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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Founder, CFP®

UPDATED: Jul 19, 2013

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Internships are an integral part of the collegiate transition from higher education to the work force.  But every experience is not rewarded financially, and sometimes not even academically.

The future of unpaid internships could drastically change due to a recent court ruling.

Last month, the Glatt v. Fox Searchlight Pictures legal case involving unpaid interns on the set of the movie “Black Swan” was ruled in favor of the interns. The plaintiffs in the case, Alex Footman and Eric Glatt, sued Fox on behalf of other interns, claiming that the internships violated the Fair Labor Standard Act.

Since the ruling, two other reported cases involving unpaid internships have been filed as well, including a suit against publishing giant Condé Naste.

As shown by the cases that appeared right after the Glatt v. Fox case, this ruling could have a significant and sweeping impact on how internships operate in the future.

Jeffrey Risman, an employment lawyer based in New York City, said that although the case is not fully resolved — since Fox has indicated it will file an appeal — the initial ruling is still significant.

“Only until this recent decision, the question of whether unpaid internships violated federal and state minimum wage laws had not been contested in courts,” he said. “As the Second Circuit is among the most influential of the federal appeals courts, its decision will likely have a major impact in the legal as well as business world at large.”

Legal Protections

The Glatt v. Fox case was monumental for the ruling, but the laws used have existed for decades.

In order to remain legal and not violate the Fair Labor Standards Act, unpaid internships must be comparable to educational training. According to the Department of Labor, there are six factors which define a legal unpaid internship:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If all of these above requirements are met, the legal guidelines for a paid employee are not required.

Maurice Pianko, attorney and director of Intern Justice, said both employers and interns have disregarded the employment laws in the past.

“We have the laws on the books. The issue is not about the laws on the books,” he said. “Interns are getting a lot smarter. Interns are starting to assert their rights.”

But each internship experience varies and that is why the law is enforced on a case-by-case basis.

For example, Heather Huhman participated in both paid and unpaid internships yet she said her unpaid experience was more valuable. Over the summer she had an unpaid internship while attending classes and working a regular full-time job.

“It was crazy for sure, but not an experience I’d trade if I had to do it all over again,” said Huhman, a hiring manager and author. “[Young professionals] can see first-hand what they will like, or not like, about an industry or profession before diving into a full-time job.”

That was the positive outcome for Sarah Barker. Barker, a consumer marketing research cooperative coordinator for American Student Assistance (ASA), said having an unpaid internship allowed her to explore a career path.

“While I went through that process, I realized that I really didn’t want that life. It was life expanding and eye-opening,” she said.

Economic Impact

Risman said that paid internships incentivize both students and recent college graduates by providing skills that enable them to contribute to the market economy.

But unpaid internships only negatively impact the economy.

Internships were created to benefit the student more than the employer. They are meant to be an opportunity for a student to gain career advice and experience outside of formal educational confines. In comparison to a job, internships are designed to be more about training, rather than just employee output.

Pianko believes unpaid internships are masqueraded as entry level positions. He said that unpaid positions remove about one million jobs from the economy.

Although interns accept the unpaid positions willingly, usually in order to network or garner experience, no one wants to work for free.

“A person works because they want to get paid for their work,” he said.

Paid internships and entry-level positions are meant to help reduce the overall cost of borrowers’ student loans. But those with unpaid positions could face increased debts.

Pianko said that some students use student loans to cover the college credits of an unpaid internship and even for the living expenses needed to live while receiving no paycheck. He said the practice itself is “repulsive.”

“Students are burdened enough with college expenses for real college purposes. To take out more money, I think there is something wrong with that,” he said.

Despite being labeled as a stepping stone to a future job within the company, most unpaid interns do not receive a job from their internship. In fact, unpaid interns are about half as likely to receive a paid position within the company, in comparison to their paid counterparts. Last year, a study by the National Association of Colleges and Employer (NACE) found that graduates in paid internships were offered jobs 60 percent of the time. Unpaid interns received paid job offers only 37 percent of the time.

The most troubling finding from the study is the fact that 36 percent of graduates with no internship experienced received job offers. This means that graduates who labored in unpaid internships faced the same employment statistics as those who ignored internships entirely.

Increased Regulation and Competition

One possible outcome of reducing unpaid positions is a reduction of internships in general. 

Barker said that despite their organization’s ability to pay their interns, some companies lack the proper funding.

But Pianko wonders if these companies simply undervalue their unpaid interns and are misleading them in future job searches.

“Unpaid interns are being fooled,” he said. “If the company is not willing to pay something, it questions how much [the interns] are worth.”

Increased regulation and paid employees would increase competition for internships, but that could be a good thing. When college graduates enter the workforce, they face stiff competition. If internships are meant to be a precursor to full-time positions, then interns and workers could see that acquiring a full-time and paid position is still difficult in the current economy.

Hiring a student as an unpaid intern gives them the impression that they will be more employable in the near future. But as the NACE report proves, this is incorrect.

“It sends a bad message of false hope,” Pianko said.