Unpaid Internships and Intellectual Property Rights

Are unpaid internships still worth the trouble? For an early stage startup, the offer of free work may seem invaluable. Although unpaid interns may aide a startups bank account, hosting one may leave you open to severe future legal consequences. According to The Department of Labor, the following six legal criteria must be met in order to determine whether an internship is required to be paid;

  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.1

If the above factors are met, an employee-employer relationship does not exist under the Fair Labor Standards Act.2 The act’s minimum wage and overtime provisions would therefore not apply.3 It wasn’t until June 11th 2013 that most businesses finally began to consider the criteria as legitimate.4

Last year, for the first time in history, a U.S. federal district court held that two unpaid internships did not meet the above criteria and that the interns should be classified as “employees” covered by the Fair Labor Standards Act.5 The act’s minimum wage and overtime provisions would then apply and they would be owed back pay under federal and stage wage and hour laws.6 Glatt v. Fox Searchlight Pictures has been certified for appeal to the Second Circuit court of appeals. This ruling may not only affect industries that rely heavily on unpaid interns. Startups and other tech focused companies that have used unpaid interns in the past may have a larger problem than Fox in the future.  Fox at worst will have to pay minimum wage to its unpaid interns that were wrongly classified. For a tech company, the stakes may be much higher with the possibility of intellectual property rights being in play.

Typically, in order to protect a company’s intellectual property, employers have their interns and employees sign proprietary information and inventions agreements (PIIA).7 A PIIA will make sure all intellectual property that an intern or employee creates or enhances is owned by the entity they are working for.8 The problem with the PIIA and an unpaid internship is running the risk of having the agreement nullified for lack of consideration. For “employees,” employment or the offer of continued employment is considered enough consideration for a PIIA.9 According to The Department of Fair Labor, an unpaid internship is not “employment” and therefore the holding in Preston may not apply.10 The worry is amplified if you host an unpaid intern and do not abide by the Department of Labor’s six legal criteria. The unpaid internship may very well serve as consideration if it follows the criteria but might not be considered as consideration if it does not. Since there is no case law on the matter, it is unclear which way a court would rule.

Having an unpaid intern design your startups logo, contribute to code, or enhance a patent could spell trouble for your startup in the future without taking some precautions. In order to protect your intellectual property, your company should avoid bringing on unpaid interns. If you insist on hiring unpaid interns, you should still make them sign a PIIA. You should try to comply with the Department of Labor and any state criteria for unpaid internships. California has an additional five criteria that must be met in addition to the Department of Labors. You should also provide and identify in the agreement some type of nominal consideration. Although it is unclear if that would be enough to hold up in court, it may prove the difference. A legal battle over intellectual property could mean the difference between your startup receiving funding in the future or being left out in the cold.

  1. Wage & Hour Div., U.S. Dep’t of Labor, Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act (April 2010). 

  2. Id. 

  3. Id. 

  4. See Glatt v. Fox Searchlight Pictures, Inc., 293 F.R.D. 516, 534 (S.D.N.Y. 2013). 

  5. Id. 

  6. Id. 

  7. Christine Comaford, Protecting Your Intellectual Property, Businessweek (May 12, 2008), http://www.businessweek.com/stories/2008-05-12/protecting-your-intellectual-propertybusinessweek-business-news-stock-market-and-financial-advice

  8. Id. 

  9. Preston v. Marathon Oil Company, 684 F.3d 1276 (Fed. Cir. 2012). 

  10. Wage & Hour Div., U.S. Dep’t of Labor, Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act (April 2010). 

Published by Christopher Sesi

University of Michigan JD Candidate, 2016 University of Michigan - Flint MS in Computer Science and Information Systems Candidate, 2016 Wayne State University BA in Economics, 2011