Unpaid Internship Considerations for Employers

If your company has interns, listen up! The Department of Labor (DOL) announced that it will adopt the same primary beneficiary test that several appellate courts use to determine whether interns are entitled to minimum wages and overtime pay under the Fair Labor Standards Act (FLSA).

The DOL’s previous six-factor test, which required interns to be paid employees unless all six of the very rigid factors in the test were met, compelled many employers to run paid internship programs to avoid running afoul with the FLSA.

However, the primary beneficiary test is more employer-friendly—offering private, for-profit employers more flexibility with their internship programs. It takes a more holistic approach by evaluating who benefits more from the internship, the intern or the company.

The primary beneficiary test for unpaid internships

Unlike the previous test, the primary beneficiary test asks not whether each factor is met, but rather the extent to which the following factors are met:

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

Not all seven factors need to be met and no single factor is determinative. Establishing whether an intern is an employee under the FLSA is on a case-by-case basis to determine which party (the intern or the employer) is the primary beneficiary of the relationship.

If it’s determined that the intern is the primary beneficiary of the relationship, the intern is not considered an employee under the FLSA and therefore can be unpaid.

What does this mean for employers?

It’s still unclear how the Department of Labor will apply the new test. Employers should have a little more leeway in operating their internship programs under this new guidance.

However, employers still need to structure their internship programs carefully to ensure that the benefit they provide the intern outweighs the productivity the company receives in return.

“If in doubt, a business could always choose to pay an intern at least minimum wage,” advises simplicityHR Director Michele Kauinui.

“But doing so would qualify them as an employee, and therefore, require all applicable laws, like health insurance, overtime, TDI, and workers’ compensation, to be provided if eligible.”

For more details, see Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act from the U.S. Department of Labor Wage and Hour Division.

Structuring unpaid internships

Be aware that an individual’s agreement to work in an unpaid position now does not prevent him or her from seeking alleged unpaid wages later.

Employers who choose to run unpaid internship programs can implement the following to protect their businesses against future wage and hour claims:

• If the internship program is educational in nature, ensure that line managers understand that and do not try to take advantage of “free” labor.
• Rotate interns from department to department to help demonstrate the educational goal.
• Do not decrease regular staffing during periods of internships.
• Ask interns to sign an agreement that acknowledges the educational nature of the program, that the program is unpaid, and that the internship is not a direct route to employment.
• Limit interns’ hours to help dispel any notion that the intern is being taken advantage of by the business.
• Work closely with the educational institution to structure the internship according to course guidelines and curriculum goals.
• Consult with an HR or legal advisor if sponsoring an unpaid internship.