Labor and Employment Law Blog

Unpaid Internships - Common but Illegal

A common, but frequently unreported labor violation is the use of unpaid interns in violation of minimum wage and possibly overtime laws.  The scenario is fairly typical: a company offers an opportunity to ‘break into the business’ in exchange for the intern working for free.  You see many examples of this in the entertainment industry.  In fact, despite jobs sites such as Craigslist prohibiting the posting of unpaid “internships,” you can almost always find one posted.  Some companies try to get around the law by requiring that the internship be part of a college program.  However, there is no exception to the law allowed just because the “intern” may receive college credit.  While it might be possible for a college credit course to require some type of training for a company, the vast majority of these internships are in violation of Federal as well as California labor laws.

In order to qualify as an unpaid internship, the requirement is simple:  no work can be performed that is of any benefit at all to the company.  That is, you can not deliver mail, sort files, file papers, organize a person’s calendar, conduct market research, write reports, watch television shows and report on them, read scripts, schedule interviews, or any other job that assists the employer in any way in running their business.   

Examples of internships that have been legal are where the job is a “dummy” job.  For example, there was a case of an internship for working on a train.  The company had the interns driving trains from one end of their yard to the other under close supervision.  The moving of the trains was completely unnecessary and was just being done to train the potential employees. As such, no “work” was being performed, so the internship was legal.  On the other hand, if the workers were moving the trains as part of the regular re-positioning of the trains, but were still performing it under close supervision, they would be required to be paid for the work.

Thus, if in the entertainment industry, you read scripts that have already been read and rejected by the company and the company will not use your input in any way but is simply instructing you on how to read scripts, then they would not need to pay you for your time.  However, if you read the scripts and perform any work that is used by anyone in the company to make any type of decision about that script, then you must be paid for your time.

Another common type of unpaid internship is in martial arts schools that require students to teach classes in order to receive additional belts.  This practice is illegal unless the student is paid for the time.  Because the act of teaching a class is work that benefits the employer, it must be paid for.   

The U.S. Department of Labor has outlined a list of criteria that ALL must be met in order for an internship to be unpaid.

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 trainee;
3. The trainees do not displace regular employees, but work under 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 may actually be impeded;
5. The trainees are not necessarily entitled to a job at the completion of the training period; and
6. The employer and the trainee understand that the trainees are not entitled to wages for the time spent in training.

From the above list, #4 is really the key one – all the others will follow from whether the employer derives any immediate benefit from the activities.

The main reason that you do not see more lawsuits regarding unpaid internships is that the interns are very unlikely to sue.  In most cases, they fear being blacklisted, as they will undoubtedly need to use the internship as a reference to get any future work.

This is where California’s Private Attorney General Act comes in.  Because this law allows anyone at the company to sue for labor violations, even if they themselves are not affected by the violation, it is now possible for these companies to be brought into compliance with the law.  If you work for a company that uses unpaid interns and would like to put an end to this illegal practice, you should consider bringing a Private Attorney General cause of action.

Of course, if the internship is work, not only minimum wage must be paid, but also California overtime (8 in a day / 40 in a week) as well as meal and rest breaks.

Another Non-Compete Thrown Out

In VL Systems v. Unisen, a Californian Court of Appeals has thrown out another type of non-compete agreement.  The general rule in California has been that an employer could not forbid an employee from working for other companies, including competitors, as long as no trade secrets were in jeopardy.  However, savvy employers have long used a loophole to get around this rule, especially in the "consulting" business. In this arrangement, an ultimate client would hire a consulting company to provide temporary labor.  The consulting company would then hire an employee and pay her a fraction of what they were getting paid by ultimate client.  The employee would work at the ultimate client site, frequently along side other employees of ultimate client.  While the consulting company might try to put a "non-compete" agreement in the contract with the employee, many employees know that these non-compete agreements are illegal.  Instead, the consulting company would put it in the contract with the ultimate client.  That is, if ultimate client hired one of consulting companies employees, they would then have to pay a significant amount of money.  Thus, not a "non-compete" because it doesn't actually prevent the employee from working wherever she wants -- or so the argument went. 

The facts of this case are a little different from the general scenario outlined above, so the holding may be a little more limited than most employees of consulting companies would hope for.  In this case, the employee (David Rohnow) worked for the consulting company, but worked on projects other that Star Trac's (ultimate client). Star Trac used the consulting company to provider workers, but never used David directly.  They did have a clause in their contract that required a significant penalty is they hired any of consulting company's employees.  Star Trac posted a job listing on the internet, David applied and was hired.  The consulting company then sued for the $60,000 penalty that they felt they were due.

The court threw out the clause in the contract that required a penalty to be paid in the event that ultimate client hired any of consulting company's employees.  It held that such a clause was simply a non-compete clause dressed up differently.  That is, it does not matter how a non-compete clause is structured. The courts will look at the end result, and if it looks like a non-compete, it will be treated as a non-compete.

