Offices across the country are flooded with fresh-faced interns looking to soak in the corporate world and gain resume-padding work experience, but the fate of the unpaid internship has become hazier after a recent court ruling has employers weighing whether the programs are worth the risk.

A New York federal judge recently ruled Fox Searchlight Pictures violated wage and hour laws by not paying interns. In the case, Glatt vs. Fox Searchlight, the judge ruled the plaintiffs -- two former interns -- were doing routine tasks that otherwise would have been performed by paid employees, and should therefore be entitled to the wage-hour protections of the Fair Labor Standards Act and the New York Labor Law.

“This ruling will have a lot of employers, especially smaller businesses, rethink their internship programs if they are unpaid,” says Francine Breckenridge, a labor and employment attorney at law firm Strasburger. “The potential fines and bad press that comes along with a violation of labor laws might not be worth the risk.”

Fox Searchlight Pictures is owned by News Corp. (NWSA), which is also the parent company of the FOX Business Network.

The Department of Labor uses a six-point test to define the legality of an unpaid internship, which says the intern must receive vocational training, benefit more from the experience than the employer, and cannot replace existing staff.

Ross Perlin, author of Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy, argues that the internship system “has gone off the rails” over the last few decades.

Claiming unpaid internships save employers around $600 million annually, Perlin says the focus of programs has shifted away from serving as a recruitment tool to becoming a cheap disposable labor force source.

“Too many employers have eliminated the training and recruitment piece of their programs and are using these unpaid workers to plug their workforce gap, claiming the experience students get is payment enough. But you can’t eat or pay the bills with experience.”

Businesses off all sizes and across industries have traditionally relied on internship programs for staffing, but as scrutiny increases, many companies are re-evaluating their programs.

Worth the Risk?

The prevalence of internships has grown exponentially over the years and has become a critical gateway into the white-collar workplace, claims Perlin. “There are many industries you can’t break into with at least one -- but usually two -- internships.”

If employers stop offering work experience to students, some experts say it will create a fundamental shift in the intern landscape and workforce.

“They get to see how the skills and information they’ve been learning at school applies in the workplace, and see how people with similar academic backgrounds apply what they learned in college in the real world. It really allows them to test drive a career,” says Emily Kissane, policy analyst for education solutions company Hobsons.

The recent court ruling will make more employers hesitant to have interns, according to Gary Burtless, an economist with Brookings Institution. “It’s going to give them pause whether to take on these students in the future. It’s just another thing they are going to have to worry about -- their interns getting an attorney and filing a lawsuit.”

Indeed, former interns have filed three separate lawsuits just this month against companies seeking wages.

“When the economy is bad, students couldn’t find paying jobs so they wanted these unpaid internships to build their resume, and no one complains or gets caught violating labor laws,” says Breckenridge. “But when the economy improves, the attention shifts a little and we will start to see more collective actions and more people will look back and say, ‘Hey, maybe I should have been paid.’”

While there is a statute of limitations on when a lawsuit can be filed, companies can get hit with large fines and hefty back-pay amounts if they are found in violation.

Paying interns is the best protection from lawsuits, but that’s not always feasible for smaller companies, so Breckenridge advises companies work with colleges when setting up a program.  

“Form a partnership with an institution of higher education where students would receive credit for the hours they would work. They may not make a wage, but it would be treated as a class for interns. That is the safest thing for employers to do.”

Making Too Big a Fuss?

According to the National Association of Colleges and Employers (NACE), 2013 graduates with paid internship experience on their resume had a distinct advantage over their peers who had an unpaid experience or who didn’t have an internship when applying for full-time jobs.

But some experts argue that too much emphasis is put on internships, and they question the benefits and value they bring.

“We need to emphasizes there are many different way to get into a career,” says Perlin. “Not all internships are productive. We should be stressing substantive experiences and not look down on non-relevant experience like lifeguarding, helping out the family restaurant, or landscaping over the summer. Those jobs can be deeply formative and provide real-work skills all while getting paid and teaching financial independence."

Colleges are also behind the spurt in internship demand, as many schools have come under fire for their graduates’ job-placement numbers.

“Schools want their students to have a leg up in getting jobs,” says Kissane. “Students are also demanding more from schools -- they want more than just a diploma for their return on investment, they want networking and professional experience.”

When it comes to making sure their experience expectations will be met, interns need to be proactive.

“When interviewing for an internship, the student also needs to ask questions, set expectations and make sure they understand their role -- especially when they won’t be compensated.”

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