Unpaid Internships: Stocking Stuffer for Employers, or a Proverbial Fruitcake?

It’s been said the best things in life are free. In California, where running a business is very expensive, an unpaid internship program might seem a perfect gift. Employers of all sizes and in virtually all industries use internships to train and identify the next generation of superstar employees. Interns frequently bring new ideas to challenging business problems and provide a regular flow of needed support staff, at a low cost or at no cost whatsoever. The benefits of internships are frequently so great that one can certainly imagine Santa staffing his busy workshop with hordes of elfish interns this time of the year.

Let Rudolph Be Your Guide

But the legal environment is not all candy canes and gum drops for unpaid or flat-rate internship programs, especially in California. The highest state and federal courts in California have not explicitly approved unpaid internships, and no California statute or regulation authorizes unpaid internships.

Some 60 years ago, the U.S. Supreme Court in Walling v. Portland Terminal Co. recognized the “special status” of interns and trainees as exempt from wage and hour laws, but Walling, alas, does not provide a clear legal standard. Apart from Walling, employers are left to follow varying sources of nonbinding “guidance” from state and federal labor agencies, and decisions from federal courts outside of California endorsing one of three multiple-factor tests: (1) the “primary beneficiary test,” (2) the ambiguous “totality of the circumstances test,” and (3) the less-than-clear “economic realities test.” Navigating this maze of tests and factors might just about require a holiday miracle!

The risks of missteps with internships are great. California has strict laws on meal and rest periods, minimum wage, and daily overtime. Many, if not most, internship programs are unpaid or involve stipends that fall below minimum wage based on hours worked, and thus do not meet California Labor Code requirements. Plaintiffs’ attorneys live on the thrill of seizing on these laws and their associated penalties to snowball employers with single-plaintiff lawsuits and class actions. For these reasons, the Abominable Snowman of wage and hour litigation appears poised to wreak further havoc on California employers using internship programs.

Don’t Shoot Your Eye Out, Kid!

So are internship programs in California akin to the often dreamed of “Red Ryder BB Gun”—a device whose potential risk outweighs the benefits? Many federal courts assess internships by asking who “primarily benefits from the relationship.” This is a good place to start when assessing your program. The DOL’s 2010 published “guidance,” including six criteria present in legal internships, deserves special attention, as it directly borrows from the U.S. Supreme Court’s only decision on the issue (Walling). Virtually all court decisions on internships, although outside of California, discuss the DOL’s factors in some degree. One important step in securing an internship from a legal Grinch is to integrate the internship with the intern’s formal education, through academic credit or a tie between technical work and classroom learning. The intern’s overall economic contribution to the business, weighed against the company’s resources dedicated to the internship program, should also remain in sight, as this is one means courts use to determine the “primary” beneficial party of the arrangement. One cannot hide the economic reality with pretty gift-wrapping. Simply labeling a job with the title “internship” is insufficient alone to ward off litigation and to keep coal out of your stocking.

The internship test involves a multitude of factors. Employers must thus consider their internship programs from every angle. Don’t simply spin the dreidel this holiday season and hope your “letter” comes up. Take action and grab the reindeer by the reins! For starters, consider including arbitration and class/collective waiver provisions in written internship agreements. That could help avoid large-scale judicial actions. Our California Workplace Solutions lawyers can also help review the numerous and varying factors involved and advise on methods to make the program more defensible from BB pellets, snowballs, or whatever comes your way this holiday season and the year to come.