Employers Should Take Care When Using Unpaid Interns

In a world where the United States’ economy is attempting to recover from a recession and the work force is saturated, some for-profit entities may receive inquiries from individuals about working for them as unpaid interns. For-profit entities should be aware that allowing individuals to work unpaid internships may run afoul of the Fair Labor Standards Act (“FLSA”) if not done pursuant to the narrow exclusion to the FLSA carved out by the Supreme Court.

By way of background, the FLSA places on employers the requirement of paying to all individuals they employ minimum and overtime wages. Accordingly, if an individual is an employee of the employer the FLSA applies. The FLSA defines broadly the term “employ” to include “‘to suffer or permit to work’ and . . . defines ‘employee’ as ‘any individual employed by an employer.’” Walling v. Portland Terminal Co., 330 U.S. 148, 152 (1947) (quoting 29 U.S.C. § 214 (3)(g)). Conceivably then, all unpaid internship could fall under such a broad definition. The Supreme Court has instructed, however, that the FLSA “was obviously not intended to stamp all persons as employees who, without any express or implied compensation agreement, might work for their own advantage on the premises of another.” Id. In other words, the FLSA “cannot be interpreted so as to make a person whose work serves only his own interest an employee of another person who gives him aid and instruction.” Id. Thus, for-profit entities are not subject to the requirements of the FLSA when they hire an intern whose work serves their own interest and only receives aid and instruction from the for-profit entity.

For-profit entities should note that the exclusion is not dependent on statements by individuals and/or the for-profit entities that the individual is working on a “volunteer” basis. As the Supreme Court has stated, “[i]f an exception to the [FLSA] were carved out for employees willing to testify that they performed work ‘voluntarily,’ employers might be able to use superior bargaining power to coerce employees to make such assertions, or to waive their protections under the [FLSA].” Tony & Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 302 (1985). So when does the exclusion apply to unpaid internships?

Recently, the Wage and Hour Division of the DOL established the following test to assist for-profit entities in making the determination of whether the exclusion applies to individuals working unpaid internships. If all of the following criteria apply, the trainee or students are not employees within meaning of the Act:
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. (Internship Programs Under The Fair Labor Standards Act).

The test is essentially one of “economic reality” that should be employed on a case by case basis. See Tony & Susan Alamo Found., 471 U.S. at 301.

In sum, for-profit entities should be careful when considering whether to allow an individual to work an unpaid internship. Failure to adequately consider the “economic reality” of the relationship between the intern and the for-profit entity prior to the commencement of the relationship could result in unintended losses for the employer.

Supreme Court Issues Potentially Signficant ERISA Decision

In CIGNA Corp. v. Amara, --- U.S. ----, 2011 U.S. LEXIS 3540, 50 EB Cases (BNA) 2569 (2011), CIGNA Corporation changed the pension plan for its employees. The employees challenged the change on the ground that “CIGNA had failed to give proper notice of changes to their benefits, particularly because the new plan in certain respects provided them with less generous benefits.” The District Court sided with the employees and ordered that the new plan be reformed finding legal authority to do so in Section 502(a)(1)(B). The Second Court affirmed the District Court’s decision and the parties appealed to the Supreme Court. The Supreme Court granted certiorari on one issue, “whether a showing of ‘likely harm’ is sufficient to entitle plan participants to recover benefits based on faulty disclosures.”

Before reaching the question on which it granted certiorari, the Supreme Court considered, based on CIGNA’s briefing, whether Section 502(a)(1)(B) authorized the relief the District Court awarded. The Supreme Court held that it does not. Rather than stopping there, the Court went on to state, in dicta, that the relief the District Court awarded could be provided under Section 502(a)(3). The Supreme Court reasoned that the relief provided by the District Court closely resembles three other traditional equitable remedies: reformation; equitable estoppel; and surcharge. Importantly, the Supreme Court opined that surcharge was a form of monetary compensation for a loss resulting from a trustee’s breach of duty, or to prevent the trustee’s unjust enrichment. The further stated, “insofar as award of make-whole relief is concerned, the fact that the defendant in this case, unlike the defendant in Mertens, is analogous to a trustee makes a critical difference.” Nevertheless, the Supreme Court remanded the case to the District Court to revisit its determination of an appropriate remedy for the violations of ERISA it identified.

Justice Thomas joined Justice Scalia in concurring in the judgment. Justice Scalia emphasized, however, that neither the District Court nor the parties to the case squarely addressed whether relief was available under 502(a)(3). Thus, Justice Scalia reasoned, “[t]he Court’s discussion of the relief available under [Section] 502(a)(3) and Mertens is purely dicta, binding upon neither us nor the District Court. The District Court need not read any of it—and, indeed, if it takes our suggestions to heart, we may very well reverse.” The Supreme Court’s decision, therefore, places in doubt what relief is available under 502(a)(3) and exactly under what circumstances. These issues will likely be clarified by the lower courts in the time to come.