• Legal Issues: Considerations Surrounding Internships

    by George C. Hlavac, Esq., and Edward J. Easterly, Esq.
    NACE Journal, November 2013


    A recent ruling in a lawsuit filed by unpaid interns may have employers thinking twice about using them to reduce costs.


    "They worked as paid employees work, providing an immediate advantage to their employer and performing low-level tasks not requiring specialized training. The benefits they may have received-such as knowledge of how a production or accounting office functions or references for future jobs-are the results of simply having worked as any other employee works, not of internships designed to be uniquely educational to the interns and of little utility to the employer. They received nothing approximating the education they would receive in an academic setting or vocational school." - Honorable William H. Pauley III

    This quote is from the recent ruling in a lawsuit filed by unpaid interns who worked on the production of the movie Black Swan. The interns alleged that Fox Searchlight illegally classified them as "unpaid interns" and, as such, failed to pay them wages that they were due. The court, in a landmark decision, agreed with the unpaid interns and indicated that unpaid internships should be allowed "only in limited circumstances." The court further indicated that in order for an internship to be classified as unpaid, it must meet the test set forth by the U. S. Department of Labor (DOL). This is only the first in a number of recent lawsuits filed by interns who contend that they have illegally been classified as unpaid. A second lawsuit has also recently come to an abrupt resolution, where Charlie Rose agreed to pay $250,000 in back pay to interns who claimed they were misclassified under the law.

    Based upon these recent decisions, employers who attempt to use "free" labor as a means to reduce costs are going to have to see the light and change their ways, or face dire consequences. Therefore, the initial question an employer seeking to use an unpaid intern should answer is "can we meet the DOL" test referenced by Judge Pauley

    Compensation

    To clarify the issue of "employment" in the area of internships, the DOL set forth a Six-Part Test for interns in May 2010. The lawsuit filed against Fox Searchlight was the first major lawsuit that implicated the Six-Part Test. Under this test, an employer is not required to pay an intern if these criteria are met:

    • The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in the educational environment;
    • The internship experience is for the benefit of the intern;
    • The intern does not displace regular employees;
    • The employer that provides the training derives no immediate advantage from the activities of the intern, and on occasion its operations may be impeded;
    • 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.

    The test, however, is fact-specific, meaning that not all of the six factors have to be met. However, if an employer hires an intern merely to make coffee, answer phones, or run errands, it is unlikely that will meet the test for an unpaid intern. An employer must focus on the productive work performed by the intern. If the productive work outweighs the training and supervision burden imposed on the employer, an employee/employer relationship may be present and an employer may be subject to liability under the Fair Labor Standards Act (FLSA).

    Employers have also attempted to rely upon the fact that an unpaid intern receives college credit to support its position that regardless of the duties performed, the intern is technically "compensated." The Black Swan ruling has, essentially, blown that argument out of the water. The court in the Black Swan case stated that receiving college credit, in and of itself, does not establish an unpaid internship and is of "little importance" in determining if interns must be paid. The true test is whether the internship is structured to benefit the intern and not the employer.

    As such, an employer must focus on the work performed by the intern, the training provided by the employer, and who, ultimately, receives the benefit of the internship. Gone are the days where unpaid interns could be used as "replacement employees," unless employers want to end up like Charlie Rose or Fox Searchlight.

    Unemployment

    A second question that is tied to compensation is unemployment benefits. As an initial matter, each state has its own specific unemployment compensation regulations. Generally, to collect unemployment, one must be "able and available" for work. As a practical matter, interns, as college students, are usually not available for work at the conclusion of an internship because they must return to college. It is unlikely that interns, whether paid or not, will be able to collect unemployment benefits at the conclusion of an internship.

    Workers' Compensation Issues

    What happens if an intern is injured while performing services for a company? Will the intern be entitled to workers' compensation benefits? Workers' compensation provides benefits to individuals who suffer injuries during the course of and arising out of the scope of their employment. Workers' compensation laws vary from state to state, but there are some consistent matters that can be addressed.

    Questions about whether an individual is an employee and whether the intern is paid or unpaid are essential to determining coverage under the applicable workers' compensation statutes. In some recent cases, courts have found that where the internship is paid, the responsibility to provide workers' compensation coverage falls to the employer. If the internship is unpaid and it is affiliated or sponsored by the educational institution, the burden falls on the school to provide workers' compensation coverage.

    It is imperative to make a determination prior to implementing an internship program. In most instances, workers' compensation claims bar recovery by the intern for any work-related injuries. So if an intern is injured while on an employer's premises, his or her sole recovery would be under the applicable workers' compensation statutes.

    Discrimination Claims

    Both federal and state statutes provide protections for individuals to be free from discrimination at the workplace. The key inquiry, however, to determine whether interns are protected is again whether they fall within the definition of an employee under the relevant statute.

