Interns: Employees or Not

By Alan S. Levins and R. Brian Dixon
     
It seems like a good idea: Your client's son is looking for a summer job and is willing to intern at your firm without pay just to have something to put on his résumé. You're thinking: This is too good to be true. You can please a client and get some needed help at the same time.
      But there's a catch. Internships may sound attractive, but they raise a hornet's nest of legal issues. To begin with, is an "intern" an employee or not? The answer to that question may trigger substantial liability, beginning with wage-and-hour considerations.
      An intern may be an unpaid volunteer, but an employee is entitled to earn the minimum wage (29 U.S.C. § 206 (a)(1); Cal. Lab. Code § 1182.12). If you don't pay those wages, you might wind up on the wrong end of a complaint for compensation filed by the labor commissioner's office. You could also incur penalties (29 U.S.C. § 216; Cal. Lab. Code § 2699). In addition, if your intern is really an employee, he or she may be eligible for a host of employee benefits (health insurance, for example). And don't overlook that I-9 form. That's the one you must file to verify that you know the employee is in the United States legally and entitled to work. If you are supposed to file it and fail to do so, you can be audited and assessed a civil penalty (8 C.F.R. § 274a10(b)(2)). There's also the matter of overtime. Employees who work more than 40 hours a week are entitled to time and a half for those additional hours (29 U.S.C. § 207(a)(1); Cal. Lab. Code § 510).
      Given the potential consequences, it is crucial to determine whether a person is an intern (or "trainee") as opposed to an employee. Resolution of this issue will not turn solely on the parties' agreement, whether written or oral. It will depend on a variety of other factors, which can change depending on whether state or federal labor law applies and on the court that addresses the issue.
      If you believe that federal law applies if the business conducts interstate commerce, while state law controls truly in-state enterprises, think again. The Fair Labor Standards Act (FLSA) (29 U.S.C. §§ 201219) winds up applying to anyone who takes a breath near interstate commerce, which includes just about everyone (29 U.S.C. § 203(b)). Your intern--if deemed to be an employee--may have rights under the FLSA as well as California law (see Cal. Lab. Code §§ 510, 1182.12). You would be wise to learn about both.
     
