With the academic year quickly coming to a close, you may already have eager undergrads knocking at your door asking for an internship. Internships, when structured right, can be beneficial for both the intern and the company. The organization gets to invest in the future of our 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 it often is in law—maybe. This post explores the current guidance for when an unpaid intern may be legally “hired.”
Unpaid Interns: Is that Even Legal?
The main issue with having an unpaid intern is that, 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?
First, the answer to the question may turn on whether the organization is for-profit or non-profit. 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. Guidance from the Department of Labor (DOL), the federal agency that enforces the FLSA, suggests that unpaid internships for nonprofit charitable organizations are generally permissible. But even this has its limits. 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.1
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:
"1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training that 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."2
All of these factors must be present in order for the internship program to not run afoul of the FLSA. Essentially, the internship program must be truly for the benefit of the student, and really not provide much benefit at all to the company. This, of course, raises the question of why you would want an intern who is of little to no benefit. But 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.
A Shifting Tide: Federal Appellate Courts Reframe the DOL Test for Unpaid Interns
Clearly, the DOL’s six-factor test is 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 in recent years, the interns have fought back. Litigation around this issue has increased, and companies have gotten intern-shy, leading to great disappointment for many would-be interns. But courts are recognizing that the test for whether someone can be an unpaid intern might not need to be so restrictive.
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 test, and instead crafted its own. 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—and vice versa.
2. 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 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."3
Unlike the DOL’s 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.
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 it is best practice to 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:
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. 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.
Don’t Replace a Paid Worker with an Unpaid Intern
An unpaid intern should not be displacing or replacing a paid position. Do not 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.