Is Your Unpaid Internship Legal? An Employer’s Guide

With the summer approaching, companies are gearing up to invite students and recent graduates to join their ranks as interns. While internships can be valuable learning experiences for new workers, many employers are unsure if — or what — they should pay these incoming workers.

Employers often assume that internships are unpaid, but this practice can put your company at risk for minimum wage and overtime violations. Here’s what your company needs to know before hiring interns.

Do interns need to be paid minimum wage?

An internship is a short-term opportunity for students or new workers to gain experience in a particular industry, and it can be paid or unpaid. Often students will apply for unpaid internships because they want the experience, the connections, and/or they will earn academic credit for completing the program.

While these programs can also benefit an employer, they should not be seen as a way for companies to hire free help. Interns are not replacements for employees. Whether or not an intern should earn minimum wage during this time will depend upon the program and if it adheres to the Department of Labor’s requirements.

What is the primary beneficiary test and what does it mean for internships?

The Fair Labor Standards Act (FLSA) requires for-profit employers to pay their employees minimum wage and overtime for hours worked. However, some workers may not be considered “employees” under the FLSA, which would mean they do not need to be compensated.

In January, The Department of Labor updated their six-part test to determine unpaid intern status and replace it with a “primary-beneficiary test.” While the previous test required workers to meet all six parts in order to be considered an unpaid intern, the new primary-beneficiary test is considered flexible and no single factor is determinative. Instead, the test should be used to determine if the intern or the employer is the primary beneficiary in the relationship.

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—and vice versa.
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.
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.

The takeaway from this test is interns should not be a substitute for a regular employee and instead need to be learning new skills they can apply in different employment opportunities. If your internships program is not structured around an academic experience, then these interns are more likely to be viewed as regular employees that need to be be paid for their work.

Federal Rules for Non-Profit Employers vs. For-Profit Employers

When it comes to unpaid workers, non-for-profit employers are in a different position. They can enlist the help from unpaid volunteers.

The FLSA allows “individuals to freely volunteer in many circumstances for charitable and public purposes. Individuals may volunteer time to religious, charitable, civic, humanitarian, or similar nonprofit organizations as a public service and not be covered by the FLSA.” However, your company will want to be cautious when classifying someone as a volunteer. FLSA has listed the following situations in which individuals would be classified as employees instead of volunteers.

• In most cases, an individual cannot volunteer in commercial activities, like helping in a gift shop, without be considered an employee.
• An individual cannot be compensated or promised compensation for volunteering for public service, religious or humanitarian objectives.
• Typically, such volunteers serve on a part-time basis and do not displace regular employed workers or perform work that would otherwise be performed by regular employees.
• In addition, paid employees of a non-profit organization cannot volunteer to provide the same type of services to their non-profit organization that they are employed to provide.

State Requirements for Hiring Unpaid Interns

Some states have additional requirements for employers that want to hire unpaid interns. An example is the State of New York which extends the DOL requirements for unpaid interns in not-for-profit businesses as well as for-profit businesses. Before you establish an internship program, be sure to check your state requirements to ensure you remain compliant!

Tips and Tricks for Employers with Unpaid Interns

Many companies have created unpaid internship programs that are focused on educational experiences; however, they should still work to maintain these compliant programs. Here are some steps they should consider when managing their programs.

• Recruiting materials and advertisements should reflect the language used in the new primary-beneficiary test.
• Have incoming interns sign an agreement/disclosure that includes the following things:
  • The start and end dates of the internship.
  • A statement that the intern understands that this is an unpaid internship and they will not receive wages for any work performed.
  • A statement that the intern understands there is not a job position tied to the completion of the internship.
• Ensure your internship remains an educational environment that teaches interns valuable and transferable skills. Train your managers to monitor interns workload so that they don’t take on administrative or clerical tasks that should be handled by regular employees.

Generally, most workers do not meet the requirements to be an unpaid intern or volunteer. If your company is uncertain if your worker qualifies as an unpaid intern, the safest thing to do would be to pay them for their time worked. And the competition for interns could be rising, which has led to a 7.8% increase in pay for paid internships.

Internships can be valuable for both the employer and intern. To get the most out of the position, make sure you’re on the right side of the law and adhering to your company’s policies.

Need help determining if your interns should be paid? Our HR advisor team can help! Schedule a demo today and meet the team. 

This article is for informational purposes and is not meant to provide legal, regulatory, accounting, or tax advice.