OVERTIME UPDATE: What the Supreme Court’s Genesis Healthcare Ruling Means For You and Assessing Whether an Unpaid Summer Internship is Legal
This edition of Overtime Update examines two discrete issues: the U.S. Supreme Court’s ruling on April 16, 2013 in Genesis Healthcare Corp. v. Symczyk, and, because internship season is upon us, a refresher on the risks of hiring unpaid "interns." Each topic is discussed separately below. Genesis Healthcare: Creating Litigation Strategy or Addressing a Make-Believe Problem?
If you have ever litigated (or hired outside counsel to litigate) a collective action (or putative collective action) under the Fair Labor Standards Act (the "FLSA"), you know that FLSA collective actions can be expensive and difficult to defend. Sometimes, if your defenses to that claim are weak or non-existent, it is more expedient to cut a check to the potential plaintiff and hope that a lawsuit is never filed. (We say "hope," of course, because most courts take the position that either a court or the U.S. Department of Labor must formally approve a settlement under the FLSA and that, absent that approval, the private "settlement" is unenforceable.)
Sometimes resolution of a putative FLSA collective action before litigation is not feasible. In those cases, one strategy that can be employed to try to cut the claim off at the knees entails making an "offer of judgment" under Federal Rule of Civil Procedure 68 to the named plaintiff. An "offer of judgment" is a special type of settlement offer that, if accepted, allows the court to enter a judgment against the defending party on the terms specified in the offer. If the offer is accepted, the case may be resolved. But, if the offer is rejected, where does that leave the parties?
The U.S. Supreme Court addressed that question, in part, in Genesis Healthcare Corp. v. Symczyk. That case arose with the following facts:
The plaintiff filed a lawsuit on behalf of herself and all other similarly-situated persons alleging that her former employers violated the FLSA by improperly automatically deducting for meal breaks, even though employees performed compensable work during those breaks. When the former employers answered the plaintiff’s complaint, they also served an offer of judgment under Rule 68 in the amount of $7,500 and "such reasonable attorneys’ fees, costs, and expenses . . . as the court may determine." If the offer was not accepted within 10 days, it would be withdrawn. The plaintiff failed to respond to the offer of judgment, and the employers filed a motion to dismiss the case for lack of subject matter jurisdiction. The district court granted that motion, found that the offer of judgment fully resolved the plaintiff’s claim and, therefore, since no one else had joined in the lawsuit, it could not proceed.
The plaintiff appealed and the case made its way to the United States Supreme Court. Ultimately, the Supreme Court held that, when a lone plaintiff’s FLSA claim becomes moot, the case is no longer justiciable. The other potential plaintiffs that the named plaintiffs purported to represent cannot join that particular lawsuit and, instead, must pursue their claims, if at all, in a separate lawsuit.
That holding begs the question: when does a lone plaintiff’s FLSA claim become moot? Does mere failure to accept a Rule 68 offer of judgment in an amount that would fully compensate the plaintiff for his or her claims render a case moot? The majority’s decision in Genesis Healthcare did not address that question and, instead, assumed without deciding that the employer’s offer of judgment mooted the plaintiff’s claim, based in part on the fact that the plaintiff conceded that her claim was moot.
So, what does Genesis Healthcare mean for employers? Probably not much. The dissenting opinion, drafted by Justice Kagan, lambasted the majority for hanging its hat on the unchallenged assumption that an unaccepted offer of judgment effectively moots a case (a conclusion with which the dissenting justices vigorously disagreed). The dissent notes, "The majority’s decision is fit for nothing: Aside from getting this case wrong, it serves only to address a make-believe problem." Ouch!
The facts in Genesis Healthcare are unlikely to be repeated as most lawyers are likely to challenge a claim that an unaccepted offer of judgment renders a case moot. This reality should preclude any meaningful reliance on Genesis Healthcare.
Assessing Whether an Unpaid Summer Internship Is Legal
College students are eager to build their work experience before graduation. If you’ve been asked to provide, or your company is considering offering, an unpaid internship for one of these eager beavers, you should ensure that the internship complies with the FLSA.
Under the FLSA, all covered nonexempt employees must be paid the minimum wage (currently, $7.25 per hour) for all hours worked and overtime pay for all hours worked in excess of 40 hours per week. Interns that qualify as employees must be paid at least the minimum wage and, if applicable, overtime pay. Interns that do not qualify as employees are not covered by the minimum wage and overtime provisions of the FLSA and, therefore, may be unpaid.
So, how does an employer know whether an internship may properly be unpaid? The courts typically consider the "economic realities" of the relationship, including whether a person’s work confers an economic benefit on the entity for which the person is working. Similarly, the Department of Labor (the "DOL"), the agency that enforces the FLSA, evaluates whether a job training program creates an employment relationship by evaluating the following criteria:
- The training, even though it includes actual operation of the company’s facilities, is similar to that which would be given in a vocational school;
- The training is for the benefit of the student;
- The student does not displace regular employees, but works under their close observation;
- The company derives no immediate advantage from the activities of the students, and on occasion its operations may actually be impeded;
- The student is not necessarily entitled to a job at the conclusion of the internship; and
- The company and the student understand that the student is not entitled to wages for the time spent in training.
If those criteria are all satisfied, the DOL historically has concluded that no employment relationship is present.
The DOL has been cracking down on for-profit corporations’ use of unpaid internships. Several years ago, in an article in The New York Times, the Acting Director of the DOL’s Wage and Hour Division was quoted as saying, "If you’re a for-profit employer or you want to pursue an internship with a for-profit employer, there aren’t going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law."
In addition, several employers have recently been sued by their unpaid interns for wages owed. For example, a former intern filed a class action lawsuit against Charlie Rose, host of the PBS talk show, "The Charlie Rose Show." According to the law firm that represents this former intern, in late 2012, the parties agreed to a settlement that provides for a "substantial payment" to the approximately 190 unpaid interns who worked on The Charlie Rose Show between March 14, 2006 and October 1, 2012.
To avoid the Charlie Rose result, employers should carefully consider use of unpaid internships, particularly where reasonable minds could differ over whether the employer derived an "immediate advantage" from those interns’ work (the fourth criteria in the DOL’s test above). Employers should also ensure compliance with any state laws that may provide for greater restrictions on the use of unpaid interns.
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