Do I Have to Pay a Summer Intern? The Legal Ins and Outs of Unpaid Internships

Why Do Students Opt for Unpaid Internships?

If there's no paycheck, why would a starry-eyed student sign on for an unpaid internship? The one-word answer is "experience"—sometimes worth more professionally than the money from a traditional summer job. A student may see the opportunity as the investment in the future, a resume-builder. Students are looking for practical exposure, mentorship opportunities, and real-world experience. Internships, paid or unpaid, can be a chance to:

1. Develop hands-on skills outside the classroom;
2. Learn the inner workings of an industry or business;
3. Make connections that may lead to future job offers or references;
4. Receive guidance and mentoring from professionals; and
5. Test-drive a potential career path before making a long-term commitment.

Some internships offer academic or vocational credit, but even if they do not, they may be well worth it for the student. 

For business owners, the arrangement may work well—they get some labor and maybe a fresh perspective. 

Internships, when structured right, can be beneficial for both the intern and the company. The organization gets to invest in the future of the workforce (and maybe even get a little extra help), while the intern gains valuable experience and exposure. You may have the work but lack the room in the budget. Can you offer an unpaid internship? The answer is—as so often in law—maybe. This post explores the current guidance for when an unpaid intern may be permissible. 

The main issue with having an unpaid intern is, well, they aren't getting paid. And federal law, specifically the Fair Labor Standards Act (FLSA), frowns upon having someone work for free. So how do unpaid interns fit into the mix? 

Different Standards for Nonprofits, Ministries, and Public Agencies

The answer to the question may turn on whether the organization is for-profit or non-profit. Nonprofits and ministries can more easily benefit from unpaid interns. For one thing, the "primary beneficiary" test does not apply. Because of the well-established principle that religious or other charitable organizations can have volunteers who, by definition, are freely contributing their time and talents with no expectation of compensation, these organizations are treated somewhat differently.

This is because, as the Department of Labor (DOL) puts it, "Unpaid internships for public sector and non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible."[1]  Charitable organizations often run on volunteer work anyway, and internships are no different. 

Congress specifically excluded public-agency volunteers from FLSA's definition of employee if they don't receive compensation (other than nominal) and they are not otherwise employed to do the same thing.[2] 

Caution must be used, as nonprofits, ministries, and agencies can all have employees, but may also have volunteers. The distinction must be maintained between the two. 

And volunteers cannot be used in commercial businesses. A nonprofit that runs a revenue-generating store, for example, can't have "volunteers" working the cash registers; those people need to be paid minimum wage and time and a half for overtime.[3]

For-Profit and FLSA

For-profit companies are treated differently. In most cases, an intern at a for-profit private sector company will need to be paid (minimum wage). There is a fairly narrow exception for legitimate internship programs. The DOL has developed informal guidance for when an intern will not be considered an "employee" of a company and therefore, does not need to be paid. The kernel of the test is who is the "primary beneficiary" of the relationship (it has to be the student). 

1. Whether the intern and the employer clearly understand there is no expectation of compensation—no promises, express or implied;
2. The internship, even though it takes place in the workplace employer, is similar to training that would be given in an educational environment;
3. Whether the internship is integrated into the formal academic program by academic credit or integrated coursework;
4. Whether the internship accommodates to the academic calendar;
5. Whether the internship's duration is limited to the period of "beneficial learning";
6. The intern does not displace regular employees, but complements their work while providing significant educational benefit to the intern; and
7. The internship is conducted without any entitlement to a paid job at the end.[4]

No single factor is determinative, but if analysis of these factors reveals that an intern is actually an employee, the student is entitled to minimum wage and overtime pay.

All of these factors must be present in order for the internship program to not run afoul of the FLSA. Also, companies must also be aware that the DOL test is not necessarily binding on courts considering the issue in litigation. And, as explained below, this can often lead to uncertainty in planning for organizations.

Federal Appellate Courts Reframe the DOL Test for Unpaid Interns
In previous years, the DOL had a six-factor test that was fairly tough for employers to meet, yet employers tried to bring on unpaid interns to do the work no one else wants to do. And the interns fought back. Litigation around this issue has increased, and companies have gotten intern-shy, leading to great disappointment for many would be interns. 

Here are some of the court standards.

The 2nd Circuit Court of Appeals (which covers New York, Connecticut and Vermont) took a fresh look at the internship test when it decided the now infamous case involving unpaid interns who worked on the movie "Black Swan." When deciding that case, the Court declined to adopt the DOL's then-test, and instead crafted its own. Spoiler alert: these are going to sound like the current DOL standards, because the DOL later adopted them. 

