Unpaid internships have long been a hallmark of many businesses, particularly in the entertainment industry. Many business owners, even sophisticated managers, do not realize how heavily regulated unpaid internships can be, and they ignore such regulation to their peril. Last week, entertainment giant Viacom entered into a $7.2 million settlement to resolve a dispute with former interns of its MTV network:

The 2013 lawsuit alleged that Viacom's unpaid internship program was a violation of state and federal wage laws.

Viacom agreed this week to pay as much as $7.2 million to settle the case, according to court documents. The amount paid will depend on how many of the former interns seek compensation for their stints at Viacom.

The lawsuit was one of several that shined a harsh spotlight on an entertainment industry practice in which unpaid internships were used as a cost-saver for television networks, movie studios and production companies -- with the prospect of a foot in the door for people aspiring to work in Hollywood.

Labor law requires that unpaid internships primarily benefits the interns -- not the employers.

This particular case was filed in August 2013 on behalf of Casey Ojeda, a New York Web developer who worked at Viacom for about five months in 2011, and Karina Reynaga, a California woman who served as an intern in Viacom's human resources department in 2012.

The suit claimed that the company illegally determined that the interns' duties were exempt from minimum-wage requirements. More than 1,000 former interns were included in the group covered by the proposed settlement.

In the last year, a number of high-profile Hollywood companies, including NBCUniversal, settled similar lawsuits for multi-million dollar sums.

The U.S. Department of Labor publishes "Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act," which contains guidance on when a person performing services can be lawfully classified as an unpaid intern under federal law (states may impose more stringent restrictions).  Of particular note:

The Test For Unpaid Interns

There are some circumstances under which individuals who participate in “for-profit” private sector internships or training programs may do so without compensation.  The Supreme Court has held that the term "suffer or permit to work" cannot be interpreted so as to make a person whose work serves only his or her own interest an employee of another who provides aid or instruction.  This may apply to interns who receive training for their own educational benefit if the training meets certain criteria.  The determination of whether an internship or training program meets this exclusion depends upon all of the facts and circumstances of each such program.

The following six criteria must be applied when making this determination:

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.

If all of the factors listed above are met, an employment relationship does not exist under the FLSA, and the Act’s minimum wage and overtime provisions do not apply to the intern.  This exclusion from the definition of employment is necessarily quite narrow because the FLSA’s definition of “employ” is very broad.  Some of the most commonly discussed factors for “for-profit” private sector internship programs are considered below.

Similar To An Education Environment And The Primary Beneficiary Of The Activity

In general, the more an internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience (this often occurs where a college or university exercises oversight over the internship program and provides educational credit).  The more the internship provides the individual with skills that can be used in multiple employment settings, as opposed to skills particular to one employer’s operation, the more likely the intern would be viewed as receiving training.  Under these circumstances the intern does not perform the routine work of the business on a regular and recurring basis, and the business is not dependent upon the work of the intern.  On the other hand, if the interns are engaged in the operations of the employer or are performing productive work (for example, filing, performing other clerical work, or assisting customers), then the fact that they may be receiving some benefits in the form of a new skill or improved work habits will not exclude them from the FLSA’s minimum wage and overtime requirements because the employer benefits from the interns’ work.

Displacement And Supervision Issues

If an employer uses interns as substitutes for regular workers or to augment its existing workforce during specific time periods, these interns should be paid at least the minimum wage and overtime compensation for hours worked over forty in a workweek.  If the employer would have hired additional employees or required existing staff to work additional hours had the interns not performed the work, then the interns will be viewed as employees and entitled compensation under the FLSA.  Conversely, if the employer is providing job shadowing opportunities that allow an intern to learn certain functions under the close and constant supervision of regular employees, but the intern performs no or minimal work, the activity is more likely to be viewed as a bona fide education experience.  On the other hand, if the intern receives the same level of supervision as the employer’s regular workforce, this would suggest an employment relationship, rather than training.

Job Entitlement

The internship should be of a fixed duration, established prior to the outset of the internship.  Further, unpaid internships generally should not be used by the employer as a trial period for individuals seeking employment at the conclusion of the internship period.  If an intern is placed with the employer for a trial period with the expectation that he or she will then be hired on a permanent basis, that individual generally would be considered an employee under the FLSA.

Businesspeople interested in establishing an unpaid internship program would be well advised to consult with experienced employment counsel to determine best practices for compliance with all applicable laws and regulations.