Good News on Internships From the Second Circuit

On the same day that the Labor Department released depressing employment data about Americans aged between 16 and 24, a three-judge panel of the Second Circuit’s U.S. Court of Appeals overturned a district court’s ruling and decided that for-profit companies such as Fox Searchlight could offer unpaid internships if these are educational and benefit the intern.  This is good news for young people who want to get temporary work experience as a valuable qualification for permanent employment.

Previously the district court had ruled that Eric Glatt, Alexander Footman, and Eden Antalik, unpaid interns at Fox, should have been paid. In addition, Antalik could file a class-action lawsuit with other interns against Fox.  Thursday’s decision vacates these district court’s rulings and sends them back to the court for further proceedings. 

With high youth unemployment and declining labor force participation, young people need internships for work experience. Also on Thursday, the Labor Department announced that the unemployment rate for young people ages 20 to 24, 9.9 percent, is over twice the unemployment rate for those 25 years and older, 4.2 percent.  The teenage unemployment rate is 18.1 percent. The rate for African American teens is 31.8 percent. The share of teens and young people employed or looking for work, known as the labor-force participation rate, is at the lowest level since the government began keeping records on this in 1948 (55 percent). 

Of course, it was a coincidence that the poor employment data and the court ruling occurred on July 2. But they are linked in the following way: internships can provide training for jobs, and make it more likely for young people to get permanent jobs in the future. 

Don’t take my word for it, ask the academics. An economic study shows that internships have a greater effect on hiring than academic major. This means that a ban on unpaid internships in for-profit companies harms job prospects. Economics professors John Nunley and Adam Pugh at the University of Wisconsin-La Crosse, Nicholas Romero of the University of Pennsylvania and Richard Seals of Auburn University in Alabama created 9,400 fake resumes and sent them to employers in the fields of banking, finance, insurance, management, marketing and sales. Their finding: A student is more likely to get a job in banking if he interned at a bank than if he majored in a related field, such as finance.  This is because the employer sees the internship as a measure of interest and experience.

Auburn University’s Richard Seals said, "There is a huge return, even years later, to internships." That is why young people compete to get them rather than taking time off.

When Labor Department rules prevented firms from offering unpaid internships, many employers, such as publisher Condé Nast and Fox Searchlight, ended these apprentice-like programs.  Lawyers lined up to file class-actions suits on behalf of former unpaid-interns. But the judges ruled that “the proper question is whether the intern or the employer is the primary beneficiary of the relationship.”  From the flood of internship applications received by the Manhattan Institute, many students think that they are the beneficiaries.

In our new book, Disinherited: How Washington Is Betraying America’s Young, Jared Meyer and I tell the story of Sammy, an aspiring rock musician, who was overjoyed to be offered an unpaid internship with a major recording company in New York City last summer.  But the recording company said that he had to receive academic credit from his university for the internship.

Sammy’s university does not grant credit for summer internships, so he could not take the internship.  The record company suggested that Sammy enroll in community college for the summer in order to receive course credit. Sammy would have to pay to enroll in college to get the internship, money that he did not have. So he was left playing his violin on the streets of New York and studying recording techniques on his computer rather than taking an internship which would clearly have been to his benefit. With the Second Circuit Court’s ruling, Sammy might have been hired. 

Over the past five years the Labor Department has been making it harder for young people to get unpaid internships at “for-profit” private-sector institutions. New regulations were issued in 2010, and companies such as Fox Searchlight have been sued for violations. 

The Labor Department’s six criteria for an internship in a “for-profit” business are:

• The internship has to be “similar to training which would be given in an educational environment.” 

• “The internship experience is for the benefit of the intern.”

• “The intern does not displace regular employees.”

• “The employer derives no immediate advantage from the activities of the intern.”

• The intern is not entitled to a permanent job at the end of the internship.

• The employer and the intern understand that the internship is unpaid.

The judges wrote, “By focusing on the educational aspects of the internship, our approach better reflects the role of internships in today’s economy than the DOL factors, which were derived from a 68-year old Supreme Court decision that dealt with a single training course offered to prospective railroad brakemen.”

As with many rules, Uncle Sam has exempted itself and its supporters. Unpaid internships at the White House, Capitol Hill, the AFL-CIO, community organizers, and environmental groups are the norm, since these are non-profits.  Representative Al Green (D., Texas), sponsor of the Original Living Wage Act of 2015, wants employers to pay a living wage, but he does not pay his interns a penny for their summer work.

When the regulations were issued, the Labor Department admitted that it will discriminate against business in their enforcement. Then-Deputy Administrator of the Wage and Hour Division Nancy J. Leppink was quoted in The New York Times on April 2, 2010 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." 

The common-sense Second Circuit ruling acknowledges that summer internships are valuable ways to learn practical skills and become familiar with a workplace. Young people who want to spend their summers as unpaid interns at businesses should be encouraged, not turned away.

Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute, is the coauthor of "Disinherited: How Washington Is Betraying America's Young." Follow her on Twitter here.

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