U.S. Department of Labor Endorses More Flexible Unpaid Intern Test

Q.  Our company wants to establish an internship program and host student interns to work alongside our employees. Do we need to pay the interns?

A.  Possibly. Over the past few years, courts and the Department of Labor (“DOL”) have carefully examined the relationship between businesses and unpaid student interns to determine whether students working at a company are more properly classified as unpaid interns or employees protected by the Fair Labor Standards Act (“FLSA”).  Under the FLSA, if an individual is deemed a non-exempt employee, that employee must be paid at least a minimum of $7.25 per hour and one and a half times their regular rate of pay for all hours worked in excess of 40 in a workweek.  The minimum wage is higher in many states, including New York and New Jersey.

Previously, the Department of Labor required employers to meet a six-part test to prove that an individual was properly classified as an unpaid intern. One of the benchmarks employers were required to prove under the prior test was that the employer providing the internship opportunity “derives no immediate advantage from the activities of the intern . . . and on occasion its operations may actually be impeded.”

Citing four separate appellate court rulings that had rejected DOL’s six-part test, the DOL recently announced that it would use a more flexible “primary beneficiary” test in order to determine the “economic reality” of whether an individual is an intern or an employee. Going forward, the DOL will consider the following seven factors to determine whether an individual is an intern:

  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.

No single factor described above is determinative and DOL cautions that whether an individual is properly classified as an unpaid intern will depend on the unique facts of any particular case.  Employers should also be aware that some states have their own test for determining whether an intern must be paid. For example, the New York Department of Labor lists eleven separate factors relevant to determining whether an unpaid intern should be considered an employee under New York law.

Before establishing an internship program or allowing a student to intern at a business, companies should examine the “economic reality” of their relationship with interns, review the new DOL Fact Sheet on interns, and consult with a qualified employment lawyer to ensure that the internship program complies with both federal and state wage and hour laws.

Lee E. Tankle

Summer Internships: To Pay or Not to Pay?

Q.  My company is thinking about hiring a summer intern. Is there a requirement that we pay the intern, or can we hire him or her on a voluntary basis?

A.  Now that the weather is getting warmer, many companies are looking at their workforce needs during the summer months. Summer internships provide an excellent way for interns to get much needed “real world” job experience, while helping employers by adding another set of hands to complete projects that have not been completed during the rest of the year.

But must the employer pay for this assistance?

In most instances, the intern must be paid at least minimum wage and overtime for time worked above 40 hours in a workweek. Thus, payment of a small stipend, that does not meet minimum wage requirements, will not be enough.  The Fair Labor Standards Act defines the term “employ” very broadly as including anyone who is “suffered or permitted to work.”  Internships in the “for-profit” private sector will most often be viewed as employment.

There is an exception, however, for interns who receive training for their own educational benefit, if the training meets certain criteria. Courts looks to the following six-part test to determine whether an internship can be voluntary:

  1.  The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If all of the factors listed above are met, the intern is not considered to be “working,” and the Wage Act’s minimum wage and overtime provisions do not apply.

Thus, if the internship program is structured around a classroom or academic experience (such as when the intern receives college credit for the program), as opposed to the employer’s actual operations, then it is more likely that the internship will be viewed as an extension of the individual’s educational experience.

Likewise, if the employer is providing job shadowing opportunities that allow an intern to learn certain functions under the close and constant supervision of regular employees, but the intern performs no or minimal work, the activity is more likely to be viewed as a bona fide education experience and payment is not necessary.

Conversely, if the intern displaces a regular employee and is expected to perform productive work, then the internship is considered to be “employment” and must meet minimum wage and overtime requirements.

Be aware that the test for determining whether an internship is volunteer work is interpreted quite narrowly.  Before hiring that summer intern, think through the above test carefully to see if the internship qualifies for the exception.  Most interns must be paid for their time.

Furthermore, while some employers try to get around the minimum wage laws by hiring their intern as an independent contractor, that relationship can be subject to scrutiny if the relationship is not classified correctly. As a general rule, if the employer expects the intern to work at the job site and provides supervision, the intern will be considered to be an employee and not an independent contractor.

– Tracey E. Diamond