Internship program considerations: compliance with labor laws and avoiding potential legal issues

The internship experience is designed to provide students with the opportunity to gain supervised experience in a work setting, while the employer gains an opportunity to help the community by participating in the educational process as well as the chance to identify potential applicants for the future. An employer may establish an internship program with a college or university that provides academic credit to the student intern in the intern’s field of study.

Alternatively, an employer may implement an internship program independently that allows students to experience its workplace and learn generally about its business. Internships may be paid or unpaid, depending on the nature of the internship and whether the intern is considered an employee.

Paid or unpaid?

The Fair Labor Standards Act (FLSA) requires for-profit employers to pay employees for their work. Interns and students, however, may not be employees under the FLSA, in which case the FLSA does not require compensation for their work. Interns who qualify as employees rather than trainees typically must be paid at least the minimum wage and overtime compensation for hours worked over 40 in a workweek.

Courts have used the “primary beneficiary test” to determine whether an intern or student is, in fact, an employee under the FLSA. In short, this test allows courts to examine the economic reality of the intern-employer relationship to determine which party is the primary beneficiary of the relationship.

Courts have identified the following seven factors as part of the test:

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; and
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.

Courts have described the “primary beneficiary test” as a flexible test, and no single factor is determinative. (See Glatt v. Fox Searchlight Pictures, Inc., 791 F.3d at 384; see also Benjamin v. B&E Educ., Inc., 877 F.3d at 1146.) Accordingly, whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case. If analysis of these circumstances reveals that an intern or student is actually an employee, they are entitled to both minimum wage and overtime pay under the FLSA. On the other hand, if the analysis confirms that the intern or student is not an employee, they are not entitled to either minimum wage or overtime pay under the FLSA.

The costs of misclassification

Misclassifying someone as an intern when they are really an employee can be very costly. Employers can be sued for FLSA and/or state law violations. If successful, the misclassified employee will be entitled to back pay and liquidated damages in the same amount (i.e., “double backpay”), plus attorneys’ fees. FLSA violations may carry a penalty of up to $1,000 per violation. In addition, the FLSA (as well as some state laws) allows corporate officers and directors to be held personally liable for minimum wage and overtime violations under certain circumstances.

How to avoid misclassification

To avoid being on the hook for significant amounts of unpaid wages, employment taxes, and penalties, make sure that an unpaid internship program:

• Is similar to training that would be provided in an educational environment;
• Predominantly benefits the interns;
• Provides interns with skills they can use in multiple employment settings rather than only in the employer’s operation;
• Ensures interns do not perform the routine work of the business on a regular and recurring basis;
• Does not result in the displacement of regular employees;
• Does not merely augment the existing workforce during specific time periods;
• Puts interns under the close supervision of existing staff;
• Provides no immediate advantage to the employer from the interns’ activities;
• Impedes the employer’s operations on occasion;
• Runs for a fixed length of time, established before the internships begin;
• Does not entitle interns to employment after their internships conclude; and
• Makes clear to interns that they are not entitled to wages for their time during the internships.

Ensure internships work for everyone

The benefits of internships should be mutual: companies create an accessible group of potential future hires, while interns obtain real-world workplace experiences and training opportunities, while being provided with valuable networking opportunities. To ensure your organization can reap the benefits without being exposed to costly risks, evaluate each internship on a case-by-case basis, and carefully consider the structure of your internship program.