Heads Up: Traps Associated with Hiring Unpaid Interns

by Paul Holtzman and Jill Brenner Meixel

Heads Up

Paul Holtzmanmeixel-jillWith the economy’s ebbs more frequent than its flows during the past decade, private sector employers have tightened their financial belts, leading to a chronically elevated unemployment rate.  As an outgrowth of the tough market, job seekers are often willing to fill gaps between jobs by working as unpaid interns.  Employers welcome the additional help without any corresponding expense.  The interns covet the experience, networking and resume building.

This match between the interests of the private employer and the unpaid intern, however, has raised important legal issues which highlight the often blurred line between the “intern” and “employee” classifications.  In fact, this rise in internships has spurred additional scrutiny by the Department of Labor (DOL) with respect to employers’ compliance with the Fair Labor Standards Act (FLSA), and has resulted in increased litigation by interns against employers for failing to pay minimum wage.  Given the serious consequences of violating federal law and the Massachusetts wage laws, the importance of employers’ implementation of strict guidelines to ensure compliant intern programs is paramount.

Recent Case Law Relating to Unpaid Interns

The growing wave of intern lawsuits has led to some important decisions addressing whether interns must be treated as employees.  A number of courts have held that employers have misclassified employees as interns and therefore violated wage laws by failing to pay minimum wage.

The success of intern plaintiffs was exemplified most recently in the June 11, 2013 decision from the Southern District of New York in Glatt v. Fox Searchlight Pictures, Inc., No. 11-cv-6784, 2013 WL 2495140 (S.D.N.Y. 2013).  There, the court granted summary judgment for plaintiffs, finding that the production company defendant misclassified interns and failed to pay minimum wage.  Plaintiffs were employees, and not interns, because they “worked as paid employees work, providing an immediate advantage to their employer and performing low-level tasks not requiring specialized training,” and the benefits they obtained resulted from “simply having worked as any other employee works, not of internships designed to be uniquely educational to the interns and of little utility to the employer.”  Further, the interns “received nothing approximating the education they would receive in an academic setting or vocational school.”

A well-designed intern program, however, can lead to a different outcome.  Two instructive recent decisions have held that intern plaintiffs were not employees.  In Demayo v. Palms West Hosp., Ltd. Partnership, No. 11-81211, 2013 WL 264691 (S.D. Fla. Jan. 23, 2013), the court determined that an unpaid extern working at defendant hospital was not an employee, as she was required to complete the externship and associated surgeries as a prerequisite to graduation, she understood that the externship would not result in employment, there was no corresponding staff reduction, and the employer monitored her work.  Similarly, in Kaplan v. Code Blue Billing & Coding, Inc., 504 Fed. Appx. 831 (11th Cir. 2013), the court held that the intern plaintiffs were not employees, as they did not displace regular employees, they performed work towards a formal degree program, and defendant supervised and trained plaintiffs in a manner which required it to take time away from the business.

Structuring a Compliant Internship Program

The most critical factor addressed by courts and the DOL in creating a compliant program is whether the intern or the private sector employer obtains the primary benefit from the internship.  If the intern primarily benefits, the non-payment of wages is proper.  If the employer primarily benefits, the intern is an employee entitled to minimum wage.  For an internship program to be compliant, the employer should be able to demonstrate that:

  • Interns do not perform essential functions of the business which provide a benefit to the employer.
  • Without the intern, the employer would not need to hire another employee to fulfill the functions served by the intern.
  • The intern does not have the same or similar job responsibilities as those of a regular employee.
  • The intern’s work is tied to an educational program where it is a requirement of graduation or where an intern receives academic credit.  Put another way, the internship is similar to training provided in an educational setting.
  • The training received during the internship is transferable to future employment at a broad range of employers.
  • The employer does not derive an immediate advantage from the internship and, at times, its operations are impeded.  For example, an employer spends time training or educating an intern in lieu of promoting its business objectives, thus benefiting the intern, and “impeding” the operation of the employer’s business.
  • There is no promise to the intern of future employment.

Massachusetts-Specific Practice Points

In order to ensure compliance with the Massachusetts wage laws when classifying interns, Massachusetts employers should take into consideration specific practice points.

 1.                   Beware of Treble Damages.  The failure to pay the minimum wage triggers a mandatory recovery of treble damages and attorneys’ fees under Massachusetts law.  Thus, if an employee is misclassified as an unpaid intern, recovery against the employer will be significant, and the anticipated financial benefits of bringing on an unpaid intern are long lost.