The Court explained that the proper question was whether the intern or the employer was the primary beneficiary of the relationship. To determine this, the Court listed a set of non-exhaustive factors, none of which was dispositive. Under the test, courts consider the extent to which: 

1. 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.
2. The internship provides training similar to that given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The internship is tied to the intern's formal education program by integrated coursework or the receipt of academic credit.
4. The internship accommodates the intern's academic commitments by corresponding to the academic calendar.
5. The internship's duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The intern's work complements, rather than displaces, the work of paid employees, while providing significant educational benefits to the intern.
7. The intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.[5]

Unlike the DOL's previous test, not all of these factors need to point one way in order for the test to be satisfied. This test is a little more forgiving for employers, allows employers a little more benefit from the internship, and gives the courts more flexibility in determining the ultimate question. With more flexibility, however, may come more uncertainty, as it is more difficult to predict how a court will ultimately come out under any one circumstance. 

Other circuits have adopted the same or similar tests, focusing on the same idea of the primary beneficiary. 

State Approaches: Floor and Ceiling

While the federal standards implement FLSA across the country, some states are even stricter. 

In New York, the training received must be transferable to the general workforce—and it can provide no immediate benefit to the company. In fact, the NY DOL suggests that unpaid interns will require additional oversight and resources.[6]  New York appears to overlook the question of why anyone would want an intern of no benefit who consumes resources.

New Jersey limits student learners to school-to-work transitions, with credit and only incidental productive work. 

In California, unpaid internships must occur in partnership with a school and be approved by the state. Otherwise, the employer must pay at least minimum wage. 

New Jersey limits student learners to school-to-work transitions, with credit and only incidental productive work.[7] 

In California, unpaid internships must occur in partnership with a school and be approved by the state. Otherwise, the employer must pay at least minimum wage.[8] 

It's important to track possibly changing standards in your state or even locality.

The Hidden Costs of Unpaid Internships

The point of an unpaid internship is to save on wages. But it's important to consider whether hidden costs could erase those savings. With any intern, paid or unpaid, there will be some staff time to supervise, train, and mentor interns. This will slow productivity, at least at the outside. There are also administrative burdens and perhaps legal costs, such as for crafting a good internship agreement and monitoring compliance standards. 

There are also the optics of perhaps taking advantage of students or limiting the work pool to students who are more financially independent. Unpaid internships can be a "pay-to-play" opportunity. Paid internships are more affordable for students without financial backing.

International Students as Interns

While international students are not authorized to work for pay, it still may not be possible to bring them on as an unpaid intern. The standards are still in effect, with the additional risk that the student might violate the terms of the visa. A university's international student office might be able to advise on compliance.

How to Develop a Legally Sound Unpaid Internship Program

For organizations wanting to develop an unpaid internship program, be cautious. This is a complex area, and you must carefully craft such a program. Every factual scenario is different, and state and local laws may apply in addition to the FLSA, so individualized advice from your attorney is important. But here are some general principles that may be instructive:

Check state and local laws.

Both state and local laws may be stricter than FLSA, or may differ slightly, so check all applicable laws, make a comprehensive checklist, and make sure your proposed internship program complies. Remember that this area of the law is likely to change fairly rapidly.

Set clear goals.

Before investing in an internship, it is worth defining what you hope to achieve for the company and for the interns. What are the long-term goals? Are you nurturing future talent? Trying to accomplish short-term projects? The goals must also be evaluated against your checklists of requirements.

It is helpful if the projects and responsibilities of the interns align with their educational pursuits (and in some places it may be required). 

Plan structured support for interns in the form of assigned mentors or supervisors who can guide them and provide structured feedback. Mentors help interns understand the workplace and connect academic learning with practical application.

Having clear goals will help the internship be beneficial to all concerned, as well as legally compliant.

Orientation and onboarding are helpful.

An internship program will be much more effective with a strong orientation to workplace norms, expectations, and your company culture in particular. It will help to address how interns can understand projects and get guidance. In addition, they may need training in specific skills and software. This will give interns confidence and some soft skills for moving forward.

Evaluate success.

If you define clear objectives and ways to measure success, this will provide direction for both interns and their supervisors. Delivering tangible value will help to avoid complaints and also help you to prove that the intern is the primary beneficiary.

Later, evaluating success by these metrics will help you evaluate whether the internship is serving the program well, as well as whether interns are developing professionally. Evaluation can include tracking completed assignments, getting feedback from mentors, and conducting exit interviews with interns. The interns themselves can comment on what worked, what didn't, and how the program can improve.

