Background

For centuries, the young worker learned the skills of his or her trade by apprenticing with a master craftsman, often as little more than an unpaid, indentured servant. Of course, both indentured servitude in general and unpaid employment in particular are now relics of another time, but the concept of employing students is a familiar one. What had been less familiar, but has become increasingly so, is the continued willingness of employers to provide a students with a practical working experience but not to pay for the work. That is, the widespread growth of the so-called “unpaid internship.” This, in turn, has led to a marked increase in litigation claiming that such interns are statutory employees entitled to minimum wage and overtime compensation. This article will address that trend.

The federal legal standards

The starting point for the analysis of any wage & hour issue is the federal Fair Labor Standards Act (FLSA). As we know, the FLSA requires that all covered “employers” pay their “employees” not less than the minimum wage for all “hours worked” and pay those employees not specifically exempted from its overtime requirements not less than one and one-half times their “regular rate” for all “hours worked” in excess of 40 in a workweek. While all of the quoted terms are statutory terms of art, the focus of this discussion is on the term “employee.” However, as with many other such terms of art, the statute itself provides little help, defining an “employee” simply as “any individual employed by an employer.” Nor are there Department of Labor (DOL) regulations with the force of law which offer any clear demarcation between “employees” and “students” for this purpose.

Rather, there are competing administrative and judicial approaches to the question based upon factors identified by the Supreme Court in Walling v. Portland Terminal Co. Before turning to those factors, however, one overarching point requires emphasis: An employee is legally precluded from waiving his or her statutory rights to compensation and, therefore, the fact that he or she chooses to participate in such a program knowing that it is unpaid is no defense to employment status or potential employer liability.

As articulated most recently by the DOL in its Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act (April 2010), the Walling factors are:

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.

While there is little dispute between the agency and the courts regarding the factors themselves, their approach to them is very different.

The DOL's position is effectively an “all-or-nothing” proposition under which the individual will be deemed to be an employee unless the employer meets the burden of establishing all six factors. Many courts, meanwhile, adopt a more flexible approach. The 4th Circuit and 6th Circuit, for example, utilize the “primary benefit” test approach, under which the individual is entitled to FLSA protection if an employer receives “the primary benefit from [the] working relationship,” but not where the individual “receives the primary benefit of the work performed for a purported employer,” and the intern's presence “does more harm to the purported employer's operations than good (or no good at all).” Other courts, including two recent, high-profile District Court decisions, apply a “totality of the circumstances” test under which the Walling factors are relevant but not determinative and where the fundamental inquiry is into the “economic reality” of the relationship.

For example, in Demayo v. Palms West Hospital Ltd. Partnership (S.D. Fla. 2013), the plaintiff was enrolled in a surgical technician vocational program, which required completion of an unpaid hospital “externship.” During the externship, the plaintiff participated in 185 surgical procedures and also performed various cleaning and administrative tasks, such as stocking and organizing supplies, organizing files, preparing and cleaning operating rooms, and taking out the garbage. After graduating, she sued both the school and the hospital for unpaid minimum wages and overtime compensation. Applying the “totality of the circumstances” approach, the court found no employment relationship, principally because (a) the program was for the benefit of the plaintiff because she received “a general gain of responsibility, knowledge, and experience” on surgical procedures, (b) the extern did not displace regular employees or otherwise save on staffing or payroll and (c) the “employer” incurred the additional burden of monitoring, supervising, and providing feedback regarding the plaintiff's work.

Conversely, in Glatt v. Fox Searchlight Pictures Inc. (S.D.N.Y. 2013), the plaintiffs were motion picture production interns whose duties included, among other things, assembling sets, arranging travel plans, taking out trash, taking lunch orders, answering phones, watermarking scripts and making deliveries. Also applying the “totality of the circumstances” approach, the court held that the interns were employees entitled to minimum wage and overtime compensation, principally because they did not receive any formal training or education, and only “incidental” other benefits, during the internship while “perform[ing] routine tasks that would otherwise have been performed by regular employees” whom the employer would otherwise have been required to hire and pay.

State law permutations

As indicated above, the FLSA does not preempt more generous provisions of state law. In general, most states which have their own wage and hour laws (Alabama, Louisiana, Mississippi, South Carolina and Tennessee do not) apply some form of the six-factor test. Three states impose additional requirements. New Hampshire applies the six-factor test, but also requires advance regulatory approval for unpaid internship programs. New Jersey applies an all-or-nothing nine-factor test, which closely resembles, but also expands upon, the federal six-factor test. New York applies an all-or-nothing 11-factor test consisting of the six federal factors, plus five of its own which emphasize the differences in the way in which the business treats the interns and its employees.