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Weary interns should make employers wary

June 2nd, 2013  |  Lisa Milam

Just in time for summer hiring season, a recent decision out of a federal district court in New York was a ray of sunshine for employers that offer college internship programs for budding professionals: the court rebuffed former magazine interns at Hearst Corporation in their attempt to pursue state-law wage claims against the company as a class. The ruling could mean that a once-promising cottage industry of class actions by unpaid interns has less growth potential than originally anticipated. However, employers ought not to assume that avoiding wage liability for unpaid interns will be a day at the beach.

Entry-level employees? The status of unpaid interns and their proper classification under the FLSA and other labor laws has been the focus of DOL enforcement efforts in recent years. In 2010, the DOL’s Wage and Hour Division issued Fact Sheet #71, laying out a six-factor test to guide employers in determining whether interns are statutory employees who must be paid minimum wage and overtime under the FLSA. That came on the heels of an Economic Policy Institute report contending that current regulations governing internships typically go unenforced and are in need of reform.

Unpaid internships are especially common in highly competitive, “glamorous” fields — publishing, film, fashion, sports — where job seekers are jockeying for a leg up. “Unpaid interns are becoming the modern-day equivalent of entry-level employees, except that employers are not paying them for the many hours they work,” said Adam T. Klein, an attorney with the New York plaintiff’s firm Outten & Golden, which represents the class in the Hearst case. The law firm contends that the use of unpaid interns often violates the FLSA and state labor laws, and that these workers are unfairly denied the standard benefits of employment and the protections of antidiscrimination laws.

In addition to the Hearst action, the firm has filed several other lawsuits on behalf of unpaid interns, including claims against film company Fox Searchlight and PBS’ Charlie Rose show. (A class certification decision is still pending in the Fox case, brought by an intern who worked for nine months on the movie Black Swan. The Charlie Rose suit, filed on behalf of nearly 200 interns, settled last December for $250,000.)

“These lawsuits will be hot,” said Michael J. Puma, a partner in the Philadelphia office of Morgan Lewis & Bockius, during a May 2012 conference when the complaints were just beginning to pick up steam. “These are kids who are just out of college, there are no jobs out there, they’re minimum wage claims — these are very sympathetic plaintiffs.” Puma predicted that the early spate of suits was a harbinger of more to come.

Not every plaintiff’s firm is chomping at the bit to take intern cases, it should be noted. Paul Lukas, a partner in the Minneapolis plaintiff’s firm Nichols Kaster who litigates class wage suits, sees little promise here. “The problem is you just can’t get a big enough class,” he said. “It’s not like an off-the-clock case where you’ve got a few hundred call center workers.” He also noted that interns are reluctant plaintiffs because they are so eager to secure a full-time job with the employer.

Early win. In response to the recession, Hearst had endeavored to reduce costs by decreasing headcount and expenses. Since 2008, the publisher had used more than 3,000 interns at 20 magazines. Some of the duties performed by the interns — answering phones, making deliveries, and organizing clothing and accessories, among other tasks — were also carried out by paid employees. In fact, several internal emails were unearthed that instructed staff to use interns instead of paid messengers as a cost-cutting measure.

A former Harper’s Bazaar intern filed suit, claiming that she regularly worked more than 40 hours per week at the magazine, and sometimes as many as 55 hours per week, without compensation. In July 2012, a federal court ruled the plaintiff could proceed with her FLSA claim against Hearst as a collective action, certifying a class of all unpaid interns who worked in the company’s magazines division since February 2009. The court rejected the company’s subsequent motion for reconsideration.

Other suits soon followed: a $50 million class action was brought by a former unpaid intern for Elite Model Management. An athletic department intern at Hamilton College filed a minimum wage claim (although he received a stipend, when broken down by hours worked, his pay came to less than $3 per hour). And earlier this month, a former photography intern for an arena football team filed suit on behalf of other unpaid staffers alleging willful violations of the FLSA as well as various claims under the Pennsylvania Minimum Wage Act.

Setbacks. In January, Hearst won a victory when the court disposed of claims that the publisher violated New York Labor Law (NYLL) by requiring interns to pay for college credit as a condition of their internship placement. The plaintiff representing this separate “deductions” class in the litigation was a former Cosmo magazine intern who had worked 32-36 hours per week one summer communicating with modeling agencies, selecting models, and attending casting meetings. She asserted that the tuition requirement amounted to an unlawful deduction from wages. But Hearst argued convincingly that the company gained no benefit from the interns’ paying tuition to their schools, and the students, in contrast, had received college credit. Another “insurmountable hurdle” for the interns: they did not receive payment, “or anything even arguably close,” that could constitute “wages” under the statute. As the court saw it, there can be no “deduction” that would implicate the NYLL if “there were no wages to begin with.”

