They’re fetching coffee for movie studio executives, or handling millions of dollars’ worth of rare art and antiques. Some are writing stories for major magazines and newspapers. Quite a few can be found working in the White House.

Often, no matter how high-profile their responsibilities, these interns are not paid for their efforts. In recent years, the venerable system of the American intern has grown into a shadow labor market — becoming what many call an exploited talent pool that persists while mostly drawing nothing more than a wink and a nod. “This is one of the little secrets of the workplace,” says Wharton management professor Peter Cappelli, who is also director of the school’s Center for Human Resources. “It’s illegal. But it’s like one of those victimless crimes. Kids are eager for work experience, and their parents … are happy to let them do it while supporting them. A lot of people don’t know it’s illegal, and even if they did, who is going to report it?”

According to Wharton legal studies and business ethics professor Janice Bellace, the proliferation of unpaid interns over the past 20 years indicates that “managers and HR types seem to have forgotten about the Fair Labor Standards Act — or else, if they vaguely know about it, they somehow think it doesn’t apply to them.”

Now, though, feeling over-worked and unpaid, interns are not only reporting employers for unpaid or significantly low-paid gigs, but also are increasingly bringing lawsuits against them. NBCUniversal, Condé Nast and the Charlie Rose show have been the objects of class-action lawsuits from former interns claiming employee status. In April, New York City mayor Bill de Blasio signed into law a measure that gives unpaid interns the right to sue if they are harassed or discriminated against by an employer. It was a right not previously ensured by the city’s civil rights code — a loophole thrown into harsh light after a federal judge threw out a lawsuit by a female intern at a Chinese news agency alleging that a supervisor groped her. President Obama is being petitioned by the advocacy group Fair Pay Campaign to start paying White House interns — for a total annual cost estimated at $2.5 million. Some see this as a moral issue directly linked to the President’s credibility in the campaign to boost the federal minimum wage and curb economic inequality.

Part of the Bargain?

Young professionals and their parents may have accepted unpaid internships as part of the bargain for being ambitious, but some studies show that landing an unpaid internship does not necessarily beget a better career trajectory. In fact, in one survey of 2013 college graduates, 37% with unpaid internships under their belts received at least one job offer — only a hair better than the 35.2% of graduates who had had no internship at all. In contrast, 63% of paid interns went on to receive a job offer, according to more than 9,000 seniors with bachelor’s degrees surveyed by the National Association of Colleges and Employers. Starting salaries reflect a similar pattern. A paid internship on a resume yielded a decent starting salary of $51,930. But the starting salary for someone who had an unpaid internship was even lower than for the graduate with no internship at all, $35,721 to $37,087, respectively.

“It’s like one of those victimless crimes. Kids are eager for work experience, and their parents … are happy to let them do it while supporting them.” –Peter Cappelli

Still, about half of all internships are estimated to be unpaid — and many young professionals are eager to have them. “What it illustrates is the nature of this job market, which is creating a situation where young workers are increasingly being forced to work for peanuts or in unpaid internships,” says Wharton management professor Adam Cobb. “That is a big thing you have seen in this supposed recovery: Companies are making tons of money, but you are seeing a big disconnect between corporate profitability and labor market outcome.”

Labor statistics underline the unmet demand for starting jobs in the past few years. In April, the jobless rate for 20- to 24-year-olds was 10.6% — lower than the peak of 16% in November 2009, but high nonetheless. “There are a lot of young people who are unemployed, so companies wield all the power here,” Cobb notes.

And some businesses are abusing that power, critics of unpaid interns say, noting that the gig not only means no money, but also the lack of a host of legal protections afforded paid workers. What options does an unpaid intern have if a boss starts tossing around racial epithets, making sexual advances or asking him or her to work in an unsafe environment? None, says Lynne Bernabei, an employment lawyer with Bernabei & Wachtel in Washington, D.C., who has handled high-profile lawsuits on behalf of unpaid interns. Because these workers are not employees per se, they do not enjoy the same federal protections as paid staff. “It is really disturbing, and because a lot of these people are young people, they are among the most vulnerable workers,” Bernabei notes.

