Lawsuits over Unpaid Internships Took Root in 2013

These lawsuits and the ruling in Glatt's case have been enough to persuade some employers to change their ways. After fulltime interns at The Nation wrote a letter to the publication's editor last summer criticizing its $150 weekly stipend, the magazine decided that it would pay its interns minimum wage. NBC News, a division of NBCUniversal, was sued by a former intern in July, and started paying its interns earlier this year.

'Trainee' Exemption

At the heart of the recent flurry of lawsuits is a 1947 U.S. Supreme Court decision in Walling v. Portland Terminal Co., 330 U.S. 148, that exempted employers from paying “trainees” the minimum wage promised to workers under the 1938 Fair Labor Standards Act. The decades-old ruling got new life in 2010, when the U.S. Department of Labor reissued a fact sheet that reiterated the six criteria an unpaid internship at a for-profit company must meet for it to be legal under the Walling “trainee” standard. According to the Department of Labor, the internship has to resemble training that would be given in an educational environment. The intern can't displace a regular employee and isn't necessarily entitled to a job at the conclusion of the internship. The employer and the intern have to understand that the intern is not entitled to wages for the time spent in the internship.

And then come the two stickiest points of the test: The internship has to be for the benefit of the intern and can't benefit the employer. With those rules in mind, linguist Ross Perlin wrote in his 2011 book Intern Nation, one of the few to examine the intern phenomenon, that unpaid internships were “lawsuits waiting to happen.” Previous suits touched on some of the Labor Department issues, but Eric Glatt's was the first to formally challenge unpaid internships.

While the recent lawsuits have drawn attention to the murky legal situation created by unpaid internships, their ultimate outcome in the courts is less clear. So far, the Fox Searchlight decision is an outright success for opponents of unpaid internships. “This [was] the first case where there has been a ruling that establishes that unpaid interns are employees,” says Glatt's counsel Turner. “This means that if interns are providing work of immediate benefit to employers where they are not receiving training other than what they're learning on the job, then they're entitled to wages.”

The Black Swan Case

In their suit, Glatt and co-plaintiff Footman claimed that for parts of 2009 and 2010 they worked full 40-hour weeks as interns on Black Swan. The pair performed menial tasks like answering phones, taking lunch orders, arranging other employees' travel plans, taking out the trash and assembling office furniture. Those circumstances made them no different from regular employees and deserving of pay, according to their first amended complaint. “Plaintiffs did not receive training similar to what would be given in an educational institution during their employment with defendants,” and Fox Searchlight “derived an immediate advantage from plaintiffs' work,” two factors that violate the Labor Department's six criteria for unpaid internships, the suit claims.

Fox Searchlight and its parent Fox Entertainment Group, represented by Proskauer Rose partner Elise Bloom, asked the court not to consider the six-point test, which they characterized as too rigid, and to instead consider applying a “primary benefit test” that would determine whether the intern or the employer was the primary beneficiary of the relationship. “If, after viewing the totality of circumstances, the internship's benefits to the intern outweigh the benefits to the engaging entity, the internship is properly classified as exempt from the FLSA wage requirements,” the defendants said in a court filing.

In his June 2013 decision certifying what's likely to be a class of 100-150 individuals who interned at various Fox subsidiaries, Judge Pauley rejected the defendants' suggestion of a “primary beneficiary test” as too subjective and unpredictable. Under such a test, an employer could never know ahead of time whether it would be required to pay its interns ' a standard Pauley called “unmanageable.”

He concluded that Glatt and Footman were classified improperly as unpaid interns and should be considered employees under the Fair Labor Standards Act (FLSA). “They worked as paid employees work, providing an immediate advantage to their employer and performing low-level tasks not requiring specialized training,” the district judge wrote.

Hearst: Six-Point Test Not Met

But not all court decisions have gone so well for unpaid interns. A high-profile ruling announced in May 2013 in Manhattan federal district court went in the employer's favor. Wang v. The Hearst Corp., 12 CV 793 (S.D.N.Y. 2013). In that case, an intern, also represented by Outten & Golden, is seeking back pay on behalf of a proposed class that theoretically includes thousands of past interns in the vast Hearst Corp. magazine empire. The plaintiffs argue that internships have to meet the six-point test issued by the Department of Labor, and that Hearst failed to meet one of those criteria by deriving an “immediate advantage from the activities of the intern.”

Hearst, represented by Mark Batten, another Proskauer Rose partner, countered that the six criteria were not a rigid checklist and that the court should consider the “totality of the circumstances” of each internship. “Our feeling is that not all unpaid internships are illegal. To determine the legality, one must evaluate the balance of benefits in each situation. Did the intern get more out of it or did the company?” says Batten.

Southern District of New York federal Judge Harold Baer Jr. agreed with Hearst and denied certification after finding that the interns, who held a variety of jobs, didn't meet the high bar for showing class commonality established by the Supreme Court in Wal-Mart Stores Inc. v. Dukes, 131 S. Ct. 2541 (2011).

