Unpaid Internships: No Panacea

Especially in these tough economic times, your company is looking to cut labor costs however it can.  And if you can, at the same time do, a favor for a deserving young person looking to gain industry experience, all the better.  An unpaid intern for your organization, then, would seem like a great idea, right?  You get free help and the intern gets a resume enhancer.  Win-win?

Not so fast.  Your well-intentioned efforts to provide an enterprising student with invaluable real-world experience (with the additional benefit of getting some high-quality, low-cost help for several months) may end up costing you more in dollars and headaches than you’d bargained.

Interns are people, too (and are likely employees, as well)

The Fair Labor Standards Act (“FLSA”) and similar state-specific wage and hour laws govern compensation payment practices for employees.  The FLSA defines the term “employee” broadly and includes any person who is “suffer[ed] or permit[ted] to work.”  It requires employers to (subject to several narrow exemptions) pay employees at least minimum wage for each hour worked and overtime (time and a half the employee’s regular rate) for hours worked in excess of 40 in a workweek.  State laws may impose other obligations.

According to its official policy, the U.S. Department of Labor (“DOL,” the agency responsible for enforcing the FLSA) designates most “interns” as regular employees and takes the position that, as employees, interns are entitled to compensation for the work they preform.  This includes at least minimum wage and overtime.  It is not enough that an intern has agreed to work for free, that the company has titled the position an “unpaid internship,” or that the intern is receiving school credit for their work – whether an intern is an employee (and therefore entitled to compensation) is a matter of law, not agreement or contract or opinion.

Because the Supreme Court said so, that’s why

In light of the DOL’s position, companies should assume that an intern is an employee and entitled to compensation for their work.  The law, though, recognizes the laudable public policy of encouraging companies to offer on-the-job training, and the United States Supreme Court has carved out a narrow exception that may, in limited circumstances, apply to and allow for unpaid internships.

According to the Supreme Court, the term “suffer or permit to work” cannot be interpreted so as to make a person whose work serves only his own interest an employee of someone who simply provides aid or instruction.  This exclusion may apply to interns who receive training for their own benefit (educational, experiential, etc.) if the internship program satisfies six defined criteria when considered against all of the facts and circumstances of the program.

The six criteria are:

  • 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 – The more an internship is structured around classroom instruction and/or an academic experience, the more likely the internship will be viewed as a part of the individual’s education (and therefore for the intern’s benefit).  The more the intern is engaged in the substantive operations of the company or performs productive work (such as filing, clerical work, or assisting customers), the more the intern starts to look like an employee.
  • The internship experience is for the benefit of the intern – A position in which the intern learns skills that can be used in a variety of employment settings, not just skills applicable one employer’s operations, is more appropriately considered an internship.  Likewise, if the intern receives academic credit for the work performed, the easier the argument that the experience is for the intern’s benefit, not the company’s.
  • The intern does not displace regular employees, but works under the close supervision of existing staff – The law will not smile upon using unpaid interns as a substitute for regular workers who would otherwise be paid.  If an employer would have hired additional workers or required existing workers to work more hours if the intern had not performed the work, the intern will likely be considered an employee and be entitled to compensation.  If, on the other hand, the intern is merely shadowing existing employees and learning the business under regular employees’ tutelage, the more likely the position will be considered a bona fide educational experience and qualify for an internship exemption from compensation obligations.
  • The employer that provides the training derives no immediate advantage from the intern’s activities (and on occasion its operations may actually be impeded)The more the intern’s services benefit the company’s operations through, for instance, increased revenue, enhanced productivity, or improved efficiency, the more likely it is the intern should be compensated.  If, however, the company spends time, money, and effort on the intern that is actually diverted away from the company’s bottom line, the arrangement can be more legitimately categorized as an internship.  This criterion is consistent with the notion that the internship is a training opportunity for the intern, not a low-cost staffing option for the company.
  • The intern is not necessarily entitled to a job at the conclusion of the internship – A genuine unpaid internship must be more than an extended interview or trial period to determine a worker’s suitability for future employment.  If there is an express or implied expectation that the intern will ultimately be hired on a permanent basis, the intern would likely be considered an employee.  True unpaid internships should be of a fixed duration, established prior to the outset of the internship, and an employer should be prepared to demonstrate that its internship program is not merely a self-serving employee pipeline.
  • The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship – Although the intern’s agreement to forego monetary compensation is not, in and of itself, sufficient to exempt the intern from the FLSA’s compensation requirements, it is a prerequisite to a lawful unpaid internship program.  Employers are advised to have clear, unambiguous, written internship program guidelines that expressly state that the intern will not receive wages (or a guarantee of future employment) and to have the intern acknowledge their receipt of and agreement to the policy.  The program guidelines should also outline for the intern the learning objectives, describe the types of training available, and set forth a conspicuous disclaimer that the intern is not an employee.

A properly classified “unpaid internship” must meet all six of these elements.  Only when all six are satisfied can an employer lawfully avoid the FLSA’s minimum wage and overtime violations.  Otherwise, the intern is entitled to monetary remuneration for their work, as well as the protection afforded by other federal, state, and local employment laws.

A simple cost-benefit analysis makes the answer clear

An internship program, therefore, is not a quick, easy, and/or cheap alternative to regular employees.  Unless the honest purpose of the internship is to offer educational or vocational training opportunities to folks looking to dip a toe into the workforce, shortsighted employers who have tried to take advantage of a misclassified intern may find themselves faced with tax penalties, wage and hour liability, and other legal jeopardy that far exceed the perceived cost savings from a temporary unpaid hand around the business.

When in doubt, therefore, about whether your company’s internship program would satisfy all six criteria and pass DOL or Internal Revenue Service scrutiny, a safer course would be to pay the interns at least the applicable minimum wage (which may be different depending on the worker’s location) and any overtime for which they become eligible.  If the intern is not worth even this marginal expense, perhaps the overall efficacy of the internship program should be evaluated.

We all know that there is no such thing as a free lunch.  There’s also no such thing as a free intern.

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Author: Todd Stanton

Todd is the founder of Stanton Law, LLC in Atlanta, GA, where he is focused on helping companies avert employment-related issues without sacrificing managerial efficiency. “I take great pride in being able to provide counsel to employers and help them achieve practical solutions to what are often very personal, and potentially expensive, problems. I feel very lucky to be where I am right now, doing work I believe in. I really have a pretty good gig.” View all posts by Todd Stanton →

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