Unpaid interns are seen as a benefit for many businesses, in particular financially-strapped small businesses and startups — it is a low- or no-cost way for the businesses to meet and evaluate potential talent, while the interns themselves get the benefit of the internship experience and the opportunity to make professional connections or secure future employment.
However, it is critical for businesses to ensure that they treat their unpaid interns like interns and not like employees. Recently, former interns from several media companies in New York filed class action suits against their former employers, claiming that they were treated like employees and not like interns and should have been classified as such pursuant to state and federal wage and hour laws and paid accordingly. They claimed that they were made to perform regular entry-level employee tasks and work overtime, and that if they had not been hired their employers would have been forced to hire paid employees to perform their tasks; therefore, the use of interns kept company costs down. Moreover, if interns are in reality being treated like employees, employers may be subject to penalties and fines for failure to pay employment taxes or securing workers compensation insurance, as local laws may dictate.
Because interns are not employees, they are not subject to minimum wage and overtime regulations. Every state has adopted its own test for classifying interns; however, the federal Fair Labor Standards Act has determined its own test for federal purposes, which is a good guideline (though cannot be solely relied on) for employers trying to ensure that they treat their unpaid interns like interns. According to the U.S. Department of Labor, which promulgated the intern test under the Fair Labor Standards Act, a position is an internship rather than regular employment if:
– the internship is similar to training or instruction found in an educational environment
– the internship experience is for the benefit of the intern
– the intern does not displace regular employee, and works under existing staff
– the employer derives no immediate advantage from the activities of the intern, and the employer’s operations may actually be impeded by the internship
– the intern is not necessarily entitled to a job at the end of the internship
– the employee and intern both understand and agree that the intern is not entitled to wages
Although the Department of Labor has decided that all of the above criteria must be met in order for an individual to be classified as an intern, some courts have ruled that while all criteria should be considered, an individual may still be an intern even if all criteria are not met. Additionally, it is unclear whether these standards apply to interns at non-profit organizations, although the Department of Labor has issued statements that seem to suggest that non-profit internships that did not meet all of the criteria may nonetheless be generally permissible. Furthermore, the Department of Labor has stated that an intern cannot voluntarily waive their minimum wage and overtime rights if the internship does not meet the above test, even if they genuinely want to work as an unpaid intern. Rule of thumb, the more an internship is like an academic experience as opposed to being merely part of the employer’s regular operations, the more likely that it meets the standards for an unpaid internship.
Before hiring interns, it is critical to determine whether your company’s internship program complies with the Department of Labor standards as well as any standards promulgated by your state’s labor department or state courts. If you already have interns and you and your legal counsel believe the program you already have in place does not meet such standards, you should quickly move to begin paying your interns, including any back pay owed, and comply with all labor and tax requirements.