On September 28, two unpaid interns who worked on the movie “Black Swan” filed suit in federal court in New York against Fox Searchlight Pictures claiming unpaid wages, penalties and interest on behalf of themselves and 100+ other interns who also worked on the film.  The interns allege they performed accounting and janitorial duties and should have been compensated for their time.  This development is resonating across the country – the New York Times September 29 story on the suit made its Most E-Mailed articles list.

Although unpaid internships are often a way for people eager to get a “foot in the door” to the entertainment business, many companies outside Hollywood accept interns as well.  As reported by Ross Perlin in the New York Times, many companies have a line of students and unemployed college graduates waiting at their door and desperate for experience, a resumé boost and possibly a paid position in the future.  U.S. News and World Report even tracks which universities produce the most interns, although it is not clear which are paid.  Unfortunately, what sounds like a win-win — interns gain experience and skills and employers get free help — can in reality be an expensive wage and hour headache if interns actually perform any work.

Failing to pay interns who function as employees can result in claims for back wages plus overtime, penalties for missed meal and rest periods (where required by State law), recordkeeping and paycheck violations, and failure to pay wages on time.  Worse yet, interns might also pursue claims under ERISA for 401k benefits and health insurance contributions.  They might also seek unemployment benefits after their engagement is over as well as compensation directly from the employer for any workplace injuries whereas an unpaid intern would not likely be covered by a workers’ compensation insurance policy.

Employers offering internships or thinking about implementing an internship program should understand the Department of Labor’s (“DOL”) internship test.  Each of the following 6 factors must be met to create a bona fide internship; if just one is not met, the relationship defaults to an employment relationship and the trainee would then need to be paid (with benefits as appropriate):

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.

To satisfy the DOL criteria for interns, employers should benchmark their internship programs to be more of a clinical-style education as opposed to “on the job training.”   In a perfect world (under the DOL test), the intern might train or practice performing the job but would not provide a “benefit” to the employer by actually generating work product for clients or customers.  He or she might spend time shadowing employees or drafting memoranda related to hypothetical problems that would not be used by the company in its day-to-day business.  The memos would provide the trainer an opportunity to provide feedback to the intern and assess progress as if it were a school assignment.

Although such a program would deny the sponsoring employer the benefit of free labor, that would of course be exactly what the Department of Labor rules are designed to assure.  So why would an employer go the expense and inconvenience of running such a program in circumstances where one measure of its success is that its business can actually be impeded?  At a minimum, the opportunity to supervise interns will give the employer a much greater insight into the interns’ work ethic, collegiality and creativity – qualities hard to assess from a resume and interview.

Special thanks to Michael Kelly for his assistance with this post.