2.                  Extraterritoriality: Out of State Interns Are Not Necessarily Out of Mind.  Not only does the Wage Act apply to Massachusetts employers and its local employees, but in certain circumstances it also applies to employees of Massachusetts companies working outside Massachusetts.  In the May 2013 case of Taylor v. Eastern Connection Operating, Inc., 465 Mass. 191 (2013), an out-of-state independent contractor sued his Massachusetts-based employer, claiming that he had been misclassified and that he was an employee within the meaning of the Wage Act.  The SJC held that the Wage Act could apply to this employee so long as (a) there was a written contract between the parties providing that any legal action shall be brought in Massachusetts and shall apply Massachusetts law, and (b) Massachusetts law “is not contrary to a fundamental policy of the jurisdiction where the individuals live and work.”  The Massachusetts Appeals Court confirmed these principles in June 2013 in Dow v. Casale, 83 Mass. App. Ct. 751 (2013).  There, the court held that a Florida-based employee of a Massachusetts company had sufficient Massachusetts contacts to pursue a claim under the Wage Act where Massachusetts had the most significant relationship to the employment relationship.

3.                  Parties Cannot Agree to A Deal that Violates Wage Laws.  The Wage Act prohibits an employer from entering into a special contract with an employee exempting the employer’s compliance with the Wage Act.  The SJC’s broad view of the prohibition on special contracts to evade Wage Act obligations was reiterated in the June 2013 decision in DePianti v. Jan-Pro Franchising Int’l Inc., 465 Mass. 607 (2013).  Accordingly, where an individual misclassified as an intern is entitled to minimum wage, an agreement exempting compliance with the Wage Act is unenforceable.

CONCLUSION

Challenges to unpaid internships are on the rise nationwide.  The consequences of failure to pay minimum wage to an “intern” who is determined to be an employee are particularly steep in Massachusetts. With careful attention to the developing law in this area, it is nonetheless possible to design a compliant internship program.

Paul Holtzman, a partner at Krokidas & Bluestein, LLP, focuses on employment and litigation matters, including discrimination, harassment, retaliation and whistleblower claims, and serves as a mediator.

Jill Brenner Meixel, an attorney in Krokidas & Bluestein LLP’s litigation group, represents for-profit and non-profit entities and individuals in commercial, employment, real estate and general litigation matters. 


Workers’ Rights Keep Pace With Corporate Practices: Recent SJC Decisions Expand Reach of Wage & Hour Laws

by Jocelyn B. Jones 

Case Focus

SONY DSCOnly 20 years ago, criminal prosecution was the sole means of enforcing the Massachusetts wage and hour laws. But the enforcement landscape has changed dramatically since 1993, when enforcement authority was transferred to the Attorney General’s Office from the former Department of Labor & Industries, and employees were authorized to initiate private lawsuits, in which those who prevailed were entitled to treble damages and attorneys’ fees, among other remedial measures. A further transformation took place in 1998, when the Attorney General was granted civil citation authority and monetary penalties for violations were enhanced, and with them, greater deterrence was set into play. The Legislature’s addition of these enforcement mechanisms in the 1990s increased  the development of wage and hour related case law, particularly at the appellate level. This rather dramatic expansion of case law in the wage and hour arena has accompanied the crystallization of the viewpoint expressed by the Massachusetts Supreme Judicial Court (“SJC”) that these legal protections are to be interpreted broadly, to ensure that the laws accomplish their underlying goal of guaranteeing that all workers receive their earned wages.  Consistent with this view, two recent SJC decisions underscore the expansive reach of the wage and hour laws’ protections.

LLC Managers & Wage Act Liability

In Cook v. Patient Edu, LLC, et al., the SJC addressed an issue of first impression about whether managers of a Limited Liability Company (“LLC”) may be held personally liable for violations of the Massachusetts Wage Act, M.G.L. c. 149, §148. A former employee brought suit in Superior Court against the LLC, as well as two of its managers, for unpaid wages. Relying on the statutory language and the express legislative purpose of protecting employees from long-term wage detention, the SJC concluded that “[b]ecause a manager or other officer or agent of an LLC…” may be a “person having employees in his service,” if he “controls, directs, and participates to a substantial degree in formulating and determining policy” of the business entity, he may thus be civilly or criminally liable for violations of the Wage Act.

