Make Sure Your Unpaid Interns Are Not Employees

May 6, 2010

By: Subhash Viswanathan

As summer nears, employers may be asked by college students about unpaid internship opportunities. Unpaid internships frequently benefit both the employer and the student. The student gains real-life experience, resume enhancement, networking opportunities, and perhaps a step toward a paid position after graduation. The employer has a low cost opportunity to evaluate a potential applicant. But employers must exercise caution in the way the internship program is set up and in the functions the intern performs.

The U.S. Department of Labor (“DOL”) recently issued a new Fact Sheet reminding employers that unpaid interns may be “employees” under the Fair Labor Standards Act (“FLSA”), the federal minimum wage and overtime law. For employers considering unpaid internships, the key question is whether the unpaid intern is “suffered or permitted” to work within the meaning of the FLSA. DOL stresses that in the “for-profit” sector, internships will most often be viewed as employment. However, there is a narrow exception for training programs. DOL has identified six criteria which must exist to satisfy the exception:
 

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.
    

In determining whether an intern is really an employee, DOL distinguishes those experiences that are similar to an educational environment from those that are not. If the program is structured around a classroom or academic experience, the student gets educational credit, or the experience provides skills that could be used in multiple employment settings the intern is less likely to be deemed an employee. If, however, the business is dependent on the intern’s work or the intern is performing productive work, the intern is more likely to be deemed an employee – even if the intern may receive some benefits (e.g., developing a new skill or improving work habits).

Another key consideration is workforce displacement. According to DOL, an intern is an employee if the employer would have employed additional workers or would have required existing employees to work additional hours but for taking on the intern.

A determination that an unpaid intern is, in fact, an employee can have consequences beyond minimum wage and overtime obligations. Discrimination laws, worker’s compensation coverage, state and federal tax laws, employee benefits and unemployment insurance coverage are all implicated in the event of a misclassification. Because the impact of a potential misclassification is so significant, before accepting any unpaid interns an employer, in particular, a for-profit employer, should, at a minimum, take the following steps:

1. Provide an agreement or letter making it clear there is no pay and no guaranteed job in the future;
    
2. Adopt a policy that sets up strict supervision of the internship program and the intern and assigns a mentor;
    
3. Train supervisors and managers regarding the limits of what interns are permitted to do;
    
4. Ensure the primary benefit of the internship is for the student, not the employer -- minimize assigning the same duties given to regular employees, and do not use interns to displace any employees;
    
5. Arrange for a structured program of internal and, if possible, external instruction; and
    
6. If possible, formalize arrangements with the intern’s college or university, and ensure that the work is being done for college credit.