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Interns, Externs & Stages: To Pay or Not to Pay?

By Carolyn D. Richmond, Partner at Fox Rothschild, LLP

With the federal and state departments of labor increasing their investigations of the hospitality industry at record pace, the issue of unpaid interns (including stages, externs and students) is an area of concern. While historically restaurants largely based their hiring and training systems on stages, trails and culinary student interns, there has always been legal risk associated with how these systems were implemented. If these individuals are performing “work” during trails or stages, the wage and hour laws typically require that they be compensated. To many restaurant owners changing these practices will mean added labor costs or redesigning hiring and training programs.

What’s At Risk?

While many restaurant employers are faced with eager applicants willing to “work for free” to learn, an employee cannot waive his/her right to compensation. It takes more than an individual volunteering to work for free and a designation of this relationship as an “internship” to pass legal scrutiny under federal and state wage and hour laws. Unless the appropriate legal steps are taken prospectively, employers face significant penalties and risk beyond simply a back pay award. Unpaid internships, stages or trails could lead to legal liability with respect to employee benefits, workers’ compensation, unemployment insurance, anti-discrimination laws and federal and states taxes. State governments have been hit particularly hard by the economic crisis and have increased their investigations and enforcement actions at record pace. Employers have seen a particular rise in audits for unemployment insurance and state tax contributions. The designation of unpaid “interns” is often tested during these audits.

What is Required for an Intern to be Non-Paid?

A common misconception by many employers is that the federal Fair Labor Standards Act (“FLSA” or the “Act”) (and related state wage and hour laws) exempts “interns” from coverage under the Act. The FLSA, however, is silent on “interns.” Over the years case law has developed which has addressed the issue of “trainees,” interns, externs and similar employees. Before the protections of the FLSA apply, a determination that an intern is an “employee” must first be established. In the United States Supreme Court decision in Walling v. Portland Terminal Co., 330 U.S. 148 (1947), the Court held that the FLSA definition of “employ” does not make all persons employees who, without any express or implied compensation agreement, may work for their own advantage on the premises of another. In reaching its decision the Court utilized an “economic reality” test and took into account the circumstances of their training.

As a result of Walling, a six-criteria test has developed to determine whether interns/trainees are employees who therefore, need to be paid. While the U.S. Department of Labor has consistently stated that all six criteria have to be met, a majority of courts addressing this issue look to the Walling decision for direction. These courts typically apply the economic reality test and primarily focus on the individual’s expectation of compensation and whether the employer received an immediate advantage from the work performed.

The six criteria are as follows:

  1. The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school;
  2. The training is for the benefit of the trainees;
  3. The trainees do no displace regular employees, but work under their close observation;
  4. The employer that provides the training derives no immediate advantage from the activities of the trainees and, on occasion, the employer’s operations might actually be impeded;
  5. The trainees are not necessarily entitled to a job at the conclusion of the training period; and
  6. The employer and the trainees understand that the trainees are not entitled to wages for the time training.

Distinct from the Walling analysis there are a number of state and federal laws that also cover student interns who receive school credit for specific job training that is typically coordinated with school-based learning. Restaurant owners should pay particular attention to whether the training is for the benefit of the intern/stage or for the restaurants—is the restaurant deriving direct revenue from the intern’s work? Additionally, a department of labor investigator will pay particular attention to whether such an individual displaced a regular employee. To ensure compliance with your jurisdiction we recommend that your business consult with legal counsel.

1. Which entity, Property Owner or Restaurateur will be responsible for and liable for the following:

How Should Companies Proceed With Non-Paid Interns?

  1. Assess current programs in terms of each of the above six factors. Review all written policies and procedures related to interns, including but not limited to individual “offer letters.”
  2. If a company is using non-paid trainees during pre-employment training or observation review the program in terms of each of the six criteria. Pay particular attention to ensuring that trainees were not guaranteed employment, and that the employer did not derive a benefit during the training (e.g. the stage was not preparing a significant amount of food that was being sold by the establishment). Take particular note that interns/stages are not displacing paid employees who otherwise would be on the line preparing food for live orders.
  3. Interns, stages and the like should sign a release agreement including the following provisions: a general release of the company from liability; confirm that the six factors are met; and, confirm the intern’s understanding that there is no guarantee of future employment or of pay.
  4. Companies should review their specific state law requirements with respect to workers’ compensation coverage for interns. To the extent permitted by law, the release agreement should include a provision confirming that the intern will be covered by workers’ compensation insurance.
  5. If student interns are being engaged, child labor laws should be reviewed for applicability of age requirements and the specific rules and requirements for academic credit be reviewed with the educational institution.

About Carolyn D. Richmond

Carolyn is co-chair of the firm's Hospitality Practice Group. Her practice consists of representing and counseling clients in the hospitality industry, financial services, retail, and manufacturing sectors on a variety of labor and employment matters. In particular, Carolyn has extensive experience in matters including: wage and hour issues, restrictive covenants, independent contractor status, EEO discrimination claims, employee handbooks and the hiring process, diversity awareness training, union avoidance, and e-workplace (e.g., privacy, blogging, surveillance).

Carolyn is also lead defense counsel on more than a dozen federal and state class actions concerning issues of overtime, tip-pooling, service charge and exemptions.

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