Employees should be cautioned that the court did make note that it was important that (1) Employee never worked directly for ultimate client while at consulting company, (2) that Employee was only with consulting company for a short period of time, and (3) that no time or money was spent on training Employee for these particular jobs.  Thus, it is likely that non-hire clauses that are designed to prevent any of the above three issues from occurring may still be enforceable.

As a side note, it appeared that consulting company was paying employee on a salary basis in violation of California overtime laws, but that was not the subject of this lawsuit. 

Changes in Federal Overtime Law for Truck Divers

Back in August of 2005, Congress passed a law entitled  the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU).  Among the myriad of provisions, there was a the following:

(a) Definitions Relating to Motor Carriers. — Paragraphs (6), (7), (12), and (13) of section 13102 of title 49, United States Code, are each amended by striking "motor vehicle" and inserting "commercial motor vehicle as defined in section 31132."

At first, these seems like a minor changes of little consequence.  The law only sets out what types of operations the Department of Transportation can regulate, and the DOT has only ever regulated commercial motor vehicles.  That is, the DOT had never previously exercised its authority to regulate non-commercial vehicles. Thus, from the DOT's point of view, that particular section was a non-event. However, the Department of Labor has a very different point of view.

It has long been the law that truck drivers were either subject to regulation by the Department of Transportation or the Department of Labor, but not both.  This law removed the ability of the DOT to regulate vehicles of less than 10,001 lbs, and thus would subject the drivers of these vehicles to Department of Labor regulation -- and the drivers would be entitled to overtime.

Prior to the 2005 law, the idea that the motor carrier exemption could extend to any vehicle had created some unfortunate results.  For instance, in Friedrich v. U.S. Computer Services, 974 F.2d 409 (3rd Cir. 1992), the motor carrier exemption, commonly called the "truck driver exemption," was applied to field service engineers who provided computer hardware and software to customers engaged in the cable television business. Apparently, the engineers drove their personal vehicles across state lines but were carrying tools and replacement parts. This was sufficient to make them "private motor carriers," and thus exempt from overtime.  Since then, employers have been trying to apply this exemption to anyone who ever drove across state line carrying anything at all (pens, pencils, papers, etc.).

Since the enactment of the SAFETEA-LU, the DOL has taken the position that drivers of vehicles with a gross weight rating of 10,000 lbs or less are entitled to overtime pay, even if they driver interstate.  The DOL has posted its position on the Motor Carrier Exemption on the web.

In addition, courts have started to agree with the DOL.  For instance, in Musarra v. Digital Dish, Inc., 454 F.Supp.2d 692 (S.D. Ohio 2006), the court notes:

Before August 10, 2005, the FLSA's MCA exemption applied to most employees who drove any type and size of motor vehicle in interstate commerce. After the passage of SAFETEA-LU, however, vehicles that were previously exempt under the old definition of "motor vehicle" are no longer exempt because they are not "commercial motor vehicles." See Felhaber, Larson, Felon, Vogt, P.A., Big Changes in Exempt Status for Drivers and Mortgage Loan Officers, 16 No. 4 Minn. Emp. L. Letter 2, at *2 (June 2006).

Other courts have also been willing to follow this holding.

Unfortunately, these interpretations by the courts have not gone unnoticed by Congress.  In the 109th Congress, H.R. 5576 attempted to undo the amendment and revert the FLSA to its previous status. This bill failed to pass the Senate, and it does not seem that Congress has expressed an interest in picking it back up this year.  As such, a confusing and much abused loophole in the Motor Carrier Exemption seems to finally have been closed.

I have posted a good reference on the current overview of California truck driver overtime on my "got overtime" website.

Court Overturns DLSE on Administrative Exemption for Computer Professionals

In the case of Eicher v. Advanced Business Integrators, Inc. (ABI), a California Court of Appeals helped to define what types of positions are covered under California's Administrative Exemption.  There are very few cases that cover computer professionals that reach the appellate court level, which makes this case very important. 

The case is also interesting because it shows the problems with taking such a case to the Division of Labor Standards Enforcement, also known as the California Labor Board. The employee, Eicher, worked as a  "Senior Consultant" for ABI in which he regularly visited customer sites to help them implement and troubleshoot ABI's automated payroll software.  He also trained people on how to use the software, once it was installed.

The Labor Board ruled against the employee.  There is a common misconception that the Labor Board is "pro employee."  This is simply not the case.  Especially in complex cases involving the technology field, the Labor Board is anything but "pro employee."  The problem created by a loss at the DLSE is that if the employee appeals an unfavorable decision and looses, he will be required to pay the other side's attorney fees.  Fortunately, the employee won in this case, and the employer had to pay his $40,000 attorney fee bill.  However, had he lost, he likely would have been devastated by having to pay their bill.