Sally J. Abrahamson, an attorney with Outten & Golden in New York, says unpaid interns are potentially unprotected in terms of discrimination based on age, gender, race, disability, religion and national origin, and they probably would not be able to organize a union under the National Labor Relations Act. “There is always a threat that any law that protects employees, federal or local, won’t protect unpaid interns since they are classified as non-employees,” Abrahamson points out. “Under almost all of the statutes that we sue, if you are not an employee, you would not have standing to bring a suit.”

Only a few states have stepped in to fill the federal protection gap — Oregon, D.C., and, likely soon, New York. “What we need is a federal law that would include in the definition of ’employee’ unpaid interns,” says Bernabei. “It’s an easy fix, but as anyone knows, Congress isn’t working these days.”

The U.S. Department of Labor has, however, stepped up some of its policing, notes Bernabei. The agency has clearly defined the six criteria for-profit companies must meet in order to legally use unpaid interns: The internship must include training similar to that of an educational institution; the experience must be for the benefit of the intern; the intern must not displace existing staff and must be supervised by existing staff; the employer must “derive no immediate advantage” from the activities of the intern and may actually see its operations impeded; the intern is not necessarily entitled to a job at the end of the internship, and both intern and employer understand that the intern will not be paid.

“That is a big thing you have seen in this supposed recovery: Companies are making tons of money, but you are seeing a big disconnect between corporate profitability and labor market outcome.” –Adam Cobb

Many intern-employer relationships clearly do not meet this test, and with increased scrutiny by the Labor Department over the last two or three years, some sectors have largely ended the practice of unpaid internships. This Labor Department test was cited by a federal district court judge a year ago in ruling that Fox Searchlight had violated labor laws by not paying interns at least minimum wage during production of the movie Black Swan. In another highly publicized case, Condé Nast — after being sued by two former interns at The New Yorker and W Magazine who claimed they were paid less than minimum wage — ended its internship programs at its publications, which include Vanity Fair and Vogue.

Internships That Pay — or Cost

Some say that the current crop of unpaid internships doesn’t warrant a wholesale clearing, but, rather, a more nuanced approach. At many newspapers, for instance, interns are trying to break into a shrinking business, and they benefit enormously from doing the job alongside veterans. “It depends in part on the industry,” says Matthew Bidwell, a Wharton management professor. “In newspapers, frankly, a lot of employers are operating on a shoestring, people are looking to get experience and not a lot of people are making much money out of it. For some employers, they could not afford to take these people on to do paid work.”

No one is advocating total elimination of unpaid internships. Says Cobb: “I had a friend who worked unpaid for a start-up, but they didn’t have any money, so that feels really different than working for free for a bank that makes billions of dollars. You don’t want to throw the baby out with the bathwater.”

But one persistent characteristic of the unpaid internship system is that it favors middle- and upper-income graduates and their parents, since it is these families that have the capacity to underwrite living expenses during an unpaid stint. Poorer students may be forced to take a paying job that does not relate to a career trajectory — denying them not only experience and resume-building, but also a chance to make critical professional contacts. “It is the province of the well-to-do,” Cobb notes. “Those are the people getting the jobs, whose parents can subsidize this. If you are doing an unpaid internship in New York, someone is paying that rent, and it is probably the parent.”

Consider one more layer of disadvantage for the poor: Middlemen companies are cropping up, promising to place students in internships in publishing, sports, international trade, films and fashion — for a fee. For the privilege of an internship in San Francisco, Dream Careers charges $7,999. Eight weeks in Miami will set you back $8,499, with housing, transportation, career seminars and networking opportunities included. “Living among the bright lights of Miami, you’ll forge lasting memories and friendships, as well as a web of business connections that stretch around the globe,” the company’s marketing materials promise. Most of the internships are unpaid, the company says.

