Unpaid Internships -- The Hidden Dangers

June 29, 2009

By Louis P. DiLorenzo

 

It is that time of year when employers are approached with requests from college students for unpaid internships. The benefits of the symbiotic relationship are obvious. The internship provides the student with an opportunity for real life experience, resume enhancement and perhaps a step towards a paying position with the employer after graduation. The employer receives the chance to evaluate a new applicant, at no cost. What is not so obvious are the legal risks.

One area of risk is the Fair Labor Standards Act (“FLSA”) which requires non-exempt employees to be paid the minimum wage for all hours worked. Non-exempt employees must also receive 1.5 times their regular rate of pay for all hours in excess of 40 in a workweek.

The $64,000 question, however, is whether the unpaid intern is an “employee” within the meaning of this and other federal and state statutes. The Department of Labor (“DOL”) has adopted six criteria for evaluating this issue. They are as follows: 

  1. he internship should be similar to the training given in a vocational school;
  2. The training must be primarily for the benefit of the intern, not the employer;
  3. The intern must not displace any regular employees, but must work under close supervision;
  4. There should be no immediate advantage to the employer and, in fact, operations may be impeded by the training;
  5. The intern must not be entitled to a job at the completion of the internship; and
  6. The intern and the employer must understand that the intern shall receive no pay for the training. 

In one case, a company requested an opinion from the DOL as to whether unpaid interns who received college credit to work 7 to 10 hours per week as field marketers were employees. There was a coordinator who advised the students and communicated regularly on their progress. There was no obligation to hire them. The DOL found that four of the six criteria were established: (i) training similar to vocational school; (ii) no expectation of compensation; (iii) training primarily for the benefit of the intern; and (iv) no obligation of hiring.

On the two remaining questions, displacing regular employees and whether the company derived an immediate benefit, the DOL indicated the record was not clear. This opinion letter indicates employers should not assume the DOL will not carefully scrutinize these relationships. DOL has affirm its view in a subsequent formal opinion letter.

If a company is using unpaid interns, it should make sure:

  1. It has an agreement or letter making it clear there is no pay and no guaranteed job;
  2. Adopt a policy that sets up strict supervision and assigns a mentor;
  3. Ensure the primary benefit of the internship is for the student, not the employer -- minimize assigning the same duties given to regular employees, do not use interns to displace any employees, and, if possible, require college credit; and
  4. Arrange for a structured program of internal and, if possible, external instruction of the type of work done by the employer.

Remember, a determination that an unpaid intern is, in fact, an employee can have impact beyond minimum wage and overtime. The discrimination laws, worker’s compensation coverage, state and federal tax laws, employee benefits and unemployment insurance coverage all pose potential consequences in the event of a misguided classification.

 

Prevailing Defendants in Employment Discrimination Case Obtain $58,000 Cost Award

June 22, 2009

By Subhash Viswanathan

It’s a case that has been to the Second Circuit twice, resulting first in a win and then a “bonus” for the prevailing Defendants. After an approximately one-month trial in November 2005 before the United States District Court for the Eastern District of New York, the jury returned a verdict in favor of the Town of Huntington and an individual board member and dismissed Plaintiff’s claims of sexual harassment, discrimination, hostile work environment, and retaliation. The United States Court of Appeals for the Second Circuit affirmed the verdict. 

After winning the case, Defendants requested reimbursement for their “costs” incurred during the lawsuit, including copying costs, deposition transcripts, and daily trial transcripts, pursuant to Federal Rule of Civil Procedure 54(d) and a federal statute, 28 U.S.C. §1920. The request involved a significant amount of money. During the trial, the Defendants had ordered daily transcripts of the trial testimony from the court reporter. Those transcripts cost approximately $50,000 for over 3,000 pages of testimony generated during the course of the lengthy trial.

District Court Clerks have the power to award costs initially. The Clerk’s decision, however, is reviewable de novo by the District Court which tried the case. The Clerk denied Defendants’ request for the high cost of the daily transcripts, but the District Court reviewed the Clerk’s decision and granted the request – including fees for daily trial transcripts.

Such costs are not customarily awarded. Daily trial transcripts are taxable to the losing party as costs only if they are “necessarily obtained for use in the case.” 28 U.S.C. §1920. In this case, the District Court agreed with the Defendants that all relevant factors favored awarding the cost of daily transcripts. The District Court cited the length of the case, Plaintiff’s “confusing and muddled” presentation, the fact that Plaintiff’s credibility was a crucial issue in the case, and the fact that the Court and the Defendants’ counsel had to resolve confusion by pointing to the record, as factors requiring the use of daily transcripts. The Court also noted that the Plaintiff failed to make any affirmative showing that he was financially unable to bear the cost of the daily transcripts. In some cases, indigency may convince a District Court that a significant award of costs is not appropriate. Perks v. Town of Huntington, Slip Op. 99-cv-4811 (March 31, 2008).

Plaintiff appealed the award of costs to the Second Circuit, challenging the District Court’s award of costs as an abuse of discretion. On May 27, 2009, the Second Circuit issued a summary order affirming the District Court's decision. Perks v. Town of Huntington, Slip Op. 08-cv-2123 (May 27, 2009). As a result, the Defendants not only won their case but the Plaintiff was also required to pay them over $58,000 in costs.

The Defendant Town of Huntington was represented by Ernest R. Stolzer of Bond, Schoeneck & King, PLLC in Garden City, New York.

