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The Nightmare That Awaits If You Don't Pay Your Interns

Think you can save a few bucks by not paying your interns? Beware of what happens when you don't follow the rules.
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If you're a non-profit, then it's usually no problem to have unpaid interns. But, if you're out to make a buck or two, unpaid interns can end up costing you a boatload of money, time, and stress. Labor and Employment Law attorney at Pepper Hamilton, Susan Lessack, explained what really happens when a current or former intern hires a lawyer and makes a claim that they were illegally unpaid.

It's important to note that all of the following conditions must be met in order to be a legal unpaid internship.

  • 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.
  • The internship experience 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 the time spent in the internship.

If your company doesn't meet just one of these, you could be on the hook for a whole lot of back pay and a boatload of legal costs.

Class actions

Since these attorneys are likely to be operating on the condition that they get paid only if they win, they are going to want to expand the lawsuit from your one, unhappy intern, to as many unhappy interns as possible--over the past two years. If the courts determine you willfully violated the law on unpaid interns, they can look back three years. This is called creating a class action.

"It's a very low threshold," Lessack explained. "Basically all the plaintiffs have to show is that they are similarly situated to a class of people who are subjected to the same policy. There is no magic number, but more than one or two could be a class. The goal for the attorneys is to have as big of a class as possible." Lessack says she doubts attorneys would work to certify a class of three, but they certainly could. Now, as to whether or not the courts will declare all your interns a class or not, depends on if they did similar work and which judge you get. But, because of the low threshold, it's not an unlikely occurrence.

For instance, Warner Music just had 3,000 interns certified as a class, but the courts declared that Madison Square Garden interns all had different enough responsibilities that they couldn't be considered a class. If the courts do allow a class to go forward, one nice thing for employers is that if the court conditionally certifies the collective action, the lawyers can send a notice to all potential plaintiffs to opt in. Most class action lawsuits are "opt out" situations, but under the Fair Labor Standards Act, Lessack said, the interns have to affirmatively opt in.

Fighting back

Your employment attorney will attempt to get the class decertified. It's expensive to sue, so the plaintiff's attorneys don't want to go to the expense of a lawsuit and only be awarded a few dollars, even if they win. But, even if you win this point and the class is decertified, it doesn't mean the case is over. Individual interns can decide to move forward anyway, which means you could be fighting six little lawsuits instead of one big one.

Discovery

In discovery, you'll get into each intern's circumstances. The plaintiff's attorney will want to know exactly what they were doing. For instance, did they fill in for people who were on summer vacation? Are they getting class credit for their work? Are they doing actual work that benefits the company, or is it more like gathering information for a big paper at the end of the semester?

You may or may not have good records. For instance, you'll need to show a record of the hours worked. If you don't have this, because you weren't planning to pay the interns in the first place, the court will strongly consider what the interns said they were working. Remember, it's not only a straight hourly wage that you'll have to pay if you lose, you"ll have to pay any appropriate overtime.

Settlement

At the end of the discovery phase, it will probably be pretty obvious to you if your company has violated the law, in which case you'll probably be settling. And it's not just about paying the interns, it's also about paying the lawyers. Lessack points to the recent Elite intern lawsuit. "There was a $450,000 settlement for around 100 interns," she said, "But the interns received between $700-$1,750 each (except for the class representatives) which means there were a whole lot of other expenses." It certainly would have been cheaper to pay the interns minimum wage in the first place.

Going to court

If you decide you have a good chance of winning, you can head to court. Even if you do win at this point, you're still out a lot of money because you do have to pay your attorneys. Additionally, you and numerous members of your staff will have to work on the lawsuit, taking time away from the office to testify and to be in depositions, and to do general work regarding the lawsuits. And not only will you be paying your HR manager for her time testifying, you'll be paying your lawyer every step of the way.

The Upshot

If you win, you don't have to pay the former interns, nor their attorneys, but you still have to pay yours. This is a case where winning is certainly cheaper than losing, but it's not cheap.

Losing, of course, is a worst case scenario. Not only will you need to devote internal resources to the case, you'll need to fork over back pay for interns, including overtime. There's also interns' attorneys fees and your own attorneys fees. 

Are you at risk?

If you pay all your interns at least minimum wage, and overtime where applicable, the answer is no. Some companies try to pay a stipend instead of an hourly wage. If you go this route, you need to make sure that the total stipend is equal to or greater than what the intern would have earned, had they been paid minimum wage, including over time.

Some industries are more likely to have problems, according to Lessack. For instance, the creative industries, such as film or magazine publishing have a tradition of hard working unpaid internships, so attorneys are looking out for those.

You can lower your risk by carefully establishing an internship program that complies with all six standards, and get the plan approved by your labor and employment law attorney. And, of course, you can eliminate your risk by paying your interns minimum wage, or more. 

Last updated: Jun 30, 2014

SUZANNE LUCAS | Columnist

Suzanne Lucas spent 10 years in corporate human resources, where she hired, fired, managed the numbers, and double-checked with the lawyers.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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