Internships are a rite of passage for many American students and recent college graduates. They work – often without pay – for a summer or longer to get experience and the proverbial foot in the door in their industry of choice. They work long hours for that coveted resume line and the chance – if they are lucky – to meet important people who could help them advance their careers. The fact that interns often are not paid is an inconvenience, but historically this has not been seen as unlawful . . . until now.

Fox Searchlight Pictures, the company that produced the movie Black Swan, and publishing giants Hearst and Condé Nast have been sued for unpaid wages by former participants in their internship programs. The former interns allege that unpaid internships violate the Fair Labor Standards Act ("FLSA"). The crux of the plaintiffs' argument in "unpaid intern" litigation is that they are employees despite the "intern" title and, therefore, the FLSA requires their employers to compensate them for their work. The plaintiffs successfully argued that the "economic realities" of their internships demonstrate an employment relationship and that their internships do not meet the following six criteria developed by the U.S. Department of Labor ("DOL") to assist employers, and the courts, in determining whether a worker may provide services in the for-profit sector without receiving compensation for their work:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which 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.

The plaintiff interns prevailed in the Fox case, and a federal appellate court has agreed to hear Fox's appeal. As a result of the pending litigation by former unpaid interns, Condé Nast announced that the company will terminate its internship program, and other companies are considering whether to follow their lead. Businesses are advised to analyze the risk of continuing their unpaid internship programs is-à-vis the DOL's criteria, the opportunity cost of closing the programs and the actual cost of converting the programs to paid internships.

Companies that receive value from their interns likely will benefit from converting their programs to paid internships. The interns must be paid at least minimum wage ($7.93 in Florida as of January 1, 2014) plus related taxes and statutory benefits. The size and structure of the internship program may also have an impact on the company's obligations under the Affordable Care Act and, potentially other benefits offered by the company. The investment in a paid internship program may be worthwhile, particularly if the program provides a pipeline for recruitment in industries where companies compete for top students.

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