Originally enacted in 1879, the Wage Act has been amended over the years to apply to both private and public sector employers. Among other provisions, the law requires that “[e]very person having employees in his service” must pay employees within the time limits specified within the statute. In addition, the statute expressly imposes liability on corporate officers and agents, as well as certain public officers. Cook’s managers pointed to these references and argued that because managers of LLCs are not specifically identified as employers under the Wage Act, in contrast to corporate or public officers, they cannot be held individually liable. But the SJC disagreed. The Court found that personal responsibility for Wage Act violations is not limited only to these particular categories of individuals. The SJC reasoned that the Legislature has merely provided examples of situations in which an individual may be deemed to be an employer. With that, the SJC remanded the case back to the trial court for further proceedings to determine what role the managers played and whether they were sufficiently involved with the LLC’s financial decisions to render either of them liable as a “person having employees in his service.”

This and other recent Massachusetts appellate decisions considering actions that may implicate workers’ rights under the wage and hour laws suggest that employers should consider that that courts are often likely to interpret statutory provisions in the light most favorable to workers. This reality, coupled with the prospect of individual liability, provides abundant motivation for business leaders to ensure that their employees are paid in full and on time.

Misclassification of Out-of-State Employees

Much has been made of the Massachusetts’ Employee Misclassification Law (or so-called Independent Contractor law), since its significant amendment in 2004. Today, the Massachusetts statute is arguably the most protective employment misclassification law in the country. The statute ensures that individuals who are properly classified as employees are afforded the protections intended for employees, including but not limited to timely payment of wages, minimum wage, overtime, as well as workers’ compensation, unemployment, the right to organize and nondiscrimination protections, i.e., statutory protections not available to independent contractors. Massachusetts has a history of leading the way in enacting laws that favor worker protections, and increasingly other states are following suit. Indeed, many state legislatures have either recently adopted misclassification laws very similar to ours or are currently considering doing so. A recent SJC decision highlights why all employers should be aware of this trend.

In Taylor v. Eastern Connection Operating, Inc., the SJC ruled that the Massachusetts Independent Contractor law applied to couriers who both lived and worked in New York while employed by a Massachusetts-based delivery company, Eastern Connection Operating.  The SJC found that these individuals, who neither live nor work in Massachusetts, are nevertheless entitled to the protections of the Massachusetts Independent Contractor law. How, you may ask, can that be? The decision rests on the “choice-of-law doctrine,” which considers, among other things, the parties’ expressed intent as to which state’s law will govern legal disputes between them and which state has the most stake in the outcome of an lawsuit.

In considering these factors, the Court made two key findings in the case:   1) the employment contracts between the company and the couriers demonstrated that the parties intended to apply Massachusetts law, and 2) because the laws of New York and Massachusetts concerning employment misclassification are quite similar, applying Massachusetts law would not undermine New York public policy. As the Court wrote:

“Under both Massachusetts and New York law, a purported independent contractor who does not enjoy sufficient independence from the hiring party is deemed an employee. States seek to protect workers by classifying them as employees, and thereby grant them the benefits and rights of employment, where the circumstances indicate that they are, in fact, employees. New York simply uses a different mechanism to effectuate this aim than does Massachusetts” (emphasis supplied.)

Importantly, the Court also noted that “where no explicit limitation is placed on a statute’s geographic reach, there is no presumption against its extraterritorial application in appropriate circumstances.” And here, the SJC found that the Massachusetts Independent Contractor law contained no such limitation. For these reasons, the court held that the Massachusetts law applied to the plaintiffs’ claims and that because the plaintiffs could ultimately be found to be employees under Massachusetts law, the Superior Court erred by dismissing their wage claims on the basis that they were independent contractors.

As other states’ misclassification laws continue to evolve to more closely resemble those of Massachusetts, the Taylor case suggests that employers should take care to ensure that they understand the effect of contractual choice of law provisions and that their in-state and out-of-state workers are properly classified. Massachusetts’ more formidable wage protections may well be within their reach.  And other states’ laws are helping them on their way.

The Cook and Taylor decision are but two of many important workers’ rights victories that have been handed down by the SJC over the past decade.  As case law in the wage and hour arena continues to expand, we can expect that the SJC will continue to interpret the law with an eye towards ensuring the goal of protecting workers’ rights so clearly central to the state’s wage and hour laws.

Jocelyn B. Jones is Deputy Chief in the Massachusetts Attorney General’s Office (AGO), Fair Labor Division, a position she has held since 2007. She has served as an Assistant Attorney General in the Division since 2000, and as Special Counsel for Fair Labor Policy since early 2013.

*  The Attorney General’s Fair Labor Division filed an amicus curiae brief on the behalf of the Plaintiff in the Cook matter.  This article represents the opinions and legal conclusions of its author and not necessarily those of the Office of the Attorney General.  Opinions of the Attorney General are formal documents rendered pursuant to specific statutory authority; this article is not intended to be an official Opinion of the Attorney General rendered pursuant to statutory authority.