V.32 Symposium (Misclassification): Recap of Panel No.3

by Charles Smith

Evolution of the Unpaid Internship

Internships, as explained by Michael Tompkins, could be traced back to the times of apprenticeships.[1] Even though the use of internships is a common tool utilized by today’s employers, internships were virtually unheard of when the Fair Labor Standards Act (“FLSA”) was enacted, [2] and the catalyst that promotes today’s use of unpaid internships stems from the recession.[3] There is no specific number, but it is assumed that at least half a million Americans hold unpaid internships every year.[4] Unpaid internship positions started with admirable intentions, and allowed individuals to demonstrate a genuine interest in a company and particular position.[5] The intern benefited by being offered an opportunity to show potential, and the employer got an individual who was able to hit the ground running once fully employed.[6] While the use of internships has been beneficial, the potential abuse of unpaid internships led to several cases of first impression as well as legislative efforts to regulate the use of unpaid internships.[7]

Evolution of the Legal Status of the Unpaid Intern

Under federal law, the standard under which employees are required to be paid is the Fair Labor Standards Act.[8] It requires both minimum wage and overtime hours to be paid.[9] FLSA defines employee broadly – “any individual employed by an employer,” and uses words such as “to suffer or permit to work.”[10] Internships have evolved from the FLSA standard under the Supreme Court case Walling v. Portland Terminal Co., which recognized that the FLSA definition does not make all persons who, without any express or implied compensation agreement, work for their own advantage on the premises of another “employees.”[11] The court made the determination that certain individuals who work for the employer might not actually be covered under the FLSA; these individuals were classified as “trainees,” which has evolved into today’s classification of unpaid interns.[12] The factors the court looked to in determining whether the individuals were considered trainees included: no immediate advantage to the employer, required close supervision, individual’s work did not expedite the company business, and the individual was not guaranteed positions.[13]

In April 2012, the U.S. Department of Labor came out with a six-factor test to determine whether an individual was an employee or unpaid intern at for-profit companies. The test was as follows:

  • 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 employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  • The intern does not displace regular employees, but works under close supervision of the existing staff;
  • 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.

The first factor describes that the internship position must be educational in nature. The second, third, and fourth factors are the most important due to the fact that the majority of litigation involves those factors.[14] The Department of Labor has taken the position that every single element must be met for a position to be classified as unpaid internship, but, according to Amy Melican, there has been established test in the Second Circuit and the Department of Labor test should be viewed as a guideline.[15]

Since the U.S. DOL released the test that serves as a guideline in determining whether an intern should be paid, several other states has released their own tests: New York included, which came out with an eleven factor test that resembles the federal test.[16] Several industries have pushed back against the regulations—in particular, the legal industry—which utilized unpaid legal students to do work.[17] The Department of Labor responded to the criticism by allowing law students to do pro-bono work, but law students are not allowed to work on paid client work and activities.[18]

Court interpretations have varied among the circuits including a “totality of the circumstances test,”[19] “primary benefits to each party test,”[20] and the “economic reality test.”[21] In Reich v. Parker Fire Protection, the court concluded that individuals were not entitled to pay after they were instructed to do several tasks that firemen would normally do after they were given some training. The court stated that from the totality of the circumstances it concluded that they were not employees, and thus, gave deference to the DOL six-factor test. In Solis v. Laurelbrook Sanitarium, the court regarded the DOL test as a poor indicator of whether an individual was an employee, and boiled the determination down to who was the primary beneficiary in the relationship. In the more recent case of Kaplan v. Code Blue Billing & Coding, students sued Kaplan saying they should be paid for their work, and the court employed an economic reality test in its conclusion.[22]

The arguments used in favor for unpaid interns include: investment in training of future talent, continued development and engagement of future talent for the industry, allows students to go through less scrutinized process to gain experience in new field, students can learn the industry, decide whether they want to pursue a career in that field, students can apply classroom learning in “real-world” environment, provides networking opportunities for students, and allows companies to “give back” by through education/community service.[23] The arguments against unpaid interns include: makes it harder to find entry level work if companies can hire unpaid interns to fill roles, creates economic glut if companies do not offer paid positions for entry level workers, disadvantages lower socioeconomic classes who cannot afford to have unpaid positions, may result in students incurring additional debt, and unpaid interns do not have access to company-sponsored health and other benefits.[24]