In any case, the court held that the Administrative Exemption was not applicable in this case because the employee was not engaged in "non-manual work directly related to management policies or general business operations of ABI or its customers."  In an important part of the analysis, the court held :

While he was required to learn of the customers’ management policies and business operations in the course of his work, in order to ensure that the product met the needs of the customers, he did so only to implement the software in the most beneficial way for the customers and not to participate in policy-making or alter the general operation of the business.

This is a crucial determination, as defense attorneys have been using this mis-interpretation of the exemption for years.  The court clearly ruled that the administratively exempt employee must participate in policy-making or alter the general business operations -- not simply install and configure software.

The court went on to specifically reject that the "[i]nstallation and troubleshooting are also exempt administrative activities." 

The court concluded: "Eicher was an employee who engaged in the core day-to-day business of ABI. He had no personal effect on the policy or general business operations of ABI or its customers."  Which has been my position on the Administrative Exemption for Computer Professionals for some time.

Murphy v. Kenneth Cole Productions, Inc.

The California Supreme Court has decided the case of Murphy v. Kenneth Cole Productions, Inc.  This case held that pay for employees missing meals is a "wage" rather than "penalty."  While this may seem like some arcane legal distinction, the difference is quite dramatic.  On its face, the case was about whether Meal Premiums could be sued for going back 1 year or 3 years.  The court held they could go back 3 years, but that is just the start of what the decision means, and that is what I will talk about in this blog.  A copy of the decision can be found at the California Supreme Court Website.  I will also point out that a video broadcast of the entire oral arguments is also available. This is one of only a few cases that the Court has published a video of oral arguments.  I had requested to video tape the proceeding with my own camera crew, but the request was denied by the Court.  I am glad they put this video online as it is very informative.

While the general consensus from talking to other employment attorneys prior to the decision was that Kenneth Cole would win, the Court did the right thing and held for Murphy.   Although the Defendants probably don't see it this way, this was actually the best decision for employers.  Had the Court held the other way, the biggest problem is that it would have criminalized having employees work through lunch.  That is, if the Meal Premium was a penalty, then it would be because the conduct was illegal.  To see why this would be a problem, we can look at how overtime is treated.  Overtime is treated as a wage, rather than a penalty.  Thus, an employer can require an employee to work overtime, provided he pays the additional premium.  The employee can not refuse to work overtime as overtime work is legal -- as long as it is paid.  An employee can refuse to work overtime (or any time for that matter) if the employer refuses to pay the proper wage.  Thus, if an employee is fired for refusing to work for less than minimum wage, this is a wrongful termination.  However, if an employee refuse to work overtime and the employer has a policy of paying for such overtime, the termination is legal. 

Now, if meal breaks were required and any violation of them was illegal, then an employee could not be terminated for refusing to work through a meal break.  In addition, any employer who required an employee to work through a meal period would be guiltily of a misdemeanor under Cal. Lab. Code § 553. Thus, had the Court decided in Kenneth Cole's favor, I think you would have a large number of issues around the illegality of working through meal breaks.

As it is, the Court held that, like overtime, you need simply pay the employee an extra amount of money, and everything is fine.  I think think makes a lot more sense.

Now, the next big thing that the ruling will bring in is that because the Meal Premium is defined as "wages," then it must be used in computing the employee's regular rate of pay for overtime purposes.  The general rule is that all wages must be included in computing your regular rate of pay, and your overtime is based upon this computed rate -- not the actual rate you are making at the time of the work.  For example, if you make $10 per hour and work 50 hours in a week (5 days, 10 hours), you normally get $10 Straight Time, and $15 Overtime.  However, if you miss a meal on 2 of the days, then you get and extra $20 for the week.  Thus, you total non-overtime earning for the week are $520 (50 hours at straight time + $20 in meal premiums -- overtime premiums are excluded from the regular rate). Thus, your new regular rate of pay is $520/50 = $10.40 per hour.  Thus, when you work overtime, you are entitled to $15.60.  As you worked 10 hours of overtime, you are also entitled to an additional $6.00 in overtime pay as a result of your meal premium.  For a general discussion about California Overtime Law and how it is applied, please see my website www.gotovertime.com

Another major issue is that because the premium is considered a wage, it is likely that employees will be able to sue going back a period of 4 years under the unfair competition law.  Unfortunately, employees who take their claims to the California Labor Board (see this article on why this is usually not a good idea), will only be able to go back 3 years.

I'll cover some more of the issues raised by this case in the coming weeks.  Also, if you are an attorney in labor and employment law and have an interesting trial or oral arguments coming up, please let me know as I would like to video tape the proceedings.