    Once again, this question reverts to whether or not the intern was provided with compensation. In a recent case in Illinois, this issue was discussed at length. In Doe v. Lee, a former police intern filed a sexual harassment claim under Title VII (which prohibits discrimination based upon race, gender, national origin, and religion). Under the terms of her internship, the intern was not paid, came and went as she pleased, and planned to leave the internship when she returned to college. In reviewing the intern's claims, the court first had to determine whether she was an employee as defined by Title VII. To make the determination, the court looked at these factors:

    • The extent of the employer's control and supervision over the worker, including directions on scheduling and performance of work;
    • The kind of occupation and nature of skill required, including whether skills are obtained in the workplace;
    • Responsibility for the costs of operation, such as equipment, supplies, fees, licenses, workplace, and maintenance of operations;
    • The method and form of payment and benefits; and
    • The length of job commitment and/or expectations.

    The court, in reviewing the facts, determined that the internship did not qualify as employment. The court found that the internship was more closely associated to that of a "volunteer" than that of an "employee." Accordingly, the intern was not protected by Title VII.

    Other courts have made similar determinations. Regardless of the issues presented, the key inquiry is generally whether there was remuneration provided to the intern in exchange for services. The question is what happens where the individual is not provided with pay but with other types of compensation. Courts have stated that nonfinancial benefits that create or relate to career opportunities may suffice. By way of example, free training and educational opportunities (such as a corporate leadership course) may establish an employer/employee relationship where the individual can demonstrate an economic dependence upon the training and not a mere pleasure from the "compensation." Also, at least one court has found that where a volunteer was provided with a "clear pathway to employment" deriving from her position as a volunteer, she could establish the plausibility of an employment relationship under federal anti-discrimination laws. If an intern can establish that he or she was provided with some form of remuneration for services provided, a court may find that the intern is afforded protections under federal and state anti-discrimination laws.

    Additionally, both employers and universities can be subject to common law tort theories of liability. If the unpaid interns are unable to use the statutory protections, they may still file suit for intentional infliction of emotional distress for harassment or discrimination. As a result, employers are recommended to treat interns the same as regular employees and investigate all claims of discrimination promptly and effectively.

    Whether an intern is paid or unpaid, it is recommended that employers take all claims of harassment or discrimination seriously and conduct a thorough investigation. Merely because an employer believes an intern is not an employee does not mean a court will make the same determination.

    Employment Agreements

    Some employers have started requiring interns to sign employment agreements at the commencement of the internship. Such agreements provide the scope of the intern's duties, along with the inclusion of restrictive covenants. Such agreements may include noncompete, nonsolicitation, or nondisclosure provisions. Both the intern and the employer should have an attorney review the agreement to ensure they understand the legal requirements that come along with entering into such terms and conditions. Whether such agreements are valid, however, is an entirely different issue.

    In general, employment agreements are necessary if an employer wants to define the manner in which an employee can be terminated, terms of severance, and to provide certain restrictions on employment. Regarding interns, most of the foregoing terms are unnecessary as the scope and duration of the internship is definite and certain. The only true need to have an intern sign an employment agreement is to protect the employer's business interests.

    Nondisclosure Agreements

    A nondisclosure agreement prohibits an employee or intern from disclosing an organization's confidential and/or proprietary information to third parties during both the tenure of employment and after termination. The individual agrees that he or she will not reveal anything the company considers confidential (i.e., customer lists or research and development plans). Unlike other forms of restrictive covenants, a nondisclosure agreement does not restrict an individual's ability to obtain work upon the termination of employment, but merely protects an employer's proprietary information.

    As interns are generally provided with unlimited access to an employer's business, it is not unusual for a company to require interns to sign a nondisclosure agreement upon the commencement of the program. Employers are generally recommended to have interns sign such agreements to protect the company's interests, and such agreements should be provided during an intern orientation period and thoroughly explained prior to execution.

    Provided the nondisclosure agreement is not overbroad and is explained to an intern prior to execution, a court will likely find such an agreement valid.

    Noncompete and Nonsolicitation Agreements

    Unlike a nondisclosure agreement, noncompete and nonsolicitation agreements limit an individual's ability to perform work in his or her chosen profession for a certain period of time. As of today, no court has determined whether a noncompete or nonsolicitation would be deemed valid and enforceable against an intern. But it is unlikely that a court would find such an agreement valid. The reason is that an employer would be hard-pressed to point to the "legitimate interest" it is trying to protect with the use of such an agreement. Further, a court is unlikely to restrict the ability of a college student to engage in his chosen profession when he or she is just entering the work force. While an employer may have interns sign such agreements; the likelihood is that they are not going to be worth the paper on which they are drafted.


    Internships provide a benefit to both employers and interns. However, employers and interns alike must be mindful of the legal land mines of such relationships. If an employer does not recognize and prepare for such issues it could result in significant liability for the employer, as evidenced by the cases involving Charlie Rose and Black Swan.

    George C. Hlavac, Esquire, and Edward J. Easterly, Esquire, are attorneys in the Labor and Employment Law Department at Norris, McLaughlin & Marcus, P.A.


    Copyright 2013 by the National Association of Colleges and Employers. All rights reserved.


Legal Issues: Considerations Surrounding Internships