Manufacturers are preparing to welcome interns into their businesses this summer. Internship programs can play a key role in a company’s ability to develop and retain talent, cultivate new ideas and perspectives, and provide valuable mentorship and opportunity to individuals entering the field, resulting in goodwill in the professional community. With the benefits of these programs come legal challenges for employers related to structuring such programs and arrangements.  One key question is how to structure internship relationships. Should individuals be classified as unpaid interns or should the arrangement resemble an employment relationship in which the intern is paid?  Under what circumstances should individuals be called “interns” and does that term have a specific legal meaning?

As most employers know, non-exempt employees must be paid minimum wage under federal law and many state laws for all hours worked and overtime for all hours worked over 40 hours in a work week.  Individuals employed by for-profit companies generally must be paid and cannot waive their right to receive legally-required wages. 

Nonetheless, individuals who have a relationship with a company wherein they are the “primary beneficiary” of the relationship can be characterized as unpaid interns rather than employees. Under federal law, courts examine the “economic reality” of the relationship between an intern and a for-profit employer in determining which party is the primary beneficiary. Courts consider a number of factors in this determination, including the extent to which: 1) the intern and employer clearly understand there is no expectation of compensation; 2) the internship provides training similar to that which would be given in an educational environment; 3) the internship is tied to the intern’s formal education program by integrated course work or receipt of academic credit; 4) the internship accommodates the intern’s academic commitment by corresponding to the academic calendar; 5) the internship’s duration is limited to the period in which it provides the intern with beneficiary learning; 6) the intern’s work complements (rather than displaces) the work of paid employees, while providing significant educational benefits to the intern; and 7) the intern and employer understand there is no entitlement to a paid job at the internship’s conclusion. 

This test is flexible and no single factor is determinative.  In general, internships that align with, or This test is flexible and no single factor is determinative. In general, internships that align with, or complement, academic study and resemble an educational relationship that is for the primary benefit of the intern (rather than the company) are more likely to satisfy the test as compared to those that resemble a summer job.  Companies seeking to properly classify an individual as an “unpaid intern” must perform this analysis under federal law using these factors. Employers should also analyze the issue under applicable state laws, which may be stricter.

Importantly, the term “intern” in an employment context is not a legal term with a single, defined meaning. Therefore, if an employer seeks to engage an individual as a paid employee, but in an arrangement that is meant to resemble an internship (e.g., time-limited, educational, etc.), the employer can still designate the position as an “internship” or “paid internship.”  

Lastly, whether to classify an individual as an unpaid intern or a paid intern/employee is a critical decision as incorrect classification can bring significant legal risks to the employer. Erroneous classification can result in awards of backpay, liquidated damages, civil fines and penalties, and other damages depending on the applicable jurisdiction. In addition, there are other issues that may arise as they relate to structuring internship relationships, including the provision of workers’ compensation insurance, applicability of the company’s policies and rules, whether another exception to wage payment may apply (including a trainee exception), and the applicability of local, state, and/or federal labor and employment laws, among other issues. Manufacturers looking to offer an internship program should seek guidance from competent employment counsel for assistance in structuring such relationships.