Should student interns be paid? Some employers think it's not necessary, reasoning that interns are still in school, live with their parents, receive valuable experience and may even drive their own new cars to work. These employers believe using unpaid interns is a smart financial move that allows their companies to save money on wages. However, this line of thinking has become much riskier in the wake of a recent court decision and the filing of new lawsuits.

Intern's Work
Must Be Training

An employer must pay an intern at least the minimum wage unless the internship experience passes these six rules issued by the DOL:

1. The work performed (the DOL refers to it as training) is an extension of a trade studied by the student. Even though the intern works on, or from, the business or organization worksite, the work must be "similar to training which would be given in an educational environment."

2. The training is for the benefit of the student intern.

3. The intern does not replace regular employees, but instead works under close observation of employees.

4. The employer derives no immediate advantage from the student intern's activities. In fact, "on occasion [the employer's] operations may actually be impeded."

5. The intern is not necessarily entitled to a job at the conclusion of the internship. The employer holds out no promise of future employment.

6. The employer and the intern both understand that the intern is not entitled to wages for the time spent in the internship.

Unpaid Internships
Still Common

It's summertime and some organizations are still looking for interns. A quick search of online job ads found numerous unpaid internship opportunities. Here are a half dozen examples:

  • A California entertainment marketing company was looking for an unpaid "production coordinator" three days a week, from 9 a.m. to 5 p.m. Candidates "must have reliable transportation" and "must be punctual."
  • A New Jersey manufacturing company was advertising for an unpaid computer science intern "who will receive academic credits (unpaid) towards graduation."
  • An international footwear company was seeking a "recruiting intern" who would "learn the recruiting strategies used to hire top talent!"
  • A Massachusetts hospital was advertising for an unpaid "philanthropy intern" with duties that included assisting with clerical duties, organizing and maintaining department files, and updating database products.
  • A graphic design company in Missouri was looking for an intern to take on several duties. The position was advertised as unpaid but "with future opportunity for full time paid position."
  • An information and referral organization, located in New Jersey, was seeking unpaid summer interns "to help develop a Health IT tool that will connect cancer patients with nonprofit services."

A spate of legal actions have been taken by former interns who are accusing employers of violating the federal Fair Labor Standards Act and state laws by not paying them. The recent activity began after a federal court judge ruled that a movie studio had illegally used unpaid interns.

Facts of the case: Unpaid interns worked for Fox Searchlight Pictures on "Black Swan," a popular movie for which Natalie Portman won a Best Actress Academy Award. Later, the interns filed a lawsuit claiming the company violated the Fair Labor Standards Act and state wage laws by not paying them. The lawsuit sought payment for wages, overtime, expenses and more.

The interns built sets and performed administrative and accounting functions. The court noted that it was "work that otherwise would have been done by a paid employee."

On June 11, 2013, the U.S. District Court for the Southern District of New York ruled the interns were employees and were covered by federal and state wage laws. (Glatt and Footman, et al. v. Fox Searchlight Pictures, Inc., No. 1:11-cv-06784, U.S. Dist. Ct., SDNY)

Within days of the ruling, at least two more lawsuits were filed by former interns working at a publishing firm and a record company.

Some law firms have put up websites offering services to former unpaid interns who want to try and recover back wages.

"If you have held an unpaid internship during the past six years, even if you received school credit for the internship, we would like to talk to you," the law firm representing the plaintiffs in Fox Searchlight suit states on its website.

The law firm is also representing former interns in lawsuits against Conde Nast, the parent company of The New Yorker and W magazines, and Hearst Corp., the parent company of Harper's Bazaar.

In another case, PBS nightly talk show host Charlie Rose and his production company reached a settlement in December of 2012 after a class action lawsuit was filed seeking back wages for approximately 190 interns who were not paid for their work. (Bickerton v. Rose, Sup. Ct. of NY, No. 650780/2012)

Court documents in the case state:

"Unpaid internships have proliferated among white collar professions, especially in fields like politics, film, fashion, journalism and book publishing. However, the practice of classifying employees as "interns" to avoid paying wages runs afoul of state wage and hour laws, which require employers to pay all workers who are 'permitted or suffered to work' the minimum wage and overtime."

The exact terms of the Charlie Rose settlement are not final yet, but it calls for the interns to receive about $1,100 each.

Employment attorneys and HR professionals expect there will be a lot more of these cases in the future -- and they won't be limited to the entertainment and publishing sectors.

Consequently, businesses that use unpaid interns, or interns who are paid less than the minimum wage, need to familiarize themselves with the relevant state and federal labor laws so they are in compliance.

Important: All unpaid internships are not illegal but an organization must meet strict requirements in order to have a legal internship and pay nothing or less than minimum wage. If you continue to use unpaid interns, ensure you meet the six-point test from the U.S. Department of Labor in the right-hand box.

So what is a legal unpaid internship?

For people to be designated as interns, and not paid, DOL regulations basically stipulate that the work they do must be for their benefit, not the employer's. That means the employer cannot use interns to replace regular staff that have left the company or are on vacation.

An intern's work must be similar to what he or she would get as part of an education program, and must be closely supervised by the employer. The intern must understand that she won't be paid and that the internship won't necessarily lead to a job after he or she graduates from college. (See right-hand box for more information about the DOL rules.)

Alex Footman, one of the lead plaintiffs in the Fox Searchlight suit, stated his duties as an unpaid intern included making and serving coffee, taking lunch orders and cleaning the office -- not chores that benefited him or bore any similarity to an education program.

Eric Glatt, the other lead plaintiff, stated his internship required him to prepare purchase orders, travel to production sets to get documents signed and do other chores that would normally be done by an employee.

Two Studies

Studies about unpaid internships find that perceptions about the practice are not always correct:

Unpaid internships lead to paying jobs - In a new study, the National Association of Colleges and Employers asked graduating seniors if they got a job offer and whether they had taken a paid or unpaid internship. The organization found that 63.1 percent of graduates with a paid internship received one or more job offers. In contrast, only 37 percent of those who had unpaid internships received a job offer. Even worse, those with former unpaid internships were offered less salary than those who had done no internships.

Unpaid interns come from wealthy families - Some employers argue that college interns have affluent parents and don't need to be paid. This argument turns out not be true, according to a 2010 study done for Intern Bridge, a college consulting and research firm. It found that 58 percent of unpaid interns at for-profit companies came from households earning less than $80,000 per year (61 percent at not-for-profit organizations).

Pay Attention to State Laws

In addition to federal laws and Labor Department regulations, employers should be aware of laws and regulations within their states that pertain to internships. For example, some states include unpaid interns in their Worker's Compensation laws. In states that don't, unpaid interns could sue the employers if they are injured on the job.

One bit of good news: If the intern is younger than 20 years old, an employer may be able to pay him or her $4.25 an hour for the first 90 consecutive calendar days, rather than the federal minimum wage of $7.25.

The bottom line is that if you want to hire interns and you expect them to work for your organization rather than be trained, you'd better pay them. If you do, they are likely to feel more appreciated and, as a result, be more productive. They are also more likely to be an advocate for your business or non-profit after the internship ends.

In light of the recent legal actions, organizations using interns should consult with their HR departments and attorneys about how to proceed. Be aware that the landscape is changing. Past unpaid interns could seek recovery of unpaid wages, including overtime. There is increased scrutiny of the practice of unpaid internships at for-profit companies. An attempt to save money by using unpaid labor may wind up being a costly liability.

© Bizactions LLC.