Effect of Academic Credit

By offering academic credit to a worker who is nonpaid, a presumption of educational benefit to the intern is created. The DOL stated that, “the more an internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience.”[25] But the fact that the interns received academic credit was given little weight by the court: “[a] university’s decision to grant academic credit is not a determination that an unpaid internship complies” with wage and hour laws.[26] Including an academic component and oversight furthers that presumption of educational benefit, such as memorandums of understandings (“MOUs”) between field placement/supervising personnel at the college or university and employers.[27] MOUs can include language relating to the educational objectives, supervision expectations for frequent written and oral feedback and assessment, the obligations to help the student achieve specific learning goals, and a prohibition on billing for student work.[28]

A local example of academic credit for student work, as stated by Chris Caruso, is the externship program at the law school.[29] Each employer seeking law students to work for school credit is vetted by law school administrators.[30] The administrators employ standards closely related to the DOL six factors.[31] There are some schools, though, which instituted a policy of not awarding credit for internships to undergraduates, such as Yale and Harvard.[32] Students have been known to actually take summer courses at a different school, which allows unpaid externships, because they believed the program to be beneficial.[33]

Collective Action/Class Actions

Standards for Rule 23 certification are extremely difficult in the present environment.[34] The possible claim from a single case would not produce the type of damages lucrative enough for each case to be litigated individually.[35] Thus, class or collective actions are necessary, and firms are looking to the courts in determining how to create a cohesive class.[36] The inquiry as to what binds the class together is an ongoing determination.[37] As well, it has been difficult to find named plaintiffs to join as class members for fears of being blacklisted, and not finding a job.[38] Finally, federal courts do not favor the creation of class actions, so any developments in this area will be in the local courts.[39]

Minimizing Risk When Using Interns

To minimize risk, employers should maintain documentation regarding the intern’s understanding that his or her activities will bot be compensated.[40] Employers should, as well, track internship hours and the work that is being performed.[41] Creation of MOUs should be utilized when academic credit is connected to the work.[42] Also, if the intern ultimately transitions to a paid position, the employer should expand or differentiate between the work done as an intern.[43]

[1] Michael Tompkins, Senior Associate, Leeds Brown Law, PC, Speaker at Hofstra Labor & Employment Law Journal Symposium Unpaid Interns on the Misclassification of Workers (Oct. 24, 2014).

[2] Id.

[3] Amy F. Melican, Senior Associate, Proskauer Rose LLP, Speaker at Hofstra Labor & Employment Law Journal Symposium Unpaid Interns on the Misclassification of Workers (Oct. 24, 2014).

[4] Tompkins, supra note 1.

[5] Id.

[6] Id.

[7] Id.

[8] Melican, supra note 3.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Meryl Kaynard, General Counsel, CUNY Queens College, Speaker at Hofstra Labor & Employment Law Journal Symposium Unpaid Interns on the Misclassification of Workers (Oct. 24, 2014).

[15] Melican, supra note 3.

[16] Id.

[17] Id.

[18] Id.

[19] See Reich v. Parker Fire Protection Dist., 992 F.2d 1023 (10th Cir. 1993).

[20] See Solis v. Laurelbrook Sanitarium & Sch., Inc., 642 F.3d 518, 525 (6th Cir. 2011).

[21] See Kaplan v. Code blue Billing & Coding, 504 Fed.Appx. 831 (11th Cir. 2013).

[22] Melican, supra note 3.

[23] Tompkins, supra note 1.

[24] Melican, supra note 3.

[25] Kaynard, supra note 13.

[26] See Glatt v. Fox Searchlight Pictures, Inc., 293 F.R.D. 516 (S.D.N.Y. 2011)

[27] Kaynard, supra note 13.

[28] Id.

[29] Christopher J. Caruso, Associate Dean for Career Services, Maurice A. Deane School of Law at Hofstra University, Remarks at the Hofstra Labor & Employment Law Journal Symposium Unpaid Interns on the Misclassification of Workers (Oct. 24, 2014).

[30] Id.

[31] Id.

[32] Melican, supra note 3.

[33] Id.

[34] Tompkins, supra note 1.

[35] Id.

[36] Id.

[37] Id.

[38] Id.

[39] Id.

[40] Melican, supra note 3.

[41] Id.

[42] Id.

[43] Id.

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