Legal Status of Unpaid Internships in NYC

The Law Regarding Unpaid Interns in NYC

The United States Department of Labor and the New York State Department of Labor have overlapping authority to regulate intern programs. Under both federal and state law, an employer must classify an intern as exempt from New York minimum wage, New York overtime law, and FLSA requirements. As such, interns need not be paid minimum wage or receive overtime compensation under federal and state law, provided that they qualify as unpaid interns under both federal guidelines and New York state law.
Under federal law, the Fair Labor Standards Act (FLSA) defines "regular rate" of pay as the rate per hour for overtime purposes. It is common under the FLSA to use overtime pay (i.e. $27.50/hour) multiplied by the total overtime hours (i.e. 6 hours) to arrive at single total figure. In contrast to this calculation, Resolution allows employers to use the Regular rate times the total hours at straight time pay (i.e. 27.50/hour at 40 hours) to arrive at a total calculation (i.e. $1,100), thus allowing the employer to use the same total for both minimum wage and overtime pay, rather than twice the rate (i.e. $2,200).
The DOL’s Fact Sheet No. 71 regulates internships under the FLSA and delineates the following requirements that must be fulfilled with regards to unpaid internships:
• The internship, even though it includes actual operation of the facilities of the employer, is similar to the training which would be given in an educational environment.
• The internship experience is for the benefit of the intern.
• The intern or student is not necessarily entitled to a job at the conclusion of the internship.
• The employer’s operations must not be impeded or disrupted by the intern’s activities with regards to their duties .
• Any benefits derived by the employer from the intern’s participation in the internship are merely incidental, while the intern’s benefit is the primary aspect of the internship program.
• The intern does not displace regular employees and works closely under supervision of staff.
• The employer and the intern understand that the intern is not entitled to wages for time spent in the internship.
Unlike the FLSA, New York State Labor Law section 651 mandates that employers generally pay interns for the hours they work. However, there is a limited exception, provided by the NYLL, where interns are eligible to be unpaid. Under 12 NYCRR §146-1.2, internships are generally exempt from minimum wage and overtime legislation if each of the following six criteria are met:
• The program is a vocational training program offered by a non-profit, non-business entity that benefits from the assignment of the trainees.
• There is no guarantee of employment for the trainees once the training ends.
• The trainees do not get paid for their training, except for reimbursement of expenses or gratuity
• The program is predominantly for the benefit of the trainees and not for the immediate advantage of the employer.
• The trainees do not displace any other employee but may work under their close supervision.
• The employer must not derive any immediate advantage from the activities of the trainee and the employer’s operations may actually be impeded.
While in any given case an internship or internship duration may satisfy the DOL aspects of this test, as a practical matter, these types of internship program are not generally employed in New York. Even where the New York State Labor Law is not applicable, employer often choose to comply with the DOL requirements in order to avoid scrutiny under both the state and federal law.

Legal Requirements for Unpaid Internships

Under the law, to be an "intern," an individual must meet certain statutory requirements set forth by the Department of Labor. Pursuant to the New York State Department of Labor requirements for employers to legally offer unpaid internships, the employer must be able to essentially prove that a number of specific factors exist in order for an internship to not be considered as "employment."
Pursuant to the NYSDOL website, the following must be present:

• The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in a vocational school.
• The internship is for the benefit of the intern.
• The intern does not displace regular employees, but works under close supervision of existing staff.
• 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.
• The intern is not necessarily entitled to a job at the conclusion of the internship.
• The employer and the intern understand that the intern is not entitled to wages for time spent in the internship.
• The employer, in fact, is not obligated to provide any employment-related benefits, such as insurance, sick leave, termination pay, or similar benefits.
• The internship period is generally limited to the period in which the intern receives training.
• Unless otherwise stated, both the intern and employer understand the intern is fitting into the employer’s ongoing operations.
• All of the above criteria must be met as a whole for an internship not to be considered as employment.

