FLSA compliance this summer: what to do about unpaid internships

Update: As of July 1, 2024 changes have been implemented to the Fair Labor Standards Act. For most up to date information, visit the Department of Labor website or schedule a consultation with Fuse.

Are you keeping your office FLSA compliant this summer? You may have classified your employees with the right FLSA status, but what about your interns? Do you have to pay them minimum wage, overtime—or any wages at all? The rules for for-profit companies in the private sector have always been tricky waters to navigate. Now, there is a new test the courts will use to determine whether interns are entitled to FLSA coverage or not. Before you hire interns this summer or for the upcoming academic semester, be sure your organization is compliant.

The DOL’s new test

At the beginning of 2018, the Department of Labor (DOL) updated its guidance on the internship programs test. This new DOL test replaces the previous six-factor test and is comprised of seven factors to help examine the “economic reality” and identify the “primary beneficiary” in an employer-intern relationship. The outcome determines whether employers are required to pay interns under the FLSA.

Courts will use the following seven factors for the primary beneficiary test according to the DOL fact sheet #71:

1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

In the end, it comes down to determining the primary beneficiary in the employer-intern relationship. If the courts determine the employer to be the primary beneficiary, the intern is considered an employee and is entitled to FLSA coverage, which includes the right to minimum wage and overtime pay. However, if the courts find the intern to be the primary beneficiary of the internship, the intern is not considered an employee and is not covered by the FLSA (the employer doesn’t have to pay wages). The 2018 updates to the test largely reflect a turn toward education-related factors to help draw some clear lines around the idea of the “primary beneficiary” in an internship program.

If the internship offers educational benefits to the intern without the intern playing an important role in your organization that would benefit it, you’re probably in the clear to offer an unpaid internship (as long as those expectations are communicated to the intern ahead of time). But if the internship program benefits your organization in any way, be ready to pay.

Best practices for ensuring FLSA compliance for internships

To help ensure FLSA compliance for unpaid internships, Jennifer T. Williams, an employment attorney at Cozen O’Connor, shares some best practices for HR managers and employers:

• Create a formal, standardized internship program and hiring process. This will help keep all managers apprised of organizational operations and keep them from doing hiring favors like a friend’s son or some other informal intern hire that can slip under the radar. Setting up a clear process will help protect your company in times of scrutiny.  
• Coordinate your internship program with an educational institution and structure the program around a classroom experience. This is a great way to help maintain compliance for unpaid programs while offering an opportunity for students to gain experience in the workplace. Work with academic institutions so interns can receive academic credit or be required to submit reports to their academic institution based on their activities with your organization.
• Make program expectations clear to the intern from the beginning. Communicate program requirements, their role, and what to expect during the program. You must make it clear to the intern they will not receive any pay for the program and no job offers will be given at the end of the program.
• Make the program time-bound and have it correspond with the academic calendar (summer or semester). This will help ensure the intern does not become a necessary contributing member of the team that could have the benefit swing in favor of the employer. The intern should never regularly perform the company's routine work, and the business should not be dependent upon the product of the intern's work.
• Rotate the intern between departments to help keep the intern from getting too involved in the business practices of a particular department. Plus, it gives the intern the opportunity to get experience working under different managers and a feel for multiple departments within an organization.
• Incorporate mentorship opportunities into your internship program. This addition to an internship program is extremely beneficial to interns. While there are benefits to your seasoned employees to be mentors to interns, the argument clearly sits with the intern as the primary beneficiary.

Summer internships can be a great way to offer students a chance to learn and experience the workplace, but they should never be viewed as an opportunity for free labor. If you’re in doubt about whether your internship program marks students as employees or interns, it’s best to err on the side of caution and comply with FLSA standards for minimum wage and overtime pay. Of course, before you start any internship programs, it’s best to consult an employment attorney for counsel.