Be very clear about compensation.

One of the main considerations in both the DOL and the 2nd Circuit's test is that both the intern and the employer are on the same page about compensation. If you are forging ahead into unpaid internship territory, the fact that the intern is not being paid must be in writing and be agreed to by both parties. While such an agreement may not forestall a future FLSA claim, having this agreement takes away any argument that compensation was somehow implied.

Eliminate the "grunt work."

An unpaid internship program should be a worthwhile experience for the intern. Do not expect to have an unpaid intern pick up an executive's morning coffee or spend the entire summer on that tedious filing project that no one else wants to do. The DOL and courts will be looking at what the intern is actually doing, and if it does not include beneficial learning for the intern, it will not look good for the employer. Not only is this likely a requirement for an unpaid internship, but it is only fair, given that the intern is giving up earning potential for the opportunity to be with the organization and learn the ropes.

Instead, provide interns with substantive (yet low-risk) tasks that relate directly to their field of study or help with professional development. For example, a writing intern might do research or draft content that is later edited by a staff writer, or a science intern can participate in supervised fieldwork. If an intern is pursuing a career in digital marketing, involve the intern in real-world marketing campaigns or let him or her contribute to your social media strategy. It's not that there can't be any tedious work for interns, but the work needs to be appropriate to their background and meaningful for growth.

Interns' contributions should assist paid staff and projects should be thoughtfully designed to offer real educational value. Think instead of that interesting research or marketing project that you have been planning to have done. And consider finding an intern with valuable skills to do something unique, such as writing code or creating a Spanish-language brochure.

By being intentional about the tasks you give to interns, you create an experience that benefits both the organization and the intern.

Don't replace a paid worker with an unpaid intern.

An unpaid intern should not be displacing or replacing a paid position. Don't think you can cut costs by having an unpaid intern fill an otherwise vacant position. If you would have otherwise hired someone to do the work, the position likely needs to be paid. Again, nonprofits, such as religious organizations, have a little more leeway on this front, as it is customary to have volunteers perform work that would otherwise be performed by a paid employee.

Unpaid internships can be legally structured, but it takes careful attention to detail. Understanding the various rules and tests can put the organization one step closer to compliance when developing these programs. 

Be aware that in many states, unpaid interns are protected by harassment and discrimination laws.

Do Think About Paying the Intern.

We've considered how many parameters are put on unpaid internships and the added burdens to the organization. It may actually be more cost-effective in terms of legal compliance, staff hours, and the headaches involved just to pay the interns at minimum wage or more. 

In addition, consider how compensation may impact the intern's motivation and the quality of their work. Some interns may view the experience as less of a priority and feel like they are doing the employer a favor (few interns would understand that even taking on an intern can be a lot of work). They may even ghost their would-be employer for a better opportunity. 

Paid internships may draw candidates who are more motivated or who have higher skills. Employers have noted that even modest compensation tends to raise work quality and accountability. In a paid internship, the work doesn't have to be for the "primary benefit" of the intern—they are not doing you a favor.

Conclusion

Internships can provide good Public Relations (PR) for the organization and possible future employees, as well as some immediate help, but only if they are well thought out and supervised. They need to be legally compliant so that the organization avoids trouble. This likely involves a team of management and legal counsel working to set up the program. However, internships can be well worthwhile both as a service to the interns and for the organization's long-term benefit.

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^{1 https://www.dol.gov/agencies/whd/fact-sheets/71-flsa-internships}

^{2 https://www.law.cornell.edu/uscode/text/29/203}

^{3 See, e.g., Tony & Susan Alamo Foundation v. Secretary of Labor, 471 U.S. 290 (1985).} 

^{4 U.S. Dep't of Labor Wage and Hour Div., Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act, January 2018, available at https://www.dol.gov/agencies/whd/fact-sheets/71-flsa-internships.}

^{5 Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528, 536-37 (2d. Cir. 2015); see also Schumann v. Collier Anesthesia, P.A., 803 F.3d 1199, 1211-12 (11th Cir. 2015) (adopting the 2nd Circuit's test).}

^{6 https://dol.ny.gov/system/files/documents/2023/09/p725-6-22-23.pdf}

^{7 https://www.law.cornell.edu/regulations/new-jersey/N-J-A-C-12-56-18-2}

^{8 https://www.littler.com/sites/default/files/Cal%20DLSE%20Manual%20Section%2046.6.4.pdf?srl7b99zho=&utm_source=chatgpt.com}