The psychological thriller “Black Swan” earned Fox Searchlight Pictures critical acclaim, a host of awards including a Best Actress Oscar for Natalie Portman and a reported $300 million in revenues.

Now, the 2010 movie has put Fox Searchlight, the independent film division of 20th Century Fox, in the spotlight again—this time in the role of the villain. In a class action lawsuit filed in late September in the Federal District Court for the Southern District of New York, two former interns claim the company violated federal and state wage and hour laws by not paying them for their work during the movie's production. It is apparently the first class action in the newly emerging area of unpaid intern rights.

The Department of Labor (DOL) first brought the issue to light with an April 2010 Fact Sheet setting out six criteria for hiring unpaid interns without running afoul of the Fair Labor Standards Act (FLSA). The stringent requirements emphasize the educational value of the internship and stress that the intern, not the company, must benefit from the experience (see “Tough Test”). It put the DOL at odds with thousands of employers who routinely use unpaid interns to augment stretched departments, and with legions of students who desperately seek those internships to build their resumes at a time when entry-level jobs are scarce.

Employers often view unpaid internships as a win-win—they get additional staffing without increasing the budget, while the intern gets experience to help land a paying job. But Elizabeth Wagoner, an Outten & Golden labor and employment lawyer who represents the “Black Swan” plaintiffs, points out that in the past, employers paid minimum wage for entry-level jobs with the same kinds of work interns often now do without pay in violation of the law. “When an employer is getting a tangible benefit, it is required to pay for the work,” she says.

Howard Fabrick, a partner at Akin Gump who represents entertainment industry clients, sees it as a conflict between two competing public policy interests.

“Public policy should encourage young people looking for jobs in today's economy to do whatever they can to get employment,” he says. “Balance that against a public policy that does not want unscrupulous employers exploiting people. They are both legitimate interests.”

Apprentice Allegations

Glatt et. al. v. Fox Searchlight Pictures, Inc., filed on behalf of all the company's former unpaid interns, alleges that their work kept the company's production costs low. According to the suit, “Black Swan” was produced for just $13 million, in part because unpaid interns worked as production assistants, bookkeepers, and performed secretarial and janitorial duties.

“In misclassifying many ofits workers as unpaid interns, Fox Searchlight has denied them the benefits that the law affords to employees … most crucially, the right to earn a fair day's wages for a fair day's work,” the suit alleges. Significantly, it claims there was no educational component to the interns' work.

In a statement, Fox Searchlight said the lawsuit represents “meritless claims aimed solely at getting press coverage for the litigants and their attorneys.” It said the interns worked for a production company that made “Black Swan” before Fox Searchlight acquired rights to the film.

The lawsuit, however, cites an email received by plaintiff Eric Glatt before he started his unpaid internship. The film's production accountant told Glatt that “Black Swan” would likely become a Fox Searchlight production and, if that happened, they would “have to clear with the Fox Production Executive for interns to be working for free and getting no college credits.” In a subsequent email, another accountant informed Glatt that “Fox is going to overlook the unpaid/noncollege intern thing,” and, as a result, Glatt could start work the next week.

Contradictory Guidelines

Emily Miller, a labor and employment attorney at Cozen O'Connor, says a court decision is needed to clear up contradictory guidelines in the DOL Fact Sheet.

She points out that the requirement that the company derive “no immediate advantage” from the interns' work essentially means the interns would have to sit in a corner. But if they are sitting in a corner, they aren't learning anything, so the company could be accused of not providing the required educational benefits.

“This 'Black Swan' suit will bring the six-factor test under scrutiny,” she says. “Hopefully we will get some guidance on how we are supposed to use it.”

Fabrick says part of the problem is that the test is based on a 1947 Supreme Court decision in Walling v. Portland Terminal Co. The case involved a railroad that gave unpaid training to prospective yard brakemen. The factors in the high court's analysis, used to develop the DOL's six-factor test, are more suitable for manufacturing jobs, where on-the-job training is similar to trade school training, than for the knowledge workers needed in today's economy, Fabrick says.

“Some suggest the DOL ought to revise the standards because they are awfully hard to apply to today's real world environment,” he adds.

Avoiding Liability

So far the plaintiffs bar hasn't seized on the unpaid intern issue, although a lawsuit filed in 2010 by a former unpaid intern against Showbiz Shorts in the Federal District Court for the Southern District of California was settled prior to trial.

But more litigation is likely in the wake of the extensive “Black Swan” publicity. Wagoner says her firm is seeking other plaintiffs, particularly in the entertainment and media industries, hoping the “Black Swan” plaintiffs' example will encourage others to step forward.

“It will be helpful to the industry at large when everyone can enter in. … Now only the wealthy can afford to break into films and magazines by doing entry-level work for free,” she says.

Lee Schreter, a Littler Mendelson shareholder, says in-house counsel should take several steps to avoid liability from unpaid internships. First, find out how many interns are in the workplace and what they are doing. Because they aren't on the payroll or in the budget, supervisors sometimes bring on unpaid interns without higher-level approval.

Second, write a policy requiring internships to be approved in advance by HR, and to be in compliance with both state and federal wage and hour laws.

Third, the company should have a written agreement with the intern specifying that the internship will be unpaid.

Fourth, establish an academic component, working with a college adviser or professor to whom the company will report on the student's progress.

Finally, be careful you are not using interns in lieu of employees—for example using interns to do the work of employees who have been laid off.

“In most cases, employers can structure this in a way that is consistent with the DOL regulations,” Schreter says. “It requires some advance planning, but it is not all that hard to do.”