Many organizations use interns, especially student interns, during the summer months. While interns often are excited for the opportunity and agree to provide services for no pay, businesses must consider the wage and hour risks of such arrangements. Simply put, an individual’s agreement to work in an unpaid position now does not prevent him or her from seeking alleged unpaid wages later. Unless specific conditions are met, a business usually is expected to provide an intern with at least minimum wage for all hours worked and overtime pay, if applicable. Federal and state departments of labor and private attorneys have become more aggressive in pursuing pay for interns in recent years, with several well-publicized collective/class actions filed during the past year. Employers with internship programs must analyze carefully the structure of their programs and the work performed by interns if they want to ensure such positions are unpaid.

The federal Fair Labor Standards Act (FLSA) defines an employee broadly as “any individual employed by an employer.” The U.S. Department of Labor, consistent with U.S. Supreme Court precedent, recognizes that the FLSA payment obligations do not apply to individuals who are part of programs that provide training for their own educational benefit if the training meets the following six criteria (see U.S. Department of Labor Fact Sheet  #71, available at http://www.dol.gov/whd/regs/compliance/whdfs71.pdf):

• The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment;

• The internship is for the benefit of the intern;

• The intern does not displace a regular employee, but works under close observation of existing staff;

• The employer that provides the training derives no immediate advantage from the activities of the intern and, on occasion, the employer’s operations may actually be impeded;

• The intern is not necessarily entitled to a job at the completion of the internship; and

• The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

State departments of labor standards often are similar, but not necessarily identical. For example, in some cases, school credit for an internship is a defense to wage and hour claims.

While courts have not universally adopted the USDOL’s standard and have focused their analysis in some cases on the “primary benefit” of the internship, the USDOL standard is a good reference for internal reviews.

Recommended Employer Actions

Employers considering using interns must review carefully each aspect of the internship program and apply the DOL’s factors and any applicable state factors to the contemplated program, as well as considering the primary benefit of the internship. If interns perform productive work, especially if such work is not akin to the work product generated in an educational setting, the safest course is to pay minimum wage (and overtime, as required) for all hours worked. If the program's goal is educational, businesses should ensure that line managers understand the rules and manage the relationship consistent with educational goals and the above six factors. Actions such as rotating interns from department to department can help demonstrate an educational goal. Similarly, a business should not decrease regular staffing during periods of internships as such reduced staffing can support an argument