Unpaid interns can be a great resource for companies to grow prospective talent internally and contribute to the local community. That is, unless the company only really hired the interns for free labor. In which case, free interns can end up costing a lot of money.    

The U.S. Department of Labor, plaintiffs’ attorneys, and watchdog groups, such as Intern Justice, have begun to closely scrutinize and sue companies which use unpaid interns as a way of reducing their labor costs.  Indeed, employers have been targets of such enforcement activities because they are viewed fairly or unfairly as predators taking advantage primarily of young college graduates who are desperately seeking jobs in a poor economy.

There have been several recent class action lawsuits in which interns filed suits against their employers. More notable examples of defendants in these types of cases include the producers of the Academy Award winning movie Black Swan and famed PBS journalist Charlie Rose.

Rose paid $250,000 to settle his interns’ claims for unpaid minimum wages and overtime owed pursuant to the Fair Labor Standards Act and similar state wage and hour laws. Rose had used interns to research issues which would be the subjects of his programs.

Employers must ensure that they satisfy the legal criteria imposed for properly classifying individuals as unpaid interns, exempt from the obligation to pay minimum wage rates and for overtime.

The federal regulations apply the following criteria in determining whether that exemption may be invoked by for-profit employers:

  1. The internship, even though it includes actual operation of the employer’s facility, is similar to training which would be given in an educational environment.  Thus, an internship is more likely to pass muster if:
    • it is structured around a classroom or academic experience, such as where a college sponsors or grants credit for the arrangement, rather than as a mere extension of the employer’s operations
    • the intern learns skills which can be used in multiple settings, not just the employer’s business
    • the intern does perform routine productive work, including filing, clerical work, or assisting customers. 
  2. The intern does not displace regular employees, but works under the close supervision of the existing staff.  Thus, interns may not be used to augment the employer’s workforce or to enable a reduction in the number of hours which would have been worked by the existing staff or new hires.  Conversely, an internship will be a bona fide educational experience if the intern shadows and is closely and constantly supervised by employees in order to learn how to perform certain functions.
  3. The internship experience is for the intern’s benefit.
  4. The employer does not derive an immediate advantage for the intern’s activities.
  5. The intern is not necessarily entitled to a job at the end of the internship.  Accordingly, the employer should not be using internships as a trial period for individuals seeking employment because that arrangement will generally mean the interns are employees entitled to compensation, paid minimum wage rates and overtime.
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Internships most often run afoul of the first, fourth, and fifth criteria.  For instance, many employers cannot or do not bother to arrange for a college to be affiliated with an internship or to include significant classroom instruction as part of the program.  In addition, the employer and intern may have at least a tacit understanding that the successful completion of the internship will likely lead to a job offer.  Finally, the employer may realize a direct economic gain as the result of the intern’s activities.

A concrete, real life illustration of such a situation involves a college graduate who majored in history at an excellent college, but who had still been unable to obtain a job several months after graduation.  He was solicited by a consulting firm to participate in an “internship” which would include training the firm’s paying clients and was represented to him as likely to result in a job offer after six months.  During the telephone call which was supposed to end in an offer being made, the firm’s human resources manager abruptly hung up when the young man had the audacity to ask how much he would be paid. That internship clearly would not be qualified under the criteria discussed above.

The recent legal challenges to unpaid internships have generated criticism and support. 

Proponents of unpaid internships have pointed out that internships provide young adults with the opportunity to build their resumes and gain valuable experience which enhances their ability to obtain paying jobs.  The proponents insist that those opportunities would not be available if companies had to compensate the interns.

Opponents to unpaid internships argue that employers are simply exploiting the interns and trying to avoid the financial burden of training new employees which has traditionally been one of the costs of doing business.  They also explain that unpaid internships give interns from upper middle class parents yet another competitive advantage because their parents can afford to continue supporting while they work without pay, whereas individuals from poorer families cannot afford to subsidize their children’s income.

In any event, whenever it is unclear whether an unpaid internship meets the applicable legal criteria, employers can easily avoid potential liability by simply paying “interns” the minimum wage rate and assigning them to work less than 40 hours a week so they are not entitled to overtime pay.  That minimal expense is a cheap price to pay for peace of mind that the employer will not end up in costly litigation.

For more information please contact Carolyn Mech at 410-583-2400 or