The denial of class action is a particularly hard hit to former unpaid interns. In these suits, the interns are seeking back pay of minimum wage for a few months of work. A class action, as opposed to an individual lawsuit, is more advantageous since it doubles damages awards and allows plaintiffs' lawyers to recoup their fees as a percentage of the total damages.

Baer also ruled that the Department of Labor's six-point standard was not a “one dimensional test” and that a wider framework that considered the totality of an internship's circumstances should be used to analyze the employee-employer relationship.

Appeals Courts

The Hearst Corp. and Fox Searchlight rulings' conflicting interpretations reveal a larger issue that underlies the unpaid internship lawsuits trend: The very guidelines the Department of Labor released in 2010 to clarify the law on internships are muddling it. The U.S. Court of Appeals for the Second Circuit has agreed to hear both lower court decisions.

Appellate courts that have considered the application of the Labor Department's six-point test as part of lower-profile cases have split on the issue. For instance, in a case that the Department of Labor itself brought against Laurelbrook Sanitarium and School in Tennessee over potential child labor violations, the U.S. Court of Appeals for the Sixth Circuit found in 2011 that the department's six-point test was “a poor method for determining employee status in a training or educational setting.” Solis v. Laurelbrook Sanitarium and School, 642 F.3d 518 (6th Cir. 2011).

The Eleventh Circuit, meanwhile, in an unpublished January 2013 opinion, applied the six-point test when it ruled that students in a medical billing and coding training program were not entitled to minimum wage for work they had completed during externships. Kaplan v. Code Blue Billing & Coding Inc., 504 Fed.Appx. 831 (11th Cir. 2013).

“The way in which the [Labor Department's six-point] test is applied is up for grabs as to whether the employer has to meet all six criteria or if the totality of circumstances should be considered,” says Suffolk University law professor David Yamada, that “it's not out of the realm of possibility” that the issue could end up before the U.S. Supreme Court.

Claire Zillman writes for Corporate Counsel, an ALM sibling of Entertainment Law & Finance.

Eric Glatt was in the library at Georgetown Law Center when he got the call last summer. On the other end of the line was his lawyer, Juno Turner, an associate at New York's Outten & Golden. “We won,” she said. With those two words, Glatt, who holds an MBA from Case Western University and is now working toward a law degree, became the unconventional hero for unpaid interns everywhere. Nearly two years earlier, Glatt and co-plaintiff Alexander Footman had filed a lawsuit against Fox Searchlight Pictures. They accused the studio of violating the Fair Labor Standards Act by not paying them minimum wage for the services they provided as interns on the production of the film Black Swan.

After his first-of-its-kind lawsuit was filed in September 2011, a dozen other groups of former unpaid interns followed Glatt's lead, suing high-profile employers in the film, media and music industries including The Hearst Corp., the Charlie Rose show on PBS and Elite Model Management Corp. The suits also sought back pay under the FLSA.

In early June 2013, U.S. District Judge William Pauley III in Manhattan certified the class of interns seeking back pay after finding that Fox should have paid the interns because they were essentially regular employees. Glatt v. Fox Searchlight Pictures Inc., 11 Civ. 6784 (S.D.N.Y. 2013). After Judge Pauley's decision in June 2013, eight similar suits hit the courts. The majority of the cases have been filed as class actions in New York ' where the statute of limitations for wage-and-hour claims is six years.

These lawsuits and the ruling in Glatt's case have been enough to persuade some employers to change their ways. After fulltime interns at The Nation wrote a letter to the publication's editor last summer criticizing its $150 weekly stipend, the magazine decided that it would pay its interns minimum wage. NBC News, a division of NBCUniversal, was sued by a former intern in July, and started paying its interns earlier this year.

'Trainee' Exemption

At the heart of the recent flurry of lawsuits is a 1947 U.S. Supreme Court decision in Walling v. Portland Terminal Co., 330 U.S. 148, that exempted employers from paying “trainees” the minimum wage promised to workers under the 1938 Fair Labor Standards Act. The decades-old ruling got new life in 2010, when the U.S. Department of Labor reissued a fact sheet that reiterated the six criteria an unpaid internship at a for-profit company must meet for it to be legal under the Walling “trainee” standard. According to the Department of Labor, the internship has to resemble training that would be given in an educational environment. The intern can't displace a regular employee and isn't necessarily entitled to a job at the conclusion of the internship. The employer and the intern have to understand that the intern is not entitled to wages for the time spent in the internship.

And then come the two stickiest points of the test: The internship has to be for the benefit of the intern and can't benefit the employer. With those rules in mind, linguist Ross Perlin wrote in his 2011 book Intern Nation, one of the few to examine the intern phenomenon, that unpaid internships were “lawsuits waiting to happen.” Previous suits touched on some of the Labor Department issues, but Eric Glatt's was the first to formally challenge unpaid internships.

While the recent lawsuits have drawn attention to the murky legal situation created by unpaid internships, their ultimate outcome in the courts is less clear. So far, the Fox Searchlight decision is an outright success for opponents of unpaid internships. “This [was] the first case where there has been a ruling that establishes that unpaid interns are employees,” says Glatt's counsel Turner. “This means that if interns are providing work of immediate benefit to employers where they are not receiving training other than what they're learning on the job, then they're entitled to wages.”

