With Memorial Day in the rearview mirror and the month of June upon us, many companies and organizations throughout the country are preparing to kick off the summer by welcoming an incoming cohort of summer interns. 

Internship programs are a win-win for both employers and students: they enable employers to identify future talent and provide students valuable work experience and training. That said, employers choosing to offer such programs should take care to structure them properly to avoid any risk of liability under applicable federal and state wage and hour laws. Keep reading to learn the key wage-hour compliance issues and best practices for hosting interns this summer.

Do I have to pay my interns?

Most likely, yes—at least unless the internship is one where the intern mainly shadows and observes but performs little to no productive work. At least under U.S. Department of Labor Wage and Hour Division (WHD) guidance, internships generally are presumed to constitute an employment relationship under the federal Fair Labor Standards Act (“FLSA”)—and, therefore, an employer must pay wages to its interns—unless the internship satisfies the “primary beneficiary test.”

The seven-factor primary beneficiary test, adopted by the WHD in a 2018 Field Assistance Bulletin, No. 2018-12, examines the economic reality of the intern-employer relationship to determine which party is the “primary beneficiary” of that relationship. In other words, who benefits most from the internship? To determine the primary beneficiary, consider the extent to which:

1. The internship provides training similar to that which a student would receive in an educational environment, such as clinics and other hands-on training provided by educational institutions.
2. The internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
3. The internship accommodates the intern’s academic commitments by corresponding to the academic calendar (such as breaks between semesters).
4. The internship’s duration is limited to the period in which the program provides the intern with beneficial learning.
5. The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
6. 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).
7. The intern and the employer understand that participation in the internship does not entitle the intern to a paid job at the conclusion of the program.

According to the WHD, this test is flexible, and no single factor will tip the scales in one direction or the other.

In addition, certain states may have separate laws or regulations governing internships, so employers should check for state and local requirements that may apply. In New York, for example, the New York State Department of Labor (“NY DOL”) has enumerated eleven criteria—six from the WHD and five of its own—to evaluate whether an intern is exempt from requirements of the State Minimum Wage Act and Wage Orders and need not be paid. According to the NY DOL’s guidance, an employment relationship will not exist between a New York employer and its interns only if the internship meets all eleven of the following criteria:

1. The training is similar to training provided in an educational program, even though it includes actual operation of the employer’s facilities.
2. The training is for the intern’s benefit.
3. The intern does not displace regular employees and works under close supervision.
4. The activities of trainees or students do not provide any immediate advantage to the employer (and such activities may, on occasion, impede the employer’s operations).
5. The trainees or students are not necessarily entitled to a job at the conclusion of the internship and are free to take jobs elsewhere in the same field.
6. The employer notifies trainees or students, in writing and before the internship begins, that they are not considered employees for minimum wage purposes and will not receive any wages.
7. The interns must perform any clinical training under the supervision and direction of knowledgeable and experienced individuals in that industry.
8. The trainees or students do not receive any employee benefits (g., health insurance, pension or retirement credit, and the like).
9. The training is not designed specifically for a job with the employer that offers the internship program; rather, the training offers general, transferrable skills that qualify trainees or students to work in any similar business.
10. The screening process for the internship program is different from the employer’s screening process for employment, and uses only criteria relevant for admission to an independent educational program.
11. Advertisements, postings, or solicitations for the internship clearly discuss training, rather than employment.

How much should I pay interns?

Most interns will be properly classified as “non-exempt,” which means that the employer must comply with the FLSA and any applicable more restrictive state and local laws in determining what wages to pay them. Generally, interns must receive at least the minimum wage (the highest of federal, state, or local), as well as overtime pay, when applicable. Interns who are non-exempt will also be subject to applicable meal and rest break rules.

What are the hallmarks of a compliant unpaid internship?

Companies and organizations that wish to engage unpaid interns can take steps to mitigate the risk of potential claims of misclassification. Consider the following suggestions and tips for a successful unpaid internship program:

• Identify and review the applicable legal framework(s) in the jurisdiction in which the intern will participate in the program.
• Structure the internship to build on classroom or academic experience, rather than to bolster the employer’s operations.
• Liaise with an educational institution to oversee the program and award educational credit.
• Facilitate job shadowing and hands-on training to learn certain job functions under close and constant supervision of employees, but ensure interns perform minimal or no substantive work.
• Limit the internship to a fixed and finite period keyed to semesters and breaks in the academic calendar.
• Avoid using the internship as a trial period for individuals seeking employment. The internship should have no connection to any offer or promise of employment.
• Keep recruiting and screening processes for employees and interns completely separate. Searches for candidates should be independent from one another.
• Clearly communicate to interns in advance, in writing, that the internship is unpaid.
• Avoid filling staffing gaps. Do not use interns to meet increased seasonal demands or to substitute for regular employees.
• Provide mentorship and training to interns by developing their work skills and knowledge in a way that is transferable to any employer in the field.

Last, but not least: consult with your trusted wage-hour counsel to maximize the rewards of a successful internship program while minimizing risk.