Federal Law
      An internship implies training. Not surprisingly, the most frequently referenced consideration in determining whether an individual is a nonemployee intern--as opposed to an employee, who is entitled to the minimum wage and overtime pay--is whether the training received is predominately for the intern's benefit. In the seminal case on the subject, the U.S. Supreme Court found trainee railroad brakemen not to be employees when they worked under the immediate supervision of regular brakemen, did not replace the railroad's employees, and received training primarily for the trainees' benefit ( Walling v. Portland Terminal Co.,330 U.S. 148 (1947)).
      In Walling, the Supreme Court noted that the definitions of employ and employee were very broad in the Fair Labor Standards Act (330 U.S. at 152153). The Court went on to delineate the rationale, still used, to determine whether trainees must be considered employees.
      The Court said that the FLSA cannot be interpreted to make a person an employee if the person's work serves only his or her own interest. "Had these trainees taken courses in railroading in a public or private vocational school, wholly disassociated from the railroad," said the Court, "it could not reasonably be suggested that they were employees of the school ..." (330 U.S. at 152153). Nor, continued the Court, could the trainees "have been considered as employees of the railroad merely because the school's graduates would constitute a labor pool from which the railroad could later draw its employees." The FLSA, the Court decided, "was not intended to penalize railroads for providing, free of charge, the same kind of instruction at a place and in a manner which would most greatly benefit the trainees" (330 U.S. at 153).
      Some federal courts have reasoned that a true intern's training should, overall, impede the employer's operations more than facilitate those operations. Thus, in a sales context, for example, an individual may be considered an intern during a training program because that person receives close supervision and does little selling. But the intern may thereafter be deemed an employee if the supervision declines and the amount of time spent selling increases. (See Marshall v. Allen-Russell Ford, Inc., 488 F. Supp. 615 (E.D. Tenn. 1980); Donovan v. American Airlines, Inc., 686 F.2d 267 (5th Cir. 1982).)
      The federal Department of Labor (DOL) has distilled six factors that are considered helpful in distinguishing between a trainee (intern) and a true employment relationship. For a trainee:
      1. The training is similar to that which would be given in a vocational school.
      2. The training is for the benefit of the trainee.
      3. The trainee does not displace a regular employee and works under close observation.
      4. The training provider derives no immediate benefit from the trainee; in fact, its operations may be impeded.
      5. The trainee is not entitled to a job at the completion of the training.
      6. The employer and the trainee understand that the trainee is not entitled to wages; however, a stipend may be permitted. (Employment Relationship/ Trainees, U.S. Dep't of Labor Op. Ltr. Wage and Hour Adm. WH-229.)
      A number of other factors have also been considered, including whether the individual is enrolled in school, taking classes concurrently with working, receiving academic credit for the work being performed, or paying tui-tion; whether the work is required for a degree; and whether school faculty are on staff. (U.S. Dep't of Labor Op. Ltrs. Wage and Hour Adm. WH-185, WH-423.)
      Will courts adhere to the DOL's six factors? That depends on the court. In Reich v. Parker Fire Protection District (992 F.2d 1023, 1029 (10th Cir. 1993)), firefighter trainees met five of the six criteria but were promised employment before they completed the training, which is inconsistent with the DOL's fifth intern criteria. Nevertheless, the court ruled that the trainees were not employees, and thus were not protected by the FLSA (992 F.2d at 1025).
      In another case, a court came to the opposite conclusion, by focusing on just one of the six factors (McLaughlin v. Ensley, 877 F.2d 1207 (4th Cir. 1989)). The Fourth Circuit held that the company's weeklong "orientation period" created an employment relationship requiring the payment of the minimum wage and overtime under the FLSA. It did not rely on the Department of Labor's six factors, concluding instead that the key issue was "whether the employee or the employer is the primary beneficiary of the trainees' labor" (877 F.2d at 1209). The court noted the "limited and narrow kinds of learning that took place" and the fact that the applicants were "simply helping to service a route," and concluded that the instruction they received did not "rise to the level that one would receive in a general, vocational course in 'outside salesmanship.' " The court decided that the company obtained more advantage from the relationship than the workers did (877 F.2d at 1210).
     
What About Antidiscrimination Laws?
      Your legal worries, however, do not begin and end with wage-and-hour issues. To complicate matters, other statutes besides the FLSA may come into play, thus prompting courts to invoke still other factors not mentioned in the DOL standards. Title VII, which prohibits employment discrimination, is just such a statue (see 42 U.S.C. § 2000e). In one case, a paid stipend led the court to conclude that a research assistant was an employee under Title VII (see Cuddeback v. Florida Bd. of Education, 381 F.3d 1230, 1234 (11th Cir. 2004)). The court held that the term employee is construed with general common law concepts in mind, taking into account "the economic realities of the situation" (381 F.3d at 1234).
      Yet in Hall v. Delaware Council (780 F. Supp. 241 (D.C. Del. 1992)), the court appeared to reach the opposite conclusion. In Hall, the fact that the volunteers received reimbursement for certain work-related expenses as well as free admittance to an annual company luncheon was insufficient to make them employees under Title VII.
      In St. Germain v. Simmons Airline (930 F. Supp. 1144 (N.D. Tex. 1996)), the court held that under the "economic realities" test, the plaintiff was not an employee under Title VII because, having received no remuneration, the plaintiff could not be considered dependent on the company.
      And, turning full circle, the economic-realities test has been used to assess the employment status of trainees under the FLSA. In Marshall v. Baptist Hospital (473 F. Supp. 465 (M.D. Tenn. 1979) (judgment reversed on different grounds)), the court, applying the economic-realities test, found that trainees in radiologic technology at a hospital were employees within the meaning of the FLSA (473 F. Supp. at 477). The court centered its decision on the fact that the hospital received the primary benefit from the training program. The court considered that, within a relatively short time of commencing their training, the trainees became functioning members of the X-ray department and "performed all duties required of them in a fashion that displaced regular employees and under conditions in which the hospital obtained a substantial economic benefit from their services" (477 F. Supp. at 473).
      In Chellen v. John Pickle Co. (344 F. Supp. 2d 1278 (N.D. Okla. 2004)), the court exhaustively analyzed both the economic-realities test and the DOL's six factors in determining that the trainees at issue were employees.
      The essential lesson under these federal cases is that you should know the DOL guidelines, follow them, and create a relationship that under the economic-realities test is a true internship designed to benefit the interns and not the employer.
     
