As internship season ends, now is a perfect time for employers to review their internship programs to ensure compliance with federal, state and local labor and employment laws.
Overview of Internships
Internships are generally intended to be educational opportunities for students or recent graduates to learn invaluable on-the-job skills, how to effectively work in a specific environment and perhaps earn academic credit or supplement their education post-graduation. Depending on the purpose of the program and a variety of other factors, the internship may be paid or unpaid. In most cases, interns will be considered employees subject to minimum wage and overtime pay, as well as other “employment” obligations such as Workers Compensation, and Unemployment Insurance and federal and state tax withholding.
FLSA and Internships
Under the federal Fair Labor Standards Act (FLSA), most interns are considered employees subject to the FLSA’s minimum wage and overtime requirements. To determine whether an intern is an “employee” or can lawfully not be paid, the U.S. Department of Labor (DOL), has developed a seven-part test to determine whether an intern is considered an employee or not and who the “primary beneficiary” is of the employer-intern relationship.
The seven-factors of the “primary beneficiary test” are:
- The intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
- The internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
- The internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
- The intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.
As its name indicates, the “primary beneficiary” test generally examines whether it is the “intern” or the “employer” that is mainly benefitting from the arrangement. Yet, this determination is very fact specific, and each factor must be weighed to determine whether the intern is exempt from the FLSA requirements. Application of the test by courts and administrative agencies can vary widely because no one factor is dispositive, leaving much leeway for subjective interpretation. For example, the Second Circuit in Velarde v. GW GJ, Inc., affirmed that the plaintiff working at a cosmetology vocational school was not an employee under the FLSA because despite the school “deriv[ing] financial value” from the plaintiff’s work, her work was always overseen by her employer. Whereas in Eberline v. Douglas J. Holdings, Inc., the Sixth Circuit held that the plaintiff also working at a cosmetology vocational school was an employee under the FLSA because, in part, the court was worried about the potential exploitation of unpaid labor.
Given the inconsistency in applying the above standard, and the current overall direction of the law towards finding “employee” status, private employers are advised to treat interns as employees and comply with requisite minimum wage and overtime, and other employment obligations. However, if a private employer wishes to use unpaid interns, it should be careful its program complies with the above factors. Employers are encouraged to communicate with the intern in writing that they will not be hired on a permanent basis following the internship. Further, the DOL advises that employers structure the internship program so that the program builds on their academic experience and that the interns are performing work that the employer does not depend on. The DOL also advises that employers operate independent recruitment programs for hiring interns and hiring employees, including having different marketing materials. Employers are also cautioned from providing unpaid interns with stipends or benefits as this will often classify the intern as an employee.
While the DOL’s implementation of the “primary beneficiary test” makes it highly unlikely for private, for-profit businesses to use unpaid interns, public sector and non-for-profit entities may be an exception. Generally, unpaid internships for the public sector and non-profit charitable organizations, where interns volunteer without expectation of compensation, are generally permissible. For example, the FLSA provides an exception for individuals who are volunteering time for religious, charitable, civic, and/or humanitarian purposes with non-profit organizations.
Regardless of the type of business entity, all employers also need to ensure that their internship programs comply with state and local laws. A misclassification of interns at any level can result in awards of backpay, liquidated damages, civil fines and penalties, and other damages depending on the applicable jurisdiction. Additionally, there are other potential legal implications when structuring the internship program such as workers’ compensation insurance, applicability of employee policies, such as sexual harassment and discrimination policies, and other potential exceptions to the intern’s wage payment that may apply (like a trainee exception).