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The $450,000 Unpaid Interships: How to Properly Hire Interns, Without a Six-Figure Cost to Your Business

Categories: All Resources, Tips

Warning:  The following article contains graphic descriptions of extreme financial loss, stringent government penalties, and stressful, protracted litigation.  Such material may not be suitable for some business owners.  Reader discretion is advised…. 

As summer approaches, many small business owners look to the possibility of hiring unpaid interns – often students who are off from college, or unemployed people, in search of job experience or a career change.  If done correctly, an unpaid internship can be a mutually enriching and valuable experience, for both the intern and the company that hires them.  However, like most decisions involving employment and labor law, it is vital to make sure that you (the business owner or employer) carefully follow the certain criteria, to ensure you don’t run afoul of federal and state labor laws. 

Of course, in order to comply with the law, one must know what the law entails.  When can your business utilize unpaid interns? What type of job functions should (or shouldn’t) your unpaid intern be primarily engaged in? How should you place postings or job advertisements for your company’s wanted unpaid interns? What written notice or other documents must you have in place? This article will discuss some of the federal and (New York) state law criteria, for how to legitimately hire an unpaid intern for your small business. Additionally, to demonstrate how important it is to follow the law, I will briefly discuss a recent court case, where an employer offered a $450,000 settlement of a lawsuit brought by a group of its former unpaid interns (alleging FLSA violations). Federal And New York State Law: Requirements For Hiring Unpaid Interns:

One helpful starting point for this discussion involves the federal and state minimum wage laws – which your business may be violating, if you misclassify a working employee as an “unpaid intern.”  An individual performing work that an employee would normally perform must be paid the minimum wage, which is set by the federal government at $7.25 per hour, as per The FLSA (The Fair Labor Standards Act; 29 U.S.C. § 206, et seq.), and the U.S. Dept. Of Labor’s Guidelines.  Moreover, the minimum wage is higher — $9.00 per hour – in New York State, as per The New York State Minimum Wage Act and The Minimum Wage Order for Miscellaneous Industries and Occupations (12 NYCRR 142; Labor Law, Article 2, § 21 (11) and Article 19, § 652).  If your employees are “non-exempt” under the FLSA (i.e., not performing executive, professional or administrative duties, are not in a supervisory or management level capacity, and are not salaried and earning more than $455 per week), then your business must pay at least the minimum wage, under both the federal Fair Labor Standards Act and the New York State Minimum Wage Act.  Note that both federal and state law minimum wage rates have been the topic of much recent debate, with a $15 minimum wage being possible in the not so distant future.  

How Can You Hire Unpaid Interns, And Comply With Federal And New York State Minimum Wage Laws?

In order to hire unpaid interns, and be exempt from the federal and New York state minimum wage Laws, your private, for-profit business must meet a number of criteria, established by both the U.S. Department of Labor, and the New York State Department of Labor.  If your company meets these criteria, you can help enrich an intern’s future, while gaining assistance with certain functions at your workplace.  These legal criteria are as follows:

1.  Training Of Your Intern Resembles An Educational Training Program; Primarily Benefits The Intern:

Any benefit provided by your unpaid intern to your company, as the employer, must be secondary / incidental to the main goal: training your intern, by teaching them new skills and advanced knowledge, which are useful in a particular field, vocation, or industry – not merely teaching the unpaid intern about the inner workings of your specific company, firm or business.  The goal of the internship should be to benefit your intern.

In addition, the training that you provide should be broad, of value in multiple employment settings, and building upon a classroom or academic experience.   Note that such “academic experience” is not limited to colleges or graduate programs: consider a high-end restaurant that hires an unpaid intern from a culinary institute, to work under a top tier Chef. 

Scheduling Coffee With Jerry And George Is Not An “Educational Experience”:

Any Seinfeld fans out there remember when Kramer had an intern, to assist him with “Kramerica Industries?”  This is a great – albeit hyperbole — example of what an unpaid intern should not be doing: scheduling your meetings and appointments, getting coffee for the staff from Starbucks, taking phone messages, and running errands.  These routinetasks did not provide Kramer’s intern withany educational or training experience, within a specific field. (I won’t even go into the civil and criminal liability or legal problems, if you, like Kramer, ask your intern to help toss a giant, oil-filled ball out of a window.  I’m presuming that such activity is not part of your plan for your unpaid interns).

I often recommend that an employer or business find their unpaid interns through an accredited internship program – whether at a university, college, technical, trade or vocational school.  Doing so helps ensure the likelihood that you will meet the “educational training” factor of the New York State and Federal U.S. Department of Labor’s criteria, for having a bona fide unpaid intern, exempt from the minimum wage requirements.   In line with such programs, your unpaid intern’s educational program should award credit or credits for the internship, and both you and the educational institution should have a curriculum of the internship’s training outlined, along with a start and end date of the internship.

2.  Your Unpaid Intern Does Not Displace Regular Employees, Does Not Perform Daily Functions of Regular Employees (Or Routine Administrative Tasks), And Works Under Close Supervision:

It is important that you do not hire an unpaid intern to replace or augment regular staff.  Quite often, companies or small business owners make the mistake of hiring an unpaid intern shortly after layoffs or resignation of a paid employee – and then the “intern” takes on the former employee’s job duties. Such an action could be seen as having an unpaid “replacement employee,” thus violating the federal and state minimum wage laws.  Moreover, you should really have clearly defined, specified functions for your unpaid interns, which do not involve them doing essentially the same job duties as your paid employees.  Note that your unpaid interns may be given “job shadowing” – learning certain job functions, and performing some of these tasks under the close and constant supervision of regular employees, for the intern’s educational benefit / experience.  Such a scenario would likely be considered a bona fide unpaid internship (providing that additional criteria are met, as set forth below). 

3.  Make It Clear (In Writing) That Your Unpaid Intern Is Not Necessarily Entitled To A Job At The Conclusion Of Their Internship, And Is Free To Take Jobs Elsewhere In Your Field:

Make it clear (both through verbal communication, and in writing) that the unpaid internship position which you are offering is for a finite, fixed duration.  This finite time should be established prior to the internship beginning.  It is important that you, as the employer, not use your unpaid intern’s time with your company as a “trial period” for potential immediate employment, at the end of the internship.  This point often brings questions from clients. “Well, what if I hire the most amazing, talented unpaid intern? Can I never hire him / her full time, when he / she is in the job market?”  Not exactly.  It is certainly alright for you, in the future, to consider employing a former unpaid intern (consider a college sophomore who comes to you, post-graduation, seeking a job with your company).  However, you don’t want to: (a) offer an immediate paid position, or the promise of one, upon successful completion of the internship; and (b) you don’t want to give the impression that there is a job waiting, after the unpaid internship concludes.  Otherwise, the unpaid internship will be in violation of the FLSA and the New York State Minimum Wage Laws, as an unpaid “training period,” where work was rendered, without compensation for said services.   Additionally, make sure you convey to your intern, as part of a written internship program and agreement, that he or she is free to take positions or jobs elsewhere — including within your industry — after they complete their unpaid internship with you.

4.  Notify Your Unpaid Intern, In Writing, That They Will Not Receive Any Wages Or Benefits, And Are Not Considered Employees For Minimum Wage Purposes:

Such writing should be contained in the agreement that the intern signs with your company, and in any advertisements, postings on job boards or student-job sites, or in other of your employment policies / publications, relating to your company’s unpaid interns.  This includes a notification that the unpaid intern (whether student or other) is an “unpaid intern,” not an employee, and is not entitled to benefits of health or dental insurance, pension benefits, or free goods and services. (Lots of business owners don’t realize this latter rule, and so they give their employees free goods, gifts, and complimentary services from the workplace).   Having an express statement of the “unpaid intern status” / “no wages or benefits” in writing avoids the risk of confusion for your unpaid interns — and minimizes the chance that they will be misled into thinking that they are actually entering an employer-employee relationship. 

5.  The Screening And Recruiting Process For The Internship Program Is Not The Same As The Process For Hiring Employees:

Small businesses, take heed: If you happen to be running an advertisement / posting to hire an employee, and another advertisement to hire an unpaid intern for a semester, make sure these two positions are set forth in two distinct, separate advertisements / postings.  Have different criteria for each (the paid and unpaid position), with the opportunity to provide education and training experience as the main objective listed for your unpaid intern.  You should further state different hiring protocol for your employees and your unpaid interns (with education, training and benefit to the intern being the primary objectives for the unpaid internship)Many companies try to save money, by running all of their hiring needs in the same ad (and even scheduling interviews with the same managers on the same day, for employees and unpaid interns).  However, it is absolutely worth spending the money on an extra advertisement, to maintain compliance with federal and New York State guidelines.

What happened with the $450,000 interns?

Since the focus of this article is to provide you (the reader / business owner / company) with some practical, concrete guidelines for hiring unpaid interns, I won’t delve into an in-depth, detailed legal analysis of recent case law, involving class action lawsuits by unpaid interns. [If curious, SeeWang v. Hearst Corp., No. 12 Civ. 793 (HB) (S.D.N.Y. May 8, 2013); Glatt v. Fox Searchlight Pictures, Inc., No. 11 Civ. 6784 (WHP) (S.D.N.Y. June 11, 2013); Moore v. NBC Universal, No. 13 Civ. 4634 (S.D.N.Y. July 3, 2013)].However, one case worth noting is that of a class of interns, who filed suit against the Elite Model Management Corporation.  In that case, a former Elite Model Management intern (along with a class of similarly situated unpaid interns) commenced a $50 million federal lawsuit against Elite Management, alleging that the Defendant company violated the Fair Labor Standards Act, the N.Y.S. Minimum Wage Act, and related federal and state laws, for unpaid minimum wages, mis-classification of employees, and unpaid over-time pay. Plaintiff Dajia Davenport interned during the summer of 2010, and claimed that Elite “deliberately misclassifie[d] its [unpaid] interns as exempt from wage requirements,” despite having them work over 40 hours per week.  In 2014, less than a year after the case was commenced, the District Court for the Southern District of New York approved a $450,000 class action settlement, guaranteeing participating interns a payout from Elite Model Management Corporation, that went as high as $1,750 per intern.  As of the 2014 settlement date, this case was the largest settlement of an intern class action suit – and the reason why I chose to highlight it in the title of this article.  The Plaintiffs’ complaint essentially alleged, among other things, that Elite Model Management did not follow the guidelines which I’ve outlined above.  Hopefully, if you follow the above guidelines in hiring and utilizing unpaid interns, you might avoid a lawsuit similar to that faced by Elite Model Management – a litigation quagmire which is not pretty.

Under Federal and New York State Laws, companies or businesses that violate the minimum wage laws (The FLSA, The New York State Minimum Wage Act, and The Minimum Wage Order for Miscellaneous Industries and Occupations), are subject to a number of federal and state government penalties, including:  a lawsuit or proceeding by the federal (and state) Department of Labor, recoveringdouble the amount of unpaid minimum wages (and overtime pay, if applicable), plus interest  (the “double recovery” includes the unpaid wages, plus an additional and an equal amount as liquidated damages).  In addition, the federal government may impose fines of $1,100 per violation (i.e., for each unpaid intern whom it deems was an employee, entitled to minimum wage), coupled with state government fines of a comparable amount.  Quite notably, if an employer is found to have willfully and repeatedly violated the federal and state minimum wage laws, those fines can exceed $10,000 – with criminal sanctions for the most egregious violations.  

Unpaid Internships Are Feasible, If Done Correctly:

Too often, the possibility of negative consequences scares people from taking healthy risks – in personal or professional life.   However, many of life’s undertakings — if approached with care and attention to proper protocol — can be a rewarding and beneficial experience.   As colleges and vocational schools let out in upcoming months, knowing the legal criteria and guidelines for hiring unpaid interns (as outlined above) can allow your company to offer an authentic, valuable experience – one that truly benefits your interns, allowing you to teach and train an up-and-coming generation.  That experience (along with some weekend trips to the beach) can make for a truly enjoyable summer.

Eric Sarver, Esq. is an attorney with over seventeen years of experience practicing law — fifteen of which as the sole proprietor / principal at The Sarver Law Firm, PLLC.  Mr. Sarver’s practice areas include: labor & employment law, business law and contracts, for small businesses, startups, restaurants/cafes/bars, and non-profits.  He is admitted to practice law in the State of New York, and in the federal courts, in the Eastern and Southern Districts of New York.  For questions in New York State involving a specific contract, an employment law-related matter, or other legal issues that your business is dealing with, feel free to contact Eric M. Sarver, Esq. at:  Tel: 917-930-8684; E-mail: ems@ericsarver.com; Web: www.sarver-law.com; LinkedIn: www.ericsarver.com 

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