California Law
      The California Department of Industrial Relations--and specifically the Division of Labor Standards Enforcement (DLSE) within that department--has taken the position that employers should follow several additional requirements that stretch beyond the DOL's six criteria. The additional requirements are:
      7. The training should be part of an educational curriculum.
      8. The students should not be treated as employees for such purposes as receiving benefits.
      9. The training should be general in nature, so as to qualify the students for work for any employer, rather than designed specifically as preparation for work at the employer offering the program.
      10. The screening process for the program should not be the same as for employment.
      11. Advertisements for the program should be couched in terms of education rather than employment. (See generally Cal. Div. of Labor Standards Enforcement, Opn. Ltrs. 1998.11.12 and 1996.121.30, available at www.dir.ca.gov/dlse/ DLSE_OpinionLetters.htm.)
      The compulsory status of these guidelines is somewhat uncertain in light of Tidewater Marine Western, Inc. v. Bradshaw (14 Cal. 4th 557 (1996)), which held that when the labor commissioner purports to publish guidelines, the agency must comply with the state's Administrative Procedure Act (APA). (14 Cal. 4th at 570; see Cal. Gov. Code §§ 1134011342.4).)
      However, the court also upheld the labor commissioner's authority to provide parties with advice letters that are not subject to the rule-making provisions of the APA. Courts may accord deference to such opinion letters (see Yamaha Corp. v. State Board of Equalization, 19 Cal. 4th 1 (1998)). Therefore, the factors set forth in opinion letters issued by the DLSE are important and must be considered when advising clients on this issue.
      Taking California's additional factors into account, it is safe to say that if an intern is working as part of an academic program and does not replace an existing employee or perform an employee's work, and if the training is primarily for the intern's benefit, you stand a better chance of the intern avoiding employee status.
     
Workers' Comp
      Suppose that intern of yours is injured on the job? Is he or she entitled to workers' comp?
      The issue is governed entirely by state law. In one case, a student intern at a hospital suffered a back injury. The Workers' Compensation Appeals Board initially held that she was not an employee and thus it denied benefits. The court of appeal reversed, holding that the student intern, who had to complete practical training in order to earn a diploma, was indeed an employee of the hospital even though the student was not otherwise paid for her services. (Barragan v. Workers' Compensation Appeals Board, 195 Cal. App. 3d 637 (1987); see also Cal. Lab. Code §§ 3352, 3357.)
      An intern who is later deemed to be an employee poses a variety of workers' compensationrelated-risks, including liability for additional workers' compensation premiums (see Cal. Lab. Code § 3602(a)). And even if an intern really is a nonemployee, he or she may have tort claims against the employer should an injury occur at the workplace (see Cal. Lab. Code §§ 3706 and 3715)).
     
Putting It All Together
      Don't get discouraged about hiring interns. A true nonemployment training program--what many of us commonly call an "internship"--can be created, but it requires careful planning. Make sure the program primarily benefits the intern, not the employer. Assisting an individual's academic course of study by providing a structured program in which the individual is rotated through several departments to provide a range of practical experience can be rewarding for the individual and for the company.
      If you're thinking of taking on a client's son or daughter on the premise that he or she will be able to replace a file clerk for the summer, proceed with caution. If you pay the minimum wage and overtime and cover the intern for workers' compensation, you won't need to worry about a possible wage claim and the penalties, interest, and other potential remedies. If your client's child will return to school in the fall, the voluntary return to campus will make moot any claim for unemployment benefits. Of course, if your client's child is deemed to be an employee, he or she will be protected by the California Labor Code, antidiscrimination statutes, CAL OSHA, and the like--but remember that I-9 form. Your apprentice must first establish the right to lawfully work in the United States.
     
Alan S. Levins and R. Brian Dixon are senior shareholders in Littler Mendelson's San Francisco office, where they concentrate on labor and employment law.
     

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