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Updated: March 27th, 2020
Internships are often seen as an easy “win-win” situation. The intern gains invaluable insight and experience while building up his or her resume, and the company enjoys the additional help. Though there are many advantages to this type of relationship, legal issues emerge when these internships go unpaid.
When a for-profit company offers unpaid internship positions, they must make sure the worker is truly an intern, defined under the law, and not an employee, otherwise the company must pay the worker at least minimum wage, plus overtime. The U.S. Department of Labor’s Fair Labor Standards Act (“FLSA”) regulates minimum wage and overtime for workers, including interns.
Under the FLSA, all unpaid internships at for-profit companies must comply with six requirements:
The more the internship program is structured around a classroom or academic experience rather than the company’s actual operations, the more likely the internship will be viewed as an educational experience and not an exploitation of unpaid labor. Companies should provide interns with skills that can be used in multiple employment settings, not only skills particular to that company’s operations.
This is arguably the trickiest of the FLSA requirements. Ideally, an internship should be educational and focused on the intern’s professional development. However, if a company engages the intern in the operations of the business or tasks the intern with productive work, as nearly all internships do, the FLSA minimum wage and overtime requirements may still apply because the company benefits from the intern’s work. Using interns to fetch coffee and perform menial clerical work is definitely beyond the scope of what is considered a beneficial, educational experience, and would require the company to pay the intern for his or her time.
Recently, magazine publisher Condé Nast faced a class action lawsuit against interns who claimed their experience did not meet the FLSA requirements for unpaid internships because their work benefitted the publisher and did not provide educational value. The suit was eventually settled for $5.8 million.
A company should be careful to not use interns as substitutes for regular workers or augment its existing workforce during specific time periods. If the company would have hired additional employees or required existing staff to work overtime for the tasks completed by the intern, then the interns will be seen as employees entitled to compensation under the FLSA. The employer should provide job shadowing opportunities that allow the intern to learn under the close and constant supervision of regular employees.
Similar to the two previous requirements, this factor emphasizes the importance of the type of experience an internship should offer. As a rule of thumb, the unpaid intern should not perform the company’s routine work nor should the company depend on the intern’s work product. For a private company, it is extremely rare that an intern’s work does not benefit the company in some way.
The FLSA states that internships should last for a fixed amount of time, established before a person begins. From the outset, it should be understood that the internship is not a trial period with the expectation of permanent employment at the end of its duration.
Again, both parties should understand the nature of the relationship. Before the internship begins, it should be clear that this is an unpaid position.
As long as a company complies with all six factors, there is no employment relationship under the FLSA that would require the payment of wage and overtime. It is also important to note that an intern who receives school credit does not automatically exempt the company from state and federal laws. Additionally, companies should have their human resources or legal department brush up on any applicable state laws that may be more stringent than the federal requirements.
The key takeaway for businesses considering internship is to consider the legal implications that come with unpaid positions. Businesses might be best served by paying interns to avoid the burden of creating a substantive internship program that complies with state and federal laws.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.