Interns – To Pay or Not to Pay (That is the Question)

To many students, summer means a summer internship (often, for the “lucky” few).  The biggest drawback of an internship is that it is typically unpaid.  Despite being unpaid, interns are often the hardest working employees because they want nothing but relevant experience or possibly future employment with that company. All employers are aware of this and some will take advantage of the situation and treat their unpaid interns like regular employees.  The United States Department of Labor is also aware of this and has established guidelines to determine if an intern is actually an employee and should be compensated as such.

So, the question for the honest employer is:  do I have to pay my summer intern?  In other words, is my intern, in actuality, an “employee” under the Fair Labor Standards Act (“FLSA”) and therefore entitled to wages?  If an internship qualifies as a paid position, interns legally must be paid at least the federal minimum wage for the work they perform for the employer, including overtime.

The regulations for both employees and interns fall under the Fair Labor Standards Act (FLSA). The FLSA requires “for-profit” employers to pay employees for their work.  Interns and students, however, may not be considered “employees” under the FLSA, in which case the FLSA does not require compensation for their work.  Unfortunately, the FLSA does not define “employee” in any meaningful way.  “Employee” is defined in a circular, broad fashion as “any individual employed by an employer.”  29 U.S.C. § 203(e)(1).

To deal with the lack of a precise definition of employee, both the courts and the United States Department of Labor (“DOL”) have relied upon a variety of different frameworks to analyze whether an individual falls within the definition of an employee.  Some courts have relied on the “rigid” six-factor all-or-nothing test, while other courts have relied on a more flexible balancing test of seven factors, referred to as the “primary beneficiary test” to determine employee status.  The latter test allows the courts to examine the “economic reality” of the employer/intern relationship to determine which party is the “primary beneficiary” of the relationship (as of January 2018, the DOL will adopt the primary beneficiary test for use, so this post will focus on this test)

 

The DOL primary beneficiary test includes the following seven factors:

 

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; and

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.

No single one of these factors is dispositive.  Instead the primary beneficiary test is designed to be flexible and is intended to accommodate the unique circumstances of each case.  If the analysis of these factors reveals that an intern or student is actually an employee, then he or she is entitled to both minimum wage and overtime pay under the FLSA. On the other hand, if the analysis confirms that the intern or student is not an employee, then he or she is not entitled to either minimum wage or overtime pay under the FLSA.

The primary beneficiary test is similar to the phrase, “if it looks like a duck, walks like a duck and quacks like a duck, then it’s a duck.” In other words, if the intern works, acts and behaves like an employee, then the true “reality” of a relationship between the employer and the intern/employee is that of employer/employee. While there are many employers out there who want to offer truly meaningful internship opportunities, there are some employers that are either unaware of the laws or are simply willing to take advantage of students looking for work experience.