by Kara Brandeisky and Jeremy B. Merrill ProPublica, April 9, 2014, 3 p.m.

Two years after the U.S. Department of Labor announced its intent to crack down on unpaid internships, a federal investigator called a final meeting with the biggest offender the agency had found: an outdoors magazine based in Santa Fe, N.M. The investigator reported interns at Outside magazine had been fact-checking, reporting, researching, proofreading and preparing content for the website, all for about $250 a month. The Wage and Hour investigator told Outside's lawyer that this arrangement violated minimum wage law, and the publication owed its interns back pay.

Outside's counsel said she'd talk it over with her client. They spoke again two weeks later. Outside refused to pay.

And with that, the Labor Department dropped the case — and 28 former Outside interns never received the nearly $172,000 in back wages the department's investigator thought they deserved. The Labor Department declined to explain to ProPublica its decision not to pursue back pay for the Outside interns.

As the number of unpaid internships has exploded over the past several decades, labor activists have become increasingly concerned that these arrangements exploit young workers and violate minimum wage law. So four years ago, the Labor Department issued new guidelines clarifying what makes an unpaid internship legal: Namely, the internship has to be of educational benefit to the intern. Interns have to understand they're not entitled to a job or wages. And — the biggest hurdle — the employer can't derive any immediate benefit from the intern's work or use interns to displace regular employees.

The Department of Labor's Internship Investigations

Explore the case files for the internship investigations the Labor Department concluded in the three years after issuing new guidelines.

"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," Nancy Leppink, acting director of the Wage and Hour division, told the New York Times.

But since then, the Labor Department has not made enforcing its guidelines for unpaid internships a priority. In the first three years after it issued its fact sheet, the Labor Department says it cited just 11 for-profit companies for failing to pay interns minimum wage.

Instead of proactively investigating employers that advertise illegal internships, the department has decided to rely on complaints — even though the agency admits unpaid interns are hesitant to complain, for fear of endangering their future career prospects.

"[The Wage and Hour Division] does not have a strategic enforcement initiative focused on unpaid interns," a department spokesman wrote. "Our investigators focus on industries where historically we have found high incidences of violations and where the most vulnerable workers are employed — industries such as construction, janitorial, agriculture, and restaurants. That will continue to be our focus."

In the course of its work, the Labor Department has discovered at least 38 unpaid internship programs at a cross-section of American businesses — from a dairy farm in Vermont to a rodeo venue in Texas to an employment law firm in Los Angeles. Many of the investigations remain ongoing, but records show that as former interns have filed lawsuits against a host of high-profile companies, the Labor Department has investigated small mom-and-pop shops, including many that only employed an intern or two at a time.

"It doesn't take a genius to find violations...You can open up Craiglist in any city and find, on its face, hundreds of employers who are openly, blatantly violating the law," said Ross Eisenbrey, vice president of the Economic Policy Institute and former policy director of the Occupational Safety and Health Administration. "They basically don't think of the intern workforce as a vulnerable segment of the population."

Illegal internships: hiding in plain sight

Experts estimate at least a half a million Americans hold unpaid internships every year, with about 38 percent in the for-profit sector. So why hasn't the Labor Department cited more employers?

The first problem: The agency is waiting for unpaid interns to blow the whistle. Of the 38 recent cases, only three began with complaints from interns themselves. In some other cases, investigators discovered unpaid interns in the course of investigating unrelated complaints from paid employees.

"Anecdotally we have heard that many individuals view unpaid internships as a way to get their foot in the door and that may lead to a reluctance to file a complaint," Laura Fortman, principal deputy administrator of the Wage and Hour Division, said in a statement.

But when it wants, the Labor Department can investigate employers proactively. According to a Labor Department spokesman, the agency makes a priority of targeting industries where workers are particularly vulnerable to exploitation. The department says it is especially concerned about low-wage workers, children, migrant workers and non-English speakers. Last year, the Wage and Hour Division closed over 10,000 targeted investigations — more than a quarter of all its cases.

