Should Interns be Paid or Unpaid?
I recently shared commentary with SHRM regarding unpaid internships, including the legal considerations that employers should keep in mind.
When are internships allowed to be unpaid and when they must be paid?
The short answer is that so long as an intern is properly classified under the law as an intern, they do not have to be paid. Technically, the distinction between paid and unpaid interns does not exist under the law. Rather, the question is whether the worker can properly be classified as an “intern” (and therefore does not have to be paid because the worker is exempt from Fair Labor Standards Act (FLSA)), or if the worker must be classified as an employee (and therefore does have to be paid).
There is a test under the FLSA to determine whether an intern is actually an employee and must therefore be paid. It is called the “primary beneficiary test”. The test looks at the “economic reality” of the intern-employer relationship to determine who is primarily benefiting from the relationship. In short, if the work performed by the intern primarily benefits the employer, the intern is an employee under the FLSA and should be paid. More specifically though, the test has seven non-determinative factors, which include:
- 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.
- 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.
- The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- 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.
- 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.
With respect to non-profit employers, to avoid the obligation to pay interns, they need to either be properly classified as interns pursuant to the primary beneficiary test, or properly classified as volunteers (which has its own analysis). A non-profit may be able to classify an intern as a volunteer if the following factors are met:
- The entity is a nonprofit.
- The intern/volunteer does not expect to receive any compensation (note, small expense stipends may be provided in limited circumstances).
- There is no implied or actual expectation benefits in exchange for work in the future.
- The work performed is on a part-time or short-term basis.
- A regular employee is not displaced by the intern/volunteer.
- The services are freely offered by the intern/volunteer without pressure or coercion and are typically associated with the organization’s volunteer work.
Is the law evolving in this area?
The law is not recently evolving in any substantial way, but employer practices are. Because of publicized lawsuits, potential exposure, and public perception, many employers are moving away from unpaid internships and instead paying interns at least minimum wage. There is a school of thought that unpaid internships disadvantage socially economic diverse individuals, because unpaid internships require individuals to have both the time and the financial security to work for free. It is largely for this reason that last summer the Biden-Harris Administration announced that the Administration would pay its interns for the first time in history, starting with the Fall 2022 session. The press release is available here.
How much do state laws vary in this area?
Many states follow federal law on this topic, but of course, there are some states that have other requirements. Unsurprisingly, California and New York are a couple. For example, California requires that an internship be part of an educational program, requiring school participation or credit, that the intern not receive any employee benefits (including insurance), and that the intern is trained to work in a specific industry as opposed to for that specific employer. Also, any employer wishing to utilize (unpaid) interns must submit an outline of the proposed internship to the California Division of Labor Standards Enforcement. New York requires that the internship provide transferable training (meaning it’s not training specific to that employer) and cannot be of any “immediate advantage” to the employer, even if the intern is ultimately the primary beneficiary.
Also, even if an intern is properly classified so they do not have to be paid, there could be some employment laws that do still apply to them. For example, California, Oregon and New York each have a law extending the states’ statutory prohibitions on sexual harassment and discrimination in the workplace to interns.
What should multi-state employers do if the state laws vary a lot?
Multistate employers wishing to utilize unpaid interns should do their research, talk with trusted employment counsel, and weigh the pros and cons. There can be an immensely high financial burden from claims by interns that they were misclassified and should have been paid as employees under applicable federal, state and local law, which would also be coupled with the potential bad press and strain on company resources that result from litigation.
For legal purposes, does it make a difference if the person gets college credit for an unpaid internship?
Yes, for legal purposes it does make a difference if the person gets college credit for an unpaid internship. I generally advise my clients to not offer an unpaid internship unless the intern is receiving course credit and the intern can provide appropriate documentation supporting their receipt of course credit. Most of the factors in the federal “primary beneficiary test” can be satisfied if the intern is receiving course credit and some states (like California) essentially require course credit. For this reason, only offering unpaid internships to interns receiving course credit is the conservative (and very often advisable) route to go.