June 2, 2017
For organizations looking to keep expenses down and yet gain exposure to potential new talent, and for students and others seeking to gain relevant experience and contacts in a highly competitive job market, the idea of unpaid internships seems like a natural solution. After all, it’s a potential “win-win” for everyone (okay, it would be more of a win for the experience seekers if they got paid, but that’s not our scenario). In any event, it is common practice. According to a 2014 Survey by the National Association of Colleges and Employers (NACE), 61 percent of graduating college seniors across the country had participated in internships. Of those internships, 46.5 percent were unpaid. Further, of those students who worked an unpaid internship, nearly 40 percent reported that they did so for a private-sector for-profit entity.
This isn’t the end of story, however. As a Silicon Valley venture capital firm learned the hard way last year, the reality is that unpaid internships are legally allowed only where specific requirements are met.
Under the federal Fair Labor Standards Act (FLSA), and individual state statutes, “employees” must be paid at least a specified minimum wage and, unless exempt, a higher overtime rate for all hours worked in excess of a specified minimum each workweek. Generally, an “employee” is anyone an organization suffers or permits to do any work unless a specific exception applies. So, what is the exception for unpaid interns?
For public-sector organizations, unpaid internships are generally permissible where the intern volunteers without expectation of compensation and performs work for civic, charitable, or humanitarian reasons. This is also generally the case where an individual freely volunteers time to religious, charitable, civic, humanitarian, or similar non-profit organizations without any expectation or receipt of compensation. Typically, such volunteers serve on a part-time basis and do not displace paid workers or perform work that would otherwise be performed by employees
For private-sector “for profit” organizations, the U.S. Department of Labor (DOL), which enforces the FLSA, has a six-factor test to determine if a worker may be treated as an unpaid intern:
- The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
- The internship experience is for the benefit of the intern;
- The intern does not displace regular employees, but works under close supervision of existing staff;
- 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;
- The intern is not necessarily entitled to a job at the conclusion of the internship; and
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
All of the test’s requirements must be met for an organization legally to treat a worker as an unpaid intern. The goal of the test is to prevent organizations from getting free labor out of workers when the work and conditions under which they work are generally the same as that of paid employees. Thus, workers may be treated as unpaid interns only where the internship is primarily for the benefit of the worker and, generally speaking, is more trouble for an organization than it is worth in terms of direct avoided wages.
If you are considering establishing (or maintaining) unpaid internships, you should consult with a competent employment lawyer. For example, while it is best that your internship program be coordinated with a school that offers academic credit, association with a school or providing academic credit is not enough by itself. Further, the DOL scrutinizes unpaid internships, and actively investigates situations that come to its attention where the legal requirements might not be met.
Mark A. Wagner concentrates his practice in employment law, homeowners association law, and health care law, and serves as Chair of the firm’s Employment and Labor Practice Group.