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Sleeping-Giant Issue of Unpaid U.S. Interns Gets Scrutiny

businessweek.com—Jim Snyder and Christie Smythe

By the time Ladan Nowrasteh got her masters degree in journalism, her resume was stacked with experience. Her bank account wasn’t nearly as full.

Like many students trying to get a leg up, Nowrasteh, 26, of Falls Church, Virginia, worked a string of unpaid internships while in undergraduate and graduate school. She often had to work part-time jobs simultaneously to pay for things like food and rent.

“The value I was getting was non-monetary,” Nowrasteh, who did seven unpaid internships as a student, said in an interview. “I wouldn’t have gotten all that experience if I wasn’t willing to work for free.”

The practice, especially common in competitive industries like journalism, finance and filmmaking, could change if the appeals court upholds the ruling of a federal judge in New York who found that moviemaker Fox Searchlight Pictures Inc. violated labor laws by not paying two of its interns. Cases have also been brought against Hearst Corp., Conde Nast Publications and the Public Broadcasting Service’s Charlie Rose Show.

“This question of whether private-sector internships violate the minimum wage laws has been sort of a sleeping-giant issue for many years,” said David Yamada, director of the New Workplace Institute at Suffolk University Law School in Boston. “The absence of payment is done with a wink and a nod. Interns know they better not make any trouble about this.”

Half Unpaid

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Eric Glatt, 43, ... The lead plaintiff in the case against Fox Searchlight, Glatt had left a job at the insurer American International Group Inc. in New York to pursue a career in film. After earning a certificate in film editing, he eventually took two temporary positions on the set of the movie “Black Swan,” where he spent much of his time learning the art of making copies.

Taken Advantage

“I knew I was being taken advantage of,” Glatt, now a law student at Georgetown University in Washington, said in an interview. “I just didn’t think there was anything I could do about it.”

That changed when he read a news article about a six-part test the U.S. Labor Department uses to judge whether unpaid internships violate labor laws.

In ruling against Fox Searchlight, U.S. District Judge William H. Pauley in Manhattan said internships can be exempt from minimum wage requirements only if they adhere to all the criteria in the Labor Department test, which is based on a 1947 U.S. Supreme Court (1000L) decision concerning railroad trainees.

The criteria require that a position be structured for the intern’s benefit and should not displace regular workers. The employer also should not derive immediate advantages from the intern’s activities.

Lunch Orders

Glatt and Alexander Footman, who also worked as an unpaid intern at Fox Searchlight, alleged that they were asked to perform routine errands and other tasks, such as making deliveries, organizing file cabinets, making photocopies and taking lunch orders.

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Fox Searchlight did obtain “an immediate advantage from Glatt and Footman’s work,” Pauley said in his ruling. “Menial as it was, their work was essential. The fact they were beginners is irrelevant.”

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In their lawsuit, Glatt and Footman alleged that Fox Searchlight keeps its production costs down by “employing a steady stream of unpaid interns.”

Such staffers “are becoming the modern-day equivalent of entry-level employees, except that employers are not paying them for the many hours they work,” the former interns alleged in their complaint, filed in September 2011.

Favors Wealth

Glatt said one of his motivations for bringing the case is he believes unpaid internships favor students from higher-income households whose parents can afford to cover their expenses or people like him who were starting second careers and had savings to carry them through.

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Outten & Golden LLP, which represents Glatt and Footman, is also handling lawsuits brought by former unpaid interns at News Corp. (NWSA) and Fox Entertainment Group Inc., Hearst Corp., Conde Nast Publications and Rose. The PBS host has settled the case with former interns, said Juno Turner, an attorney with the firm. The Conde Nast and News Corp. cases still pending. Plaintiffs in the Hearst case were dealt a setback in May when U.S. District Judge Harold Baer Jr. in Manhattan declined to uphold the Labor Department test and rejected their request to include other interns in their suit.

Robert Shindell, a vice president at Intern Bridge Inc., a college recruiting and research company based in Austin, Texas, said it wasn’t clear what the broader impact of the court cases may be. Most companies can probably afford to pay interns, who would earn about $3,000 if they were paid the minimum wage over three months.

“Hopefully some of these companies do the moral and just thing and just pay their employees,” Shindell said in an interview.

The case is Eric Glatt et al v. Fox Searchlight Pictures Inc., 1:11-cv-0684, U.S. District Court, Southern District of New York (Manhattan).