As the vice president of the Economic Policy Institute, Eisenbrey says he has pushed the Labor Department to root out illegal internships by scrutinizing industries such as fashion, media and film. But the agency has decided to expend its resources elsewhere.

To be sure, the Labor Department has a finite amount of resources. With only about 1,000 investigators, the agency must monitor 7.3 million workplaces and enforce labor laws that protect 135 million employees.

"The Department of Labor has a mammoth job to do," said Juno Turner, an attorney who represents the interns who worked on the movie "Black Swan" in their lawsuit against Fox Searchlight films. "I think they have to pick their battles."

However, under the Obama administration, the Wage and Hour Division has grown its investigator ranks by 42 percent, from 731 investigators in 2008 to 1,040 investigators in 2013. In his 2015 budget, President Obama has asked for funding to hire another 300.

The Labor Department says the extra manpower has helped the agency secure a record-breaking amount in back wages for low-wage workers. No-wage workers, on the other hand, have not received much attention.

When the Labor Department has investigated internship programs, it has usually found that employers had violated labor law. That's because the Labor Department enforces a stricter standard than most federal courts. The agency takes an "all-or-nothing" approach — if an unpaid internship violates just one or two parts of its six-part test, an employer can be on the hook for back wages. The Labor Department even won back wages for interns who had received academic credit, stipends and free housing from their employer.

Just last week, the Labor Department reiterated its concern about the proliferation of unpaid internships in an amicus brief filed on behalf eight former interns suing Hearst Corporation for back wages. The Labor Department asked the 2nd U.S. Circuit of Appeals to adopt a stricter interpretation of the agency's guidelines in its rulings on the issue.

"The Department's test is...an important backstop to ensure that this very limited trainee exception to the [Fair Labor Standards Act]'s broad coverage is not unduly expanded, particularly in difficult economic times when employers are eliminating paid staff positions and the promise of free labor is both tempting and available," the brief says.

The second problem: The agency faced pressure to scale back its internship enforcement efforts almost as soon as it announced them. Weeks after the Labor Department released the new guidelines, 13 college presidents — including New York University President John Sexton and then-University of California System President Mark Yudof — wrote to then-Labor Secretary Hilda Solis to ask that the agency reconsider its plans to step up enforcement.

"The Department's enforcement actions and public statements could significantly erode employers' willingness to provide valuable and sought-after opportunities for American college students," the administrators wrote. "While we share your concerns about the potential for exploitation, our institutions take great pains to ensure students are placed in secure and productive environments that further their education. We constantly monitor and reassess placements based on student feedback."

Likewise, the American Bar Association has lobbied the Labor Department to allow law students to intern for free at for-profit firms, albeit to work on pro bono matters. The agency responded that this practice would be acceptable, as long as the internship met the department's six-part test.

As a former Labor Department official, Eisenbrey said he thinks the agency fears a backlash from congressional Republicans, who might not look kindly on an aggressive campaign against businesses that employ unpaid interns.

"Having worked in the Labor Department when there was a Republican-controlled House, I know they fear and hate the time and resources that are devoted to responding to investigatory requests from the Hill," Eisenbrey said.

Ultimately, the Labor Department said that it will enforce its internship guidelines when asked, but it has no plans to look for illegal internships on its own.

"Anecdotally, we know that the Division has received very few complaints on this issue," a department spokesman wrote."When we do receive complaints, we generally investigate them."

Confusing rules, patchy enforcement

A review of records shows the Labor Department's guidelines are not always clear-cut, even to those responsible for enforcing them. Take two investigations into apparently similar unpaid internships at separate medical practices —the Labor Department found violations in one case, but not the other:

• Horizon Family Medicine, a doctor's office in Powell, Tenn., employed two unpaid interns in 2011. The investigator reported that the interns, who were fulfilling a graduation requirement at a vocational school, were "scanning, entering the Explanation of Benefits (EOBs) into the computer system, checking patients in, checking patients out [and] verifying insurance."
• Axis Medical, a doctor's office in Poughkeepsie, N.Y., employed "several" unpaid interns in 2011 and 2012. The interns, also fulfilling a graduation requirement at a local vocational school, were reported to be "independently 'rooming' patients (showing patients to their rooms, taking their vitals, inquiring as to their reasons for their visits) and doing electronic filing."