The Black Swan Case

In their suit, Glatt and co-plaintiff Footman claimed that for parts of 2009 and 2010 they worked full 40-hour weeks as interns on Black Swan. The pair performed menial tasks like answering phones, taking lunch orders, arranging other employees' travel plans, taking out the trash and assembling office furniture. Those circumstances made them no different from regular employees and deserving of pay, according to their first amended complaint. “Plaintiffs did not receive training similar to what would be given in an educational institution during their employment with defendants,” and Fox Searchlight “derived an immediate advantage from plaintiffs' work,” two factors that violate the Labor Department's six criteria for unpaid internships, the suit claims.

Fox Searchlight and its parent Fox Entertainment Group, represented by Proskauer Rose partner Elise Bloom, asked the court not to consider the six-point test, which they characterized as too rigid, and to instead consider applying a “primary benefit test” that would determine whether the intern or the employer was the primary beneficiary of the relationship. “If, after viewing the totality of circumstances, the internship's benefits to the intern outweigh the benefits to the engaging entity, the internship is properly classified as exempt from the FLSA wage requirements,” the defendants said in a court filing.

In his June 2013 decision certifying what's likely to be a class of 100-150 individuals who interned at various Fox subsidiaries, Judge Pauley rejected the defendants' suggestion of a “primary beneficiary test” as too subjective and unpredictable. Under such a test, an employer could never know ahead of time whether it would be required to pay its interns ' a standard Pauley called “unmanageable.”

He concluded that Glatt and Footman were classified improperly as unpaid interns and should be considered employees under the Fair Labor Standards Act (FLSA). “They worked as paid employees work, providing an immediate advantage to their employer and performing low-level tasks not requiring specialized training,” the district judge wrote.

Hearst: Six-Point Test Not Met

But not all court decisions have gone so well for unpaid interns. A high-profile ruling announced in May 2013 in Manhattan federal district court went in the employer's favor. Wang v. The Hearst Corp., 12 CV 793 (S.D.N.Y. 2013). In that case, an intern, also represented by Outten & Golden, is seeking back pay on behalf of a proposed class that theoretically includes thousands of past interns in the vast Hearst Corp. magazine empire. The plaintiffs argue that internships have to meet the six-point test issued by the Department of Labor, and that Hearst failed to meet one of those criteria by deriving an “immediate advantage from the activities of the intern.”

Hearst, represented by Mark Batten, another Proskauer Rose partner, countered that the six criteria were not a rigid checklist and that the court should consider the “totality of the circumstances” of each internship. “Our feeling is that not all unpaid internships are illegal. To determine the legality, one must evaluate the balance of benefits in each situation. Did the intern get more out of it or did the company?” says Batten.

Southern District of New York federal Judge Harold Baer Jr. agreed with Hearst and denied certification after finding that the interns, who held a variety of jobs, didn't meet the high bar for showing class commonality established by the Supreme Court in Wal-Mart Stores Inc. v. Dukes, 131 S. Ct. 2541 (2011).

The denial of class action is a particularly hard hit to former unpaid interns. In these suits, the interns are seeking back pay of minimum wage for a few months of work. A class action, as opposed to an individual lawsuit, is more advantageous since it doubles damages awards and allows plaintiffs' lawyers to recoup their fees as a percentage of the total damages.

Baer also ruled that the Department of Labor's six-point standard was not a “one dimensional test” and that a wider framework that considered the totality of an internship's circumstances should be used to analyze the employee-employer relationship.

Appeals Courts

The Hearst Corp. and Fox Searchlight rulings' conflicting interpretations reveal a larger issue that underlies the unpaid internship lawsuits trend: The very guidelines the Department of Labor released in 2010 to clarify the law on internships are muddling it. The U.S. Court of Appeals for the Second Circuit has agreed to hear both lower court decisions.

Appellate courts that have considered the application of the Labor Department's six-point test as part of lower-profile cases have split on the issue. For instance, in a case that the Department of Labor itself brought against Laurelbrook Sanitarium and School in Tennessee over potential child labor violations, the U.S. Court of Appeals for the Sixth Circuit found in 2011 that the department's six-point test was “a poor method for determining employee status in a training or educational setting.” Solis v. Laurelbrook Sanitarium and School, 642 F.3d 518 (6th Cir. 2011).

The Eleventh Circuit, meanwhile, in an unpublished January 2013 opinion, applied the six-point test when it ruled that students in a medical billing and coding training program were not entitled to minimum wage for work they had completed during externships. Kaplan v. Code Blue Billing & Coding Inc., 504 Fed.Appx. 831 (11th Cir. 2013).

“The way in which the [Labor Department's six-point] test is applied is up for grabs as to whether the employer has to meet all six criteria or if the totality of circumstances should be considered,” says Suffolk University law professor David Yamada, that “it's not out of the realm of possibility” that the issue could end up before the U.S. Supreme Court.

Claire Zillman writes for Corporate Counsel, an ALM sibling of Entertainment Law & Finance.