Unpaid Internships: Staying in compliance

Unpaid internships are popular across the country, providing benefits for companies and valuable experience for college students or recent graduates. The Department of Labor (DOL) issued guidance in 2010 that addresses how internship programs must be structured to comply with the Fair Labor Standards Act (FLSA).

A common misconception exists that if a student is willing to work for free to get industry experience, then there is no harm in taking advantage of it. Unfortunately, this practice leaves many employers open to substantial legal liability. Make sure your unpaid internships meet DOL standards to help avoid significant penalties.

DOL Guidance

On Jan. 5, 2018, the DOL adopted a new test to determine whether an intern should be paid for his or her work. This determination is based on whether the intern is an “employee” or a “trainee” (legally eligible to perform unpaid work) under the FLSA. These guidelines apply to for-profit, private sector employers. Unpaid internships in the public sector and for nonprofit charitable organizations are generally permissible under the FLSA.

To determine whether an intern can be considered a trainee, the DOL now uses a “primary beneficiary” test that looks at which party in the intern-employer relationship benefits most from the internship. Below is a list of seven factors that federal courts have used to make this analysis:

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.

Courts have described the primary beneficiary test as a flexible test, and no single factor is determinative. Accordingly, whether an intern or student is an employee under the FLSA depends on the unique circumstances of each case.

If analysis of these circumstances reveals that an intern or student is actually an employee, then he or she is entitled to both minimum wage and overtime pay under the FLSA. On the other hand, if the analysis confirms that the intern or student is not an employee, then he or she is not entitled to either minimum wage or overtime pay under the FLSA.

Penalties

Employers who are not in compliance with the DOL regulations face possible administrative penalties and potential lawsuits. Penalties can include owing back pay, taxes not withheld, Social Security and unemployment benefits. In a lawsuit, individuals may also recover interest on unpaid wages, attorneys’ fees and liquidated damages (double the amount of unpaid wages).

Compliance Tips

The following strategies can help your company’s unpaid internships stay compliant with federal law and meet the criteria established by the DOL.

• Work with the student’s university. The school will often sponsor the internship and may offer the student course credit. Coordinating with a university can help ensure that the internship is providing the necessary training to make it an educational experience for the student.
• Make sure the intern is learning skills that are applicable in multiple job settings, rather than being specific to your company.
• Consider allowing interns to observe various aspects of your company’s operations (for example, job shadowing) without always needing to engage in work.
• Make it clear before the internship begins what the responsibilities and expectations will be, that the internship is unpaid and that there is no expectation of a job offer once the internship is over. Keep records of these written expectations along with any other documentation that describes what the intern does, what training is available and what type of supervision is provided.
• If the internship program causes any disruption to your company or represents a time commitment for any of your employees, this should be documented as well. An unpaid internship that satisfies the DOL’s requirements should actually be somewhat of a drain on the employer due to the time put in for training and the lack of production coming from the intern.

If your company has unpaid interns, it is essential that you familiarize yourself with the DOL guidelines and make sure your program is in compliance, as it could be costly for your company to get caught not complying.