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Should You Be Paying Your Interns? The Employee vs. Intern Distinction.

Students seeking practical job experience pursue unpaid internships in hopes of gaining valuable “real world” experience. The question that employers must answer, however, is whether such individuals can actually be treated as unpaid “interns” or whether they must be treated as employees entitled to compensation.

The Fair Labor Standards Act (FLSA) requires covered employers to pay workers minimum wage and overtime, unless a specific exemption applies or the worker is not covered by the FLSA. Because there is no specific exemption for “interns,” an employer must consider whether the internship constitutes “employment” and whether the individual is performing “work.” The FLSA broadly defines “employee” to include any individual employed by an employer. Similarly, the term “employ” means to suffer or permit to work. Although the term “work” is not defined by the FLSA, it is generally accepted that an activity is “employment” under the FLSA if it is done, at least in part, for the benefit of the employer (even though it may also be beneficial to the worker). Thus, the default rule is that an individual providing services is an “employee” covered by the FLSA and entitled to minimum wage and overtime.

The U.S. Department of Labor (“DOL”) has offered guidance on when an individual may be treated as an unpaid intern rather than as an employee who must be paid wages. Under the DOL test, individuals may be classified as an unpaid intern only if all of the following criteria are met:

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.

For the unpaid intern exception to apply, the purpose of the internship must not be to perform productive work for the benefit of the employer. In fact, the DOL guidance indicates that if the employer gains any benefit from the activities of the individual, that individual must be treated as an employee, and not as an unpaid intern.

The courts have taken different analytical approaches to these cases. Some courts give deference to the DOL’s six-factor test and apply the test as written. Other courts look at the “totality of the circumstances” in order to divine the true nature of the relationship. Still other courts apply a primary beneficiary test, which means that the individual’s status as an intern or employee depends on whether the employer or the individual is the primary beneficiary of the work performed. One thing, however, is clear: rights under the FLSA may not be waived. An individual may not agree to work without compensation if they would otherwise be classified as an employee. Agreements or understandings of this type, even if entered into willingly by the individual, are irrelevant and will not be recognized.

Ultimately, whether a particular individual may be classified as an intern largely depends on specific facts and circumstances of each program. It is likely that many traditional “internships” offered by employers would be considered employment relationships upon close examination. A failure to closely analyze these issues could result in significant liability for unpaid wages and overtime under state and federal law.

If establishing an “internship” program at your place of business, consider the following: 1) make sure there is an educational component to the program; 2) make sure the program is for the benefit of the intern, and not just a source of free labor; 3) do not use interns to displace or take over work that would otherwise be performed by regular employees; 4) make sure there is no promise of a job at the end of the program, and make sure there is no expectation of payment for tasks performed as part of the program; 5) develop internship program materials to formalize the structure of the relationship and the learning objectives; 6) assign a mentor to the intern; and 7) have a written agreement that clarifies the nature of the relationship, that there is no promise of future employment, and that the internship is unpaid.