Supreme Court considers arguments in City of New Haven race discrimination case

June 15, 2009

By Subhash Viswanathan

On April 22, 2009, the Supreme Court heard oral arguments from both parties in the case of Ricci v. DeStefano. In the Ricci case, 17 white firefighters and one Hispanic firefighter who passed promotional examinations filed claims under Title VII of the Civil Rights Act and the Equal Protection Clause of the U.S. Constitution that the City of New Haven discriminated against them based on their race by refusing to certify the results of the exam because too few minority candidates passed. The Supreme Court granted certiorari after the U.S. District Court granted summary judgment to the City of New Haven, and the Second Circuit Court of Appeals affirmed.  Circuit Judge Sonia Sotomayor, who was recently nominated by President Obama to serve on the Supreme Court, was on the three-member Second Circuit panel that affirmed the District Court's decision.

The facts of the case are fairly simple. In late 2003, 118 applicants took a written and oral exam administered by the New Haven Fire Department for promotion to the positions of Captain and Lieutenant. Of the 118 applicants, 68 were white, 27 were African-American, and 23 were Hispanic. Based on the results of the exam, no African-American or Hispanic candidates were eligible for promotion to the Lieutenant position. Only two Hispanic candidates and no African-American candidates were eligible for promotion to the Captain position. The City of New Haven refused to certify the results of the exam, and did not grant any promotions based on the results of the exam, due to its stated fear that it would face a disparate impact lawsuit from non-white applicants.

The fundamental legal issue is whether a municipal employer’s fear of a disparate impact race discrimination lawsuit is a valid basis to disregard the results of a promotional exam that would make disproportionately more white applicants eligible for promotion than minority applicants. In other words, can a municipal employer engage in disparate treatment based on race, due to a fear of a disparate impact lawsuit? The plaintiffs contend that the City of New Haven’s fear of a disparate impact lawsuit was not sufficient to justify making the decision to disregard the results of the exam. The plaintiffs urged the Supreme Court to hold that an employer must have a “strong basis in evidence” for believing that an exam violates the law, and argued that the City of New Haven did not make such a showing.

The City of New Haven contends that an employer need only have a reasonable basis for believing that it could lose a disparate impact lawsuit if it makes promotions based on the results of an exam. The City of New Haven argued that the District Court correctly held that its belief that it could lose a disparate impact lawsuit was reasonable, based on the disproportionate percentage of white applicants who passed the exam, concerns about the validity of the exam, and the possibility of alternate exams.

The U.S. Government filed an amicus brief in this case, and also presented its argument to the Supreme Court. The Government essentially supports the City of New Haven’s argument that an employer need only have a reasonable belief that it could be liable under a disparate impact theory, but asked the Supreme Court to remand the case back to the District Court for further consideration of whether the City of New Haven’s belief in this case was reasonable. The Government noted during oral argument that the District Court found that there were several motivations for the City’s decision to disregard the results of the exam, which included not only the disparate impact concern, but also a desire to promote diversity within the Fire Department and to develop managerial role models for aspiring firefighters. The Government’s counsel stated during oral argument that promoting diversity and developing managerial role models “do not fit into complying with the Title VII disparate impact test,” and that the District Court therefore needed to re-examine whether the disparate impact concern alone was reasonable.

The Supreme Court's decision in the case is expected to be issued before the end of its term in June.

Coordinating Retiree Health Insurance with Medicare Not Illegal Age Discrimination

June 15, 2009

By Subhash Viswanathan

In what appears to be the first reported decision of its kind, the United States District Court for the Northern District of New York recently interpreted an Equal Employment Opportunity Commission (EEOC) regulation to permit an employer’s efforts to control retiree health insurance costs by coordinating its retiree health insurance plan with Medicare. Lefevre v. Niagara Mohawk Power Corp., slip op. no. 1:06-CV-768 (N.D.N.Y. April 21, 2009). The employer provided health insurance benefits to retirees under a plan that required a Medicare eligible employee to apply for Medicare Parts A and B. Medicare then became the primary health insurance coverage, and the plan paid benefits to supplement the benefits paid by Medicare. Due to the terms of the plan, a Medicare eligible retiree’s share of the plan premium was somewhat greater than that of a non-Medicare eligible employee. 

Several Medicare eligible employees sued alleging that the higher premium share constituted age discrimination in violation of the Age Discrimination in Employment Act (ADEA). The ADEA prohibits discrimination based on age in terms and conditions of employment, including the terms of benefit plans. 29 U.S.C. §§ 623(a) & 630(l) However, the ADEA also authorizes the EEOC to create reasonable exemptions from the statute’s prohibitions when necessary and proper in the public interest. 29 U.S.C. § 628 EEOC created a coordination with Medicare exemption for employee benefit plans that provide health insurance benefits that are altered, reduced, or eliminated when the plan participant becomes Medicare eligible. 29 C.F.R. § 625.32(b) 

In the Lefevre case, the Court found that the regulation applied and required dismissal of the plaintiffs’ age discrimination claim. Because the premium differences were the result of the coordination with Medicare, they fell squarely within the regulatory exemption, even though they only impacted individuals who were age 65 (the age of Medicare eligibility) and older.

The Court also examined and applied a safe harbor provision within the ADEA which permits employers to implement a bona fide employee benefit plan which treats older and younger workers differently when either the costs are the same for both sets of workers, or the benefits are the same, the equal cost/equal benefit provision. 29 U.S.C. § 623(f)(2)(B)(1).  In Lefevre, the Court found that the equal cost provision did not apply – the employer was in fact trying to lower its retiree health insurance costs by coordinating benefits with Medicare – but that the equal benefit rule did apply because the Medicare eligible retirees received the same benefit as non-Medicare eligible retirees. The plan supplemented any benefit provided by Medicare to provide full coverage.

Because the plan fell within the EEOC’s regulatory exemption, as well as qualifying under the equal benefit rule, the Court granted summary judgment to the employer and dismissed the complaint. The employer was represented by Robert A. LaBerge and Louis Orbach of Bond, Schoeneck & King, PLLC, in Syracuse, New York.

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