The Labor Department dropped the case against Axis Medical, but requested Horizon Family Medicine to pay its two interns $707 in back wages for non-compliance.

"They are employees, there was a minimum wage violation," the Nashville investigator wrote.

Based on what an Albany investigator observed, the Labor Department briefly considered a similar finding against Axis Medical.

"The productive work could have resulted in there being an 'employment relationship' which would require the payment of not less than the minimum wage for hours worked," the investigator wrote.

But then the investigator turned the case over to superiors and "it was decided that we would not assert a violation regarding this matter," the investigator concluded. The report does not explain why.

"Our policy is not to comment on enforcement decisions made in specific investigations," a department spokesman wrote. "In general, enforcement decisions can differ based on the facts, evidence supporting the facts, and circumstances in each case."

But the seemingly disparate conclusions reinforce what employers and school officials have been saying about the guidelines all along: They're plain confusing.

For instance, the Labor Department says unpaid internships for academic credit — which interns at both Axis and Horizon received — are more likely to be considered legal, especially when schools exercise some oversight. But the department doesn't make it clear exactly when internships for academic credit are okay.

Tina Smith, Horizon Family Medicine's intern coordinator, actually thought it was illegal to pay interns for "extern" hours performed for academic credit, according to an email obtained through a public records request. Smith did not respond to multiple requests for comment.

"I was told that some interns were paid for their extern hours at other businesses and that really surprised me as I didn't know that was legal," Smith wrote to the interns in September 2011. "In fact, I actually have known in other cases similar that it was illegal to do so. After thinking this through, I am certainly not the one to say what is legal and illegal in this respect."

Employers aren't alone in their confusion. One survey found 25 percent of college officials thought academic credit could never be a legal substitute for pay; the rest believed it sometimes could, and 24 percent believed academic credit could replace compensation in all or most cases.

Labor Department investigators are left to fill in the gaps.

Consider the agency's handling of an investigation at the Brooklyn Free School, a nonprofit where students vote on school rules and what to study. Founder Alan Berger said the school employed between five and 10 unpaid interns every semester, providing college students (and recent graduates) a chance to observe the school's unique approach while sometimes earning academic credit.

In fall 2012, Wage and Hour investigators found most of the interns to be getting a "bona-fide" learning experience, but one intern said he was doing "odd jobs," such as emptying the trash, cleaning rooms and organizing supplies.

The investigators concluded Brooklyn Free School was using this intern to displace paid staff and called a meeting with Berger to explain the minimum wage violation.

A week later, the Wage and Hour Division got an email from the intern in question — the unpaid "intern" had agreed to work as an unpaid "volunteer" instead.

Problem solved. The investigator dropped the back wages assessment and closed the case.

The Brooklyn Free School case raises another common source of confusion around the rules for unpaid internships: a vague exemption for nonprofits.

"In general, [the Wage and Hour Division] recognizes an exception to the employment relationship for individuals who volunteer their time, freely and without anticipation of compensation for religious, charitable, civic, or humanitarian purposes to non-profit organizations," a department spokesman wrote.

The distinction between unpaid intern and volunteer didn't mean that much to Berger.

"It was confusing to us," Berger said. "I think we tried to just call everybody volunteers to avoid any future hassles. It was just a matter of semantics, from our point of view. Everyone who came in was a volunteer."

The one that got away

By the time a federal investigator came knocking at Outside, the magazine had already received national attention for its internship program.

In his 2011 book, "Intern Nation," Ross Perlin reported the magazine had stopped paying interns minimum wage because of budgetary constraints. But, Perlin wrote, the underpaid interns continued to do the same work as their predecessors — fact-checking, researching and writing. In December 2011, the Labor Department opened its investigation into Outside.

One former Outside intern — who asked not to be named, for fear of alienating her former employer — said she had to work a second job and get help from her parents to make ends meet. But despite the low pay, she thought it was a great experience. She said the fact-checking training she received was better than the training she got at a top journalism school. According to her, after two to three days of orientation, editorial interns worked independently to fact-check articles for each issue of Outside magazine, with a supervisor available to answer questions.

