avoid liability (though not expensive litigation) if interns cause the company to run less efficiently. On the other hand, if the interns actually confer an economic benefit on the company, it apparently is at risk for being held liable to them.
The recent decisions do not stop to ask what will happen to internship programs in the long run if companies are told they can only have interns that make them run less efficiently and confer no economic benefit. But given this Hobson’s choice between unproductive interns and the risk of liability in litigation, some companies are opting out entirely.
On Oct. 23, 2013, Condé Nast—a publisher with numerous brands including The New Yorker, Vogue, GQ and Vanity Fair—announced the termination of its internship program. Having already incurred the expense and burden of training inexperienced interns to work in the industry, Condé Nast was similarly subjected to suits by its interns that were expensive to defend against and created at least the risk of large judgments for wages it never would have agreed to pay to inexperienced interns in the first place. Whatever benefits the company received from the interns simply were not worth the risks.
Ironically, while the prevalence of lawsuits challenging the validity of internship programs is a relatively new phenomenon, the legal principles that govern them have not really changed in more than half a century. The leading judicial authority on the subject is still Walling v. Portland Terminal Co., 330 U.S. 148 (1947). In that case, the Supreme Court decided that trainees who observed employees for a short period before being hired were not employees entitled to pay for their training.
The U.S. Department of Labor continues to rely on Portland Terminal, and it has drawn from the facts of that case to establish six factors, identified in Wage and Hour Division Fact Sheet Number 71 (published on April 21, 2010), necessary to establish a valid internship program. The six factors are:
- The internship, even though it includes actual operation of the employer’s facilities, is similar to what would be given in a vocational school or academic educational instruction.
- The internship is for the interns’ benefit.
- The interns do not displace regular employees, but work under their close observation.
- The employer derives no immediate advantage from the interns, and on occasion the employer’s operations may actually be impeded.
- The interns are not necessarily entitled to jobs at the conclusion of the internship.
- The employer and the interns understand that the interns are not entitled to wages.
The Department of Labor expects employers to satisfy all six factors, but courts have looked to the totality of the circumstances to determine whether the interns or the company receives the primary benefit of the arrangement—much as the Supreme Court did in Portland Terminal—with the six factors being considered as part of that analysis. See, e.g., Reich v. Parker Fire Prot. Dist., 992 F.2d 1023, 1026-27 (10th Cir. 1993); McLaughlin v. Ensley, 877 F.2d 1207, 1210 n.2 (4th Cir. 1989).
Regardless of the merits of claims by unpaid interns, however, defending against lawsuits alleging that interns are entitled to wages is an expensive proposition. Companies thus must weigh the benefits of an internship program against the risk of litigation.
Notably, there is no indication that most unpaid interns are dissatisfied with the arrangement or that they expect to be paid. But as Condé Nast’s decision illustrates, lawsuits by a handful of disgruntled interns can ruin entire programs for everyone, removing opportunities for inexperienced workers to obtain training, even as a soft employment market makes it harder for inexperienced workers to obtain employment at all.
Mark Robertson is a partner with O’Melveny & Myers in the firm’s New York City office and a member of the Labor and Employment Practice. Ryan Rutledge is a counsel in O’Melveny’s Newport Beach office and a member of the Labor and Employment Practice. The opinions expressed in this article do not necessarily reflect the views of O’Melveny or its clients, and should not be relied upon as legal advice.