“Very troubling,” is how Ross Perlin sees the rise of the internship business. “How many young people can afford to pay thousands of dollars to a company, in addition to working unpaid?” asks the author of Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy. “It both misses the point and causes larger inequality when well-off parents can buy an internship for Junior.”

Changing the System

Recent high-profile lawsuits might slow the use of unpaid interns. “There has been some scaling back on this, particularly in companies concerned about their reputations,” says Cappelli. “Law firms, especially, have stopped doing this altogether because it’s now a big enough deal reputation-wise, and there is some real damage to it now that it’s more widely known that it is illegal.”

“Organizations are not especially excited about making long-term investments in workers who might be laid off or who would leave themselves.” –Matthew Bidwell

Still, for the system to truly change, green talent looking for professional experience would have to be given a series of more meaningful career steps to choose over unpaid internships. The underlying issue, Cappelli adds, is that companies are afraid of investing in an employee with paid, on-the-job training, only to see that employee lured away by another company after a few years. But he points to two models elsewhere that work. Some European countries have laws preventing this kind of poaching, and in Germany, corporations rather than government have adopted a voluntary prohibition of one company luring young talent from another. This means a company can reap more fully the benefits of training its employees. In Canada, where unpaid internships also have been controversial, a recent government report proposed measures to toughen protections of exploited workers, and raised the idea of offering tax credits to businesses that hire Canadians between the ages of 18 and 30.

In fact, the U.S. long ago modeled a more organized system — for blue-collar jobs. Unions have traditionally run programs in which a journeyman could work, and be paid, while receiving training on the job. “The way these programs were paid off was that the worker, post-apprenticeship, effectively paid back the program costs through union dues. Unions would be happy to do it, but they are weak and don’t cover that many employees anymore,” says Cappelli, pointing out that registered union apprenticeship programs fell by half in the 2000s while the overall population was growing.

“If you look at the structure of the modern U.S. labor market, there are no big institutions that would coordinate anything like that,” Bidwell notes. “Organizations are not especially excited about making long-term investments in workers who might be laid off, or who would leave [on their own terms]. Unions no longer exist in the private sector in an effective way. And the U.S. doesn’t do government [oversight of this kind]. People don’t want to pay for other people to train workers. Training is obviously a big gap in the labor market. There have been local experiments linking up community colleges and consortiums of employers. Some have been successful, but they haven’t really scaled.”

In the tech-entrepreneur sector, one new entrant aspires to help fill the gap. Enstitute, a non-profit based in New York, has placed apprentices in digital media companies, mobile software firms and non-profits, and means to be an alternative to college. Last year, its first in operation, Enstitute placed 11 fellows, who are paid a small stipend, and this year expects to place 200 more. It is operating in New York, D.C., and St. Louis, and plans to expand into Miami shortly with the help of a major foundation. The firm currently covers 80% of its budget through philanthropy, and aims for 100,000 apprentices by 2025, while widening its target sectors.

“We are constantly looking at new industries,” says Enstitute co-founder Kane Sarhan. “We are breaking into life sciences and bioscience in St. Louis. I would say we are really flexible on that. Our over-arching goal as an organization is being a platform for learning by doing, and being supportive of the idea that learning can happen anywhere.” Whether the innovation can scale to become a significant alternative to unpaid internships remains to be seen, but the last few years have clearly demonstrated the need. “Everyone wants someone with five years’ work experience, and nobody wants to give it to them,” says Cappelli. “How do we crack that one? Free labor is obviously one way to do it. But it certainly disenfranchises the kids, especially the poor ones.”

For Cobb, it boils down to one question: “What would the world actually miss if there were not unpaid internships, so everyone would be on the same playing field? Maybe what it leads to is kids getting jobs where they get paid — which is not a bad thing.”