Unpaid Internships Are Not Always the Answer

Unpaid Internships Are Not Always the Answer
The March 2011 Riker Danzig Employment UPDATE

Depending upon how a business operates an intern program, the legal risks might make unpaid interns more costly than paid interns.

As the season turns to spring, college and graduate students turn their thoughts to their summer plans. And those summer plans necessarily must include distinguishing internship experiences. In this competitive market, most students are in no position to turn down an internship simply because it is unpaid. Unpaid internships have become an acceptable and expected facet of many career paths. The appeal of an unpaid internship for both employers and potential employees trying to establish a career is fairly self evident--free labor and invaluable experience and networking opportunities.

As with most aspects of employment, there are, of course, countervailing pitfalls associated with unpaid internships. Most obvious is that the intern makes a serious opportunity-cost decision by foregoing a salary. However, these pitfalls have another special characteristic: they implicate federal and state law liability for the employer. In other words, hiring unpaid interns may actually increase budgetary constraints rather than solve a workforce and cash flow dilemma.

Federal and state wage and hour laws make it difficult to offer an unpaid internship program that does not run afoul of the statutes and regulations. Additionally, the penalties for violating the law can go beyond paying the interns for the actual hours they worked. Moreover, the time and coordination needed to create a compliant internship program is simply not workable for many organizations. Considering the possibility of being found in violation of the law, the effort required to bring a program into compliance, and the monetary and other penalties, most businesses should consider paying the interns for their work.

This alert addresses the specific criteria a business must meet before it may offer unpaid internships without violating state and federal wage and hour law and the related potential penalties. It also discusses the different treatment of public, private, and non-profit employers offering unpaid internships. It highlights some additional employer downsides to offering unpaid internships that go beyond wage and hour risks. Finally, it recommends a few options on how to approach your organization's internship program.

I. Unpaid Interns Under Federal Law

Despite its recent popularity, the genesis of the unpaid internship dates back to 1947. In Walling v. Portland Terminal Co., 330 U.S. 148, 151-52 (1947), the Supreme Court first established when an employer need not compensate ostensible employees. The Court determined that a railroad company did not have to pay its new hires while they were still in training. During training, the new hires did not displace any employees but instead shadowed current employees. They did minimal supervised work and actually impeded the railroad's business. The Court's ruling rested on the Fair Labor Standards Act's ("FLSA") definition of employ: "suffer or permit to work." 29 U.S.C. § 203(g). During their training, the new hires were working solely for their own benefit, not the railroad's, and thus had not been suffered or permitted to work for the railroad.

The Department of Labor ("DOL") has used the Court's language in Walling to fashion a six-part test for when an intern need not be paid, even within the for-profit, private sector:


As is clear from this language, fashioning an intern program that meets these six criteria is difficult and likely poses a challenge to a business's profits. The DOL's example of a proper unpaid internship is unworkable for many businesses--"if the employer is providing job shadowing opportunities that allow an intern to learn certain functions under the close and constant supervision of regular employees, but the intern performs no or minimal work, the activity is more likely to be viewed as a bona fide education experience." Moreover, the DOL emphasizes that although the intern is receiving a benefit from its work for the employer, that alone is not enough to exclude the intern from minimum wage and overtime requirements.

For many businesspeople, this standard seems to be a mistake. Most people can point to numerous examples of existing unpaid internships that do not meet this criteria, possibly one's own internship experience. Furthermore, many courts do not require that all six criteria be met to avoid liability. See Reich v. Parker Fire Prot.Dist., 992 F.2d 1023, 1026-27 (10th Cir. 1993); Archie v. Grand Central Partn., Inc., 997 F.Supp. 504, 532-33 (S.D.N.Y. 1998).

However, the DOL has made it clear that it intends to find and punish employers with internship programs that violate the rule.[2] Because many young interns are unlikely to complain, the DOL conducts audits to identify programs that do not comply with its rules. Of course, the DOL generates revenue in the form of payroll taxes and fines.

If your business is investigated by the DOL, the repercussions could be serious. An employer who violates the minimum wage requirements not only must pay the intern minimum wage and overtime for the time worked, but is liable for an equal amount as liquidated damages. 29 U.S.C. § 216(b). If the employer is sued, then it can also be liable for attorneys' fees and costs. Moreover, a person who willfully violates the FLSA may be fined up to $10,000 per violation and faces potential prison time.

II. Unpaid Interns Under New Jersey Law

New Jersey state regulations make the possibility of noncompliance even greater. Unpaid interns in New Jersey must be a part of a school-to-work program, regardless of whether they are working for a non-profit or a for-profit. N.J.A.C. 12:52-18. In order to employ unpaid "student learners," the organization must meet an eight part test:


While there is some overlap with the federal six-part test, New Jersey's requirements are obviously more stringent.

Like its federal counterpart, there are serious penalties. In addition to owing back pay, an employer who knowingly and willfully violates New Jersey's Wage and Hour laws, is guilty of a disorderly person offense and may be liable for a penalty of up to $1,000 per violation. N.J.A.C. 12:56-1.2. Each week that an employer fails to pay the statutory minimum as required, even if only for one day, is a separate violation, per employee. The Commissioner of Labor and Workforce Development is also authorized to collect administrative fees on top of the other fees and penalties. N.J.A.C. 12:56-1.3.

III. So What To Do?

As shown above, offering unpaid internships may be more trouble than it is worth. Even when attempting to create a compliant program, it can be a risky move that could end with significant penalties.

In the long run, businesses should consider paying interns. While this would include some cost, nothing prevents paying interns the minimum wage and restricting their hours to under forty per week to avoid paying overtime. Businesses should consider that a bottom line sacrifice now could save the business from greater liability, and potential embarrassment, if the DOL comes knocking or an intern or someone else files a complaint.

If paid interns are not an option, employers should carefully construct an intern program that complies with federal and New Jersey law. Employers should also work with counsel to create internship agreements for the intern. The internship agreement will evidence the intern's understanding that he or she has no expectation of wages. The agreement should also outline the limited scope of the internship, emphasizing the academic structure and nature of the experience. If possible, creating a program that offers academic credit works in the employer's favor.

While this alert does not address all of the complexities and issues that may arise in this area, we hope your organization will evaluate your current internship program and consider working with counsel before hiring interns on an unpaid basis.

To further discuss the consequences of resorting to unpaid internships as a cost cutting method, please contact Michael Furey, Scott Ohnegian, or Dan Zappo of Riker Danzig's Labor & Employment Group.

[1] Department of Labor, Wage and Hour Division, Fact Sheet #71, April 2010
[2] Greenhouse, Steven. "The Unpaid Intern, Legal or Not?," The New York Times, April 2, 2010.