She said those skills and the connections she made set her up for a career in journalism. "I wouldn't have wanted the publication to suffer," she said of the Labor Department's investigation.

The former intern said she received a letter from the agency asking about her experience, but when she left a message for the investigator, she never heard back.

"When a worker reaches out to WHD, we respond," a department spokesman wrote in response to a question from ProPublica. "Although we lack[ed] sufficient information to respond to this particular concern, we do expect our investigators to return all telephone calls received regardless of the type of inquiry being made."

The investigator interviewed Outside's managerial staff, including then-research editor, Ryan Krogh, who said he was in charge of "a pretty extensive training process" before overseeing the interns' fact-checking work. He also arranged for other staff members to give special educational seminars on topics such as travel writing and feature editing.

But when the investigator visited Outside, Krogh said his interview lasted less than 10 minutes. "It wasn't a very thorough investigation," Krogh said. "They asked me three questions."

Nevertheless, the investigator concluded Outside failed to meet at least two (and possibly four) of its criteria for unpaid internships. The magazine disputed this assessment.

For instance, in its final report, the agency noted that Outside editor Chris Keyes said he would likely have to hire more junior editors without the internship program, which the investigator took as a sign that interns were displacing paid employees. Outside disagreed. The lawyers said that while interns helped with some tasks, editorial supervision was time-consuming. The interns hadn't displaced regular employees, they said, but had burdened them. Keyes did not respond to multiple requests for comment from ProPublica.

"The internship program at Outside Magazine provides the interns with numerous highly useful and readily transferrable skills that most graduates of the program readily use to find positions with major national and international publishers and begin their career in the industry," Outside's attorneys wrote in their position statement. "Many courts have determined such a benefit to be of sufficient value to preclude a finding of any [minimum wage] violation altogether."

So Outside took a gamble. It simply refused to pay.

As it turns out, the Labor Department has no authority to force employers to pay. Instead, the agency could have filed a lawsuit seeking back pay on behalf of the unpaid interns (which it does about 150 to 200 times a year for all wage cases). But the agency chose not to in the Outside case.

"The Department's Solicitor's Office and the Wage and Hour Division work together to identify litigation priorities, for example, based on particular industries or the legal questions presented," a department spokeswoman wrote. "We also consider the strength of each particular case and its complexity, balanced against resource demands in cases department wide."

Camille Olson, an attorney at Seyfarth Shaw who represents employers and specializes in wage and hour issues, said the government's report on Outside "doesn't describe a slam-dunk, clear violation of the law." Rather, Olson said, the interns' case would probably turn on a factual dispute about the nature of their training. She added that the department may have worried that district court judges in New Mexico would not have been inclined to favor the agency's position.

Since the government's investigation, Krogh said Outside has scrapped its internship program and hired more junior editors — as Keyes reportedly predicted it would. The magazine is now advertising paid "fellowship" positions. Krogh denied that the Labor Department investigation inspired any of those changes.

"There's no direct correlation there at all," Krogh said.

Krogh speaks glowingly about Outside's internships. He was an intern himself, back when the program was paid, and many of the magazine's editors have been pulled from its intern ranks.

But looking back, Krogh said he thinks Outside's program probably didn't abide by Labor Department guidelines — because, as the director of the Wage and Hour division said in 2010, most unpaid internships at for-profits don't.

"Frankly, there's no way to meet the Labor Department's standards by having interns unless you pay them," Krogh said. "In terms of what we were offering the interns, I think it was definitely as in line with the regulations as you can get. But if you go by the letter of the law and the way those six stipulations are written, there's no way to actually have an unpaid intern and be aboveboard."

Two years ago, the Labor Department confirmed it didn't think Outside met that standard either. The Wage and Hour Division sent letters to 28 former interns telling them they could hire attorneys and file lawsuits on their own to claim back wages.

The statute of limitations runs out this spring.

For more on this story, read the Labor Department case files for 16 closed investigations into unpaid internships or tell us about your own internship experience.