The law regarding "intern" is also set forth in 29 C.F.R. § 785.27. Although the Supreme Court has provided that the guidelines given in the NYSDOL statutes can be considered, the DOL has provided more definitions as to who is an intern and who is an employee and employers should be aware of these regulations so as to avoid litigation in the future.

Exemptions & Misconceptions on Legal Internships

There are, however, a couple of exceptions that allow for unpaid interns to work for private employers. The first exception is if the intern is employed by a non-profit entity. Internships for non-profit entities are governed by federal law (the Fair Labor Standards Act) rather than New York labor law, and may be unpaid as long as there is an education program where the student participates in the clinical experience and there meets all other requirements of the U.S. Labor Department. Second, legitimate apprenticeships or professional training programs approved by the U.S. Department of Labor, if the employer is expressly granted the ability to hire unpaid interns for these programs. These programs, though, are limited to participants with requisite skills; the employer must compensate any non-trainees; and the program must not be used to displace regular employees.
Finally, while employers often believe that if the internship is unpaid it may not constitute "employment" because the individual is volunteering, NYC law explicitly states, "Any individual who volunteers his or her services for a non-profit may not be found to be in employment for such services." There is a catch to this exception, however. It cannot be used to, for example, expand the application of the student exception to non-profits. Furthermore, any individual may only volunteer for the same organization 120 days in a calendar year, and they must voluntarily choose to participate. Therefore, an intern who provides valuable services to a non-profit over 120 days may not be deemed an unpaid volunteer under the law.

Consequences of Illegal Unpaid Internships

Unpaid interns’ experience may suffer loss of educational credits and the potential of reduced job prospects, but the more likely and serious result of illegal unpaid internships for them would be a claim for damages against the employer for failure to pay minimum wage. Employers, on the other hand, face a litany of potential consequences, from back pay for all unpaid hours, to damages, attorney’s fees, and the possibility of being investigated by government agencies. The fallout from illegal unpaid internships for employers also extends to affect the morale and attitude of its paid staff and outside industry observers proximate to the situation. Moreover, lengthening lists of business and media leaders tout the unethical nature of unpaid internships by either refusing to engage their use or cancelling existing programs as a show of solidarity with their underpayment.
Employer’s Exposure
Employers should keep in mind that New York State passed similar laws in 2010, as did the City of New York. Accordingly, the applicable laws regarding employers and interns are GS LAWS N.Y. Lab. 190 et seq.; 2010 N.Y. Laws 628; CITY ADMIN. CODE N.Y. Code § 20-929. New York courts will, where possible, refer to the Federal provisions in the as authorities on the New York law. Mills v. New York Post, 15 F.3d 7 (2d Cir. 1994). The following consequences may result from failure to comply with labor and insurance laws: Under the Fair Labor Standards Act ("FLSA"), unpaid interns cannot bring a class action in federal District Court without a prior state or federal Department of Labor final determination that the employer has violated FLSA, or without approval of the subject litigation by the District Court. 29 U.S.C.A. § 216(b). Employers facing non-compliance with FLSA, in addition to penalties and attorney’s fees, may face a private federal action, initiated with consent of the Secretary of the Department of Labor. 29 U.S.C.A. § 216(c) (private cause of action and litigation initiated by the Secretary of the Department of Labor). The employee bears the burden of proving non-compliance with the FLSA. Donovan v. Hazen Paper Co., 689 F.2d 710, 712 (2d Cir. 1982) (burden of pleading prima facie case for overtime compensation is on employee).
Other Potential Consequences
Generally, damage awards are in the amount of unpaid minimum wage and overtime compensation; liquidated damages; and attorney’s fees and costs. 29 U.S.C.A. § 216(b). Liquidated damages are in the amount of 100% of the unpaid minimum wage and overtime compensation. 29 U.S.C.A. § 216(b). Under New York labor laws, damages are the award amount found to be owed, multiplied by three. NY CLS Lab § 198(3); see e.g. Mercado v. R.F. Pralogistics, Inc., 2014 US Dist. LEXIS 1363. The remedial provisions of the NYS Labor Law Section 198(3) that govern claims for failure to pay minimum wages, the unpaid wages’ recovery multiplier is set at three times the amount due. Duarte v. Tri-County Care, Inc., 2014 U.S. Dist. LEXIS 120139 (E.D.N.Y. Aug. 12, 2014) (Plaintiffs’ awarded treble damages on their motion for summary judgment in a FLSA and NYLL case, but denied liquidated damages under FLSA as the record was insufficient to show clarity on good faith); Torres v. Gristede’s Operating Corp., 628 F. Supp. 2d 447, 466 (S.D.N.Y. 2008) (Court held that class of approximately 3,000 sued Defendants for minimum wage and overtime compensation as unpaid interns, holding that employers owe employees full wages plus one-third under state law).

