Should Interns Be Paid? Putting Your Internship to the FLSA Test

May 23, 2018

By Alexis V. Preskar

Nothing signals the beginning of summer like a fresh crop of interns. Internships are meant to provide students with a chance to learn more about their chosen field and gain insight into “real world” employment. But do companies have to pay their intern or should the student just be grateful for the experience? The answer depends on whether the intern is considered an employee. This year the Department of Labor (DOL) relaxed the test to determine if an intern qualifies as an employee, allowing businesses and students to benefit from the internship experience.

Intern Or Employee? Here’s A Test

You can thank the Fair Labor Standards Act (FLSA) for the requirement to pay (or be paid) minimum wage and overtime. But the FLSA only applies to employees, so does an intern count as an employee? Strangely enough, the FLSA doesn’t answer this question, but the DOL provides guidelines under the “primary beneficiary test.” This test is used to determine who is the primary beneficiary of the internship – the company or the intern?  If the intern is the primary beneficiary, then the position can be unpaid.

There are seven factors used to subject an internship to this test, including:

  1. The extent to which 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;
  2. The extent to which 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;
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar;
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern; and
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

Class Action Changes the Game

These considerations have always been part of the equation to determine whether an intern is an employee, so what’s changed? Prior to this year, the DOL standard required that an intern had to meet all (previously six) parts of the test in order to be unpaid. This strict interpretation was problematic for employers, especially the component suggesting that the company receives no benefit from the intern’s work. For all the jokes about hapless interns, most employers would agree that interns provide some value, otherwise employers would have no incentive to host the programs.

This narrow test resulted in class action lawsuits from former interns who claimed unpaid wages from being improperly classified as non-employees. Many of the interns worked long hours and did the same work as regular employees, clearly providing a benefit to the employer. These lawsuits caused some employers to abandon their internship programs altogether for fear of later claims.

Recently, courts have determined that no single factor is conclusive and the test is flexible, so an unpaid intern need not meet all parts. The DOL’s January 2018 decision adopted this “relaxation” of the test, which makes it easier for employers to properly classify interns as non-employees.

Also worth noting, the FLSA only requires for-profit companies to pay employees, leaving non-profits unrestrained and open to inviting unpaid interns into their workforce.

Pay or Not? How to Decide

As a practical matter, employers may have to pay interns to find high-quality student candidates, especially for in-demand fields. Pay can also increase an intern’s sense of pride in their work or loyalty to the company, resulting in greater output and satisfaction for the intern and employer.

With all this in mind, before hiring any new intern or employee, employers should take a few steps to clarify and help protect from later claims:

  1. Apply the test. Compare the position, including title, duties and expectations, against the DOL test before posting the position or conducting an interview. Talk with a lawyer about the legal concerns, but also consider reaching out to others in your industry to see if they typically pay their interns.
  2. Don’t overpromise. When posting a position and conducting an interview, be clear about the nature of the work (temporary, part or full-time) and compensation and benefits. If you decide the position should be unpaid, do not allude to the potential for a full-time job if the candidate completes the internship or make any promise of later or “under the table” compensation.
  3. Get it in writing. Work with an attorney to draft an unpaid intern or employment agreement and have the new hire sign the agreement before starting. The agreement should include a provision identifying and even cross-referencing certain provisions of the employee handbook that are applicable to the intern, such as non-discrimination, drug and alcohol, electronic communications, etc.
  4. Observe potential. Monitor the intern’s work over the summer and consider whether he or she is a good fit for your team long-term. It is not illegal to hire an intern as an employee later, but do not dangle the carrot of long-term employment while the intern is unpaid.
  5. Consider word-of-mouth. Provide meaningful opportunities and experiences for the intern. The last thing you want is to have an unhappy intern who could later consider suing you for unpaid work, or – more likely – tell his or her friends and school that your company has a poor work environment. Bad word-of-mouth travels quickly, and employers do not want to alienate a potential recruitment tool, such as college placement programs, or hurt their reputation in the community.

For more information about internship and employment issues, please contact our Labor and Employment group.

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