If You Don’t Give Your Interns Minimum Wage, the Courts May Give Them a Whole Lot More

As company payroll budgets shrink nationwide, employers’ interest in unpaid internships are on the rise. Not surprising, so are FLSA claims of Wage and Hour violations.

The road for an employer to offer an unpaid internship that does not violate the DOL’s Fair Labor Standards Act (FLSA) is very narrow - more like a bike path than a road. It has become a “best practice” in many industries to at least offer minimum wage to interns to avoid the scrutiny of the program or possible litigation. There is a six-factor compliance test for an internship to be unpaid, but the three that usually cause liability for the employer are:

#2. The training is for the benefit of the trainee
More to the point, the training is not for the benefit of the employer. If the internship is designed around meeting an employer’s need for work to be done and the work adds value to the organization, inherently or monetarily, the intern assumes employee status and must be paid at least minimum wage.

#3. The trainees do not displace regular employees, but work under close observation
In layman’s terms, don’t have an intern perform work that employees have performed, do perform or would need to perform if the intern were not there and all work must be closely supervised by and assigned mentor/instructor. They do not work independently. Bottom line, if you would otherwise have to pay someone else to do it, because an intern isn’t there to do it, you’ll have to pay the intern to do it too. They’re an employee.

#4. The employer that provides the training derives no immediate advantage from the activities of the trainees and on occasion the employer’s operations may actually be impeded
This is where the rubber hits the road…or bike path. The employer is not supposed to benefit from the internship – in fact, the expectation is that it should, to some degree, be a burden to the employer. Most of the case law sited is on this factor. If an intern answers a phone that otherwise would have needed to be answered by someone else, the employer has experienced an “immediate advantage” from the intern’s “employment” and therefore must be paid like and employee. To split hairs, if the scope of the internship, for example, is research, and that research does not benefit the employer in its raw state and does not become of value to the employer until a paid staff person further “processes” it, that single activity could meet test #4 of the compliance test for an unpaid internship under the guidelines, but the question still remains, what else are they doing for you?

Many employers falsely believe that if their internship is coordinated through a college or university for credit, then it automatically qualifies to be unpaid. Not so. The first criteria requires that the experience should be “similar to that which would be given in a vocational school” for the intern, but it does not specify anything about college credit. The coordination with the university is not required (although would still be a nicety for the intern) and since the same six criteria still apply, minimum wage is still substantially cheaper than hiring “staff” to do the job. A paid internship would obviously remove the handcuffs of making sure the relationship and intern-output does not immediately benefit the employer and could be of long-term benefit to an employer to explore paid internships as a mutually beneficial relationship.

Sometimes non-profit organizations believe that the internship regulations are different for them or don’t apply, but the reality is that there is only one set of compliance criteria – same six factors for not-profits as for corporate America. This confusion may be due to the frequency that non-profits use unpaid volunteers which is (or should be) very different than the "work" of an intern.

Engaging unpaid volunteers to accomplish work for the benefit of the association has DOL compliance issues as well. To continue the metaphor, it’s a two-lane country dirt road compared the man-made bike path through the rough grass that an unpaid internship can be.

There is a four-factor compliance test for an unpaid volunteer not to fall into the category of employee (and therefore require compensation), and they are far easier to demonstrate compliance with. The one that generates the greatest liability (and law suits) is the first one:

#1. The individual must not be characterized unilaterally by the entity as a volunteer in order to avoid minimum wage or overtime obligations
More often this is referring to existing employees who are asked to “volunteer” after hours or for extended hours so that the employer can avoid additional compensation or overtime, but equally there are cases where the creation of “volunteer” positions inadvertently (or intentionally) displaced paid workers and the employers were found to be liable under rule #1. Best practice is to avoid tasking volunteers with work that has traditionally been performed by paid staff. If you take rule 3 from the “intern” test, adopt that first phrase and reverse the second part, you’d be on track. Volunteers need to be free to come and go on their own schedule, perform only the work that interests them and can’t be held to performance standards like you would an employee. When you consider all that, it’s frequently more effective and (less risky) to just hire someone to get the work done.

That’s not to dismiss the educational value of an internship or the philanthropic value of volunteerism … for both the volunteer or intern as well as the employer. But more frequently than not, the context of a manager’s inquiry about unpaid interns and pursuit of these programs is not “how can my organization give back to the field and community at large by providing these kinds of volunteer and internship opportunities, even if it costs us productivity and time” but rather “how can I get some of this work done for free.” That second thought is precisely what the regulations were written to prevent.

The Department of Labor and the EEOC recently released their annual statistics of claims filed and they are experiencing record highs. Not to minimize or dismiss legitimate claims, but it’s no surprise that with people losing their jobs left and right, that those people may be looking for ways to go after the employer. In this current economy and our litigious culture, I would not recommend that an employer create a new unpaid intern program unless it meets the letter and the spirit of all six criteria. If you have an existing unpaid internship program, don't assume that it's in compliance, just because "we've done it that way for years and never had a problem." This is probably a good time to give it a solid review and adjustment, if needed.