Unpaid business internships: they seem like an obvious win for your business. But, proceed judiciously before you launch an unpaid internship program to, say, help with a spike in summer business or to cover for regular employees going on vacation. There are federal and, in many cases, state regulations you must follow, and failure to do so can put your business at substantial risk.
First off, forget about those internships you see on television and in the movies, where the interns are just toadies who do coffee runs, take the company truck to the car wash, and pick up the boss’s dry cleaning. Sonja Morgan, one of Bravo’s Real Housewives of New York City, has a whole stable of college students she refers to as “interns” who often perform menial tasks and run errands. She often refers to the valuable work experience they are gaining, but unless that work experience is how not to run an internship program, it doesn’t seem to translate to any meaningful real-world job. Worse, it seems to be just asking for legal trouble.
Paid vs. Unpaid
The Wage and Hour Division (WHD) of the U.S. Department of Labor is very specific about when an internship can qualify for exemption from the Fair Labor Standards Act (FLSA.) That exemption means the internship can be unpaid. Otherwise, the FLSA requires that hours worked be paid at least the current minimum wage and that overtime kicks in after 40 hours of work in any given week. The WHD’s Fact Sheet #71, well-known in labor and employment law circles, sets out a six-part test for unpaid interns:
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.
Potential Pitfalls
Employers of all sizes face liability for misclassification of employees as interns. The WHD is in charge of enforcing the FLSA and will respond to complaints with potentially disruptive audits and investigations. Their enforcement power allows them to file suit and collect back pay and, in some cases damages, for violations.
Federal law isn’t the only concern for employers. The FLSA should be considered a floor, the minimum compliance required on your part as an employer. Some states and municipalities have their own wage-and-hour laws that provide protections above and beyond those of the FLSA. For instance, New York State’s Wage Requirements for Interns in For-Profit Businesses Fact Sheet specifies that unpaid interns must be “notified in writing” that they will not receive wages. This goes well beyond the WHD requirement that the intern “understand” the position is unpaid. Also in New York, the intern cannot receive benefits given to employees, including “discounted or free goods and services from the employer.”
Employment Status: It’s Complicated
Even if a business is operating in a state that doesn’t have any additional requirements over the FLSA, the six-point test isn’t necessarily the end-all and be-all of determining when an intern can be unpaid. Federal courts have issued opinions all over the board, with some strictly interpreting the WHD test and others using a “totality of the circumstances” test, in which not every one of the six points of Fact Sheet #71 need to be met.
It gets even more complicated when an internship program offers academic credit or is for a nonprofit or government agency, which many times are exempted from the test altogether.
HR professionals, compensation experts, and in-house counsel can help large business properly classify workers, but most small businesses need outside legal help. This can be in the form of packaged business legal services or specific advice from a labor and employment expert. Whatever the case, getting it right isn’t always easy and getting it wrong can end up being expensive, which is why all businesses should examine their intern programs carefully.
Bio: Leigh Raper has a degree in English Literature from the University of Miami and a JD from Pepperdine University School of Law. She received her MFA at the UCR-Palm Desert program for Creative Writing and Writing for the Performing Arts. She writes fiction and blogs about pop culture, as well as items from the world of labor and employment law. Leigh also writes for AvvoStories, brought to you by Avvo, the leading online legal marketplace connecting consumers and lawyers. Avvo’s free Q&A forum with more than 9 million questions and answers, along with on-demand legal services that provide professional counsel for a fixed cost, make legal faster and easier.