Also in January, the Eleventh Circuit, in an unpublished decision, affirmed a grant of summary judgment to an employer in a minimum wage suit brought by three medical billing students who worked for the defendant company as part of a required school externship. They asserted that the externships were of little educational benefit and they were performing tasks for the company for which it benefitted economically. However, the appeals court observed that the interns received academic credit for the work, thus deriving a benefit in that they were now eligible to earn their degrees. Also, the employer’s paid staff had to spend time away from their own duties to train and supervise the interns’ work, causing the business to run less efficiently. As a result, the company saw little, if any, economic benefit from the interns’ efforts, the appeals court found.

Then, on May 8, the Hearst court denied the interns’ motion for partial summary judgment on the issue of whether they were employees under the FLSA and NYLL. Although the interns contended that Hearst had to satisfy all of the six factors set forth in the DOL’s test, Hearst urged the court to eschew a “rigid checklist” approach and argued for a “balancing of the benefits” and an evaluation of the economic reality of the relationship. Looking to the totality of the circumstances — the six factors articulated by the DOL among them — the court concluded that disputed fact issues meant a jury could find in Hearst’s favor.

Of greater significance, however: the court refused to certify the state-law class, concluding that the interns did not satisfy the commonality requirement under Rule 23(a)(2) and the predominance requirement of Rule 23(b)(3). With an eye to the Supreme Court’s decision in Wal-Mart Stores, Inc v Dukes, the court determined that the plaintiffs could not show anything more than a uniform policy by Hearst of utilizing unpaid internships. That alone could not resolve the liability issue, which turned on what duties the interns performed and what benefits they received during their internship, which varied greatly from magazine to magazine. There was a myriad of internship postings, manuals, and guidelines that set out different duties and training for each magazine. As such, the court would have to undertake an individualized analysis of the factors set forth by the DOL in distinguishing “interns” from “employees.” (The plaintiffs have recently asked the district court for permission to challenge the denial of their motions for class certification and summary judgment on interlocutory appeal to the Second Circuit.)

A failure notice to plaintiffs? “The Hearst ruling is clearly a significant obstacle for plaintiffs seeking to bring these cases on a class or collective basis,” said Will Anthony, a partner in the Hartford, Connecticut office of Jackson Lewis (and Employment Law Daily Advisory Board member). “It is, however, only a district court decision, and I doubt that it will cause plaintiffs’ counsel to stop bringing these lawsuits entirely,” he predicted. Yet, “its analysis and citation of the Supreme Court’s certification decisions should make plaintiffs’ counsel think twice before investing time and money on cases that may end up as single-plaintiff claims.”

While Anthony has always advised employers to be mindful of the case law and the DOL criteria in considering their interns’ status under the law, he noted that “if the case law starts to break significantly in favor of rejecting class claims in the context of an intern or other fact-intensive wage claim, companies may be willing to tolerate more risk of an adverse ruling regarding an individual intern in a single-plaintiff case.”

“At the same time,” Anthony pointed out, “we caution companies to remember that enforcement agencies do not typically have to satisfy standards for class certification and thus can proceed with across-the-board enforcement actions more readily than private attorneys can.”

Making the grade. Morgan Lewis’ Puma noted the difficulty of administering an internship program that would safely pass muster under the DOL’s criteria:

(1) The internship, even though it includes actual operation of the facilities of the employer, must be similar to training that 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.

While no easy task, here are several pointers for meeting the mark:

• Interns should earn college credit for their efforts as part of a formal academic program at a college or university.
• Structure tasks around the intern’s academic goals, not the employer’s operations. “Grunt work” should be only rarely assigned.
• Afford the intern the chance to attain skills that are readily transferable to other employers within the industry, not skills or procedures that are unique to your organization.
• Cooperate closely with the educational institution, which should be providing careful oversight. Such scrutiny helps to demonstrate that the intern’s duties are educational, not merely operational, and that the internship is primarily academic in nature.
• Set a clear start and end date, perhaps tied to a school semester or break. Establish the duration before the internship begins, and don’t schedule it around the organization’s busy season or an employee downsizing.
• Don’t over-work your interns, even if they aren’t currently enrolled in classes. Generally, the intern should not be scheduled based on your productivity needs, but in accordance with the intern’s academic goals. (As a practical matter, you shouldn’t “need” an intern; if you’re so reliant on interns to get the work done that they are working extreme hours, then your interns are probably employees.)
• If unforeseen circumstances create a need for interns to fill in for regular employees, consider hiring them on a temporary basis. Make clear, however, that the intern is not being given a “tryout” for eventual full-time employment.
• The DOL six-factor test is based on an intern’s status according to the FLSA’s definition of “employee.” But state wage and hour laws apply too.
• In light of these considerable demands and caveats, consider whether an internship program is ultimately worth the risk and administrative burden.

In the end, it might just pay to pay. Says Puma: “I ask employers, ‘do you really want this headache? Couldn’t you just pay them minimum wage?’” Some companies have started to do just that, compensating their interns based on an hourly rate or modest per-semester stipend. In such cases — as our Hamilton College plaintiff instructs us — you’ll need to ensure that the stipend satisfies the minimum wage after calculating the intern’s hours worked, and that overtime is paid where due.