Rights and Protections For Unpaid Interns

For any individual interested in pursuing an unpaid internship under the assumption that they are participating in a lawful work-trade arrangement, it is important to consult with a legal professional to confirm that you are being treated lawfully. The above-mentioned attempts at legification in several major cities are not yet widespread, and employers can often flout the requirements of the law intended to protect interns. If you have applied for an unpaid position with a startup or another small or new company, be especially conscious of the risk that these businesses present to interns . Without experience in HR and employment law, many small companies may be violating wage and hour laws as well as violating other workplace requirements. Such violations may be the result of ignorance and not a demonstrable desire to violate the law. If you suspect that you may be a victim of the many legal hazards that threaten interns, consult with a lawyer experienced in these areas of the law. Report any suspected employer violations to human resources or other authorities within your workplace if you feel safe to do so. Sometimes, such conduct can be corrected internally from the inside.

Latest Cases and Examples of Unpaid Internships

Selective case studies can be helpful reminders to employers about the dark-side of unpaid internships, especially in the vibrant (and expensive) city of New York. I include a few representative examples for illustrative purposes only. While the legal analysis may vary from what is cited above, these show the range of "lessons" that can be learned by employers.
This lawsuit claimed the popular NYC restaurant used unpaid interns who primarily engaged in manual labor rather than academic training. Faced with the grind of litigation, the restaurant eventually settled the case and agreed to pay $500,000 to settle the claims.
This lawsuit claimed a major popular media company in Times Square utilized unpaid interns and then refused to hire them when they applied for regular jobs. The plaintiffs reached a settlement in this matter and received a class action certification. Settlements in this matter were reached in June 2016.
This suit was brought by former interns against the luxury design and elegance retailer called Ralph Lauren. The plaintiffs sued for failure to pay interns who worked for the company. In this case, the court authorized the release of the names of all individuals who ever interned for the company, which may ultimately yield far greater damages.
Again, while the legal analysis my vary from what is cited above, these show the range of "lessons" that can be learned by employers.

Future Predictions on the Unpaid Internship Landscape in NYC

The future of unpaid internships in New York City, as in the rest of the country, is tied to the outcomes of litigation. As this author has previously discussed in other articles on this blog, a second federal judge has found that the Department of Labor’s six-factor test for determining whether an internship can be unpaid has limited effect. The court found the regulations to be helpful but concluded they could not serve as the definitive regulation . So the judge turned to the primary statute, the SCA, which is unhelpful as it grants industries’ opinions the same authority as the DOL’s opinion letter, and ends with the Court deciding the topic based on its own knowledge and interpretation.
SCA is only the first of many with pending decisions on the horizon, and more litigation is sure to come after those rulings, as wage theft litigation has been prevalent in the past several years. Fair to say, however, is that the landscape of unpaid/paid internships has changed drastically in the past decade. However much employers may bemoan it, the prevalence of litigation is unlikely to make that change any less substantial.