The use of unpaid internships to provide “real world” work experience has grown tremendously in recent years. For example, a recent study by the National Association of Colleges and Employers found that 55 percent of students in the class of 2012 had an internship or co-op at some point during college. Approximately half of those internships were unpaid.

While an employer, and even a for-profit company, can hire unpaid interns, the internship program must be appropriately structured so the employer does not violate the Fair Labor Standards Act (“FLSA”) and similar state laws which require the payment of a minimum wage. The United States Supreme Court identified a “trainee” exception to the FLSA which allows a company to hire unpaid trainees or interns so long as certain conditions are met, such as requiring the employer to closely supervise the trainee and provide educational instruction. Walling v. Portland Terminal Co., 330 U.S. 148 (1947).

A recent class action lawsuit from the influential Southern District of New York clarified the trainee exception and expressly incorporated six criteria identified by the United States Department of Labor (“DOL”), which administers the FLSA. Specifically, in Glatt v. Fox Searchlight, WL 2495140 (S.D.N.Y. 2013), the film production and distribution company Fox Searchlight Pictures was accused of violating the FLSA by not paying a minimum wage to interns that worked on the movies Black Swan and 500 Days of Summer. The court held that the following six criteria should be examined under a totality of the circumstances test to determine whether an unpaid internship program qualified under the trainee exception:

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 impaired;
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.

In applying these criteria to the unpaid interns at Fox Searchlight, the court found that the interns were actually “employees” and Fox Searchlight violated the FLSA by not paying them minimum wage. The court reasoned that, “[t]he benefits [the interns] may have received – such as knowledge of how a production or accounting office functions or references for future jobs – are the results of simply having worked as any other employee works, not of internships designed to be uniquely educational to the interns and of little utility to the employer. They received nothing approximating the education they would have received in an academic setting or vocational school.”

Although the Glatt case was decided in New York and is not binding Washington law, employers throughout the nation should play close attention to this precedent and refine their internship programs if necessary since similar class action lawsuits involving unpaid interns have been filed in other states. If you or your company has an internship program, consult with our experienced employment law attorneys so that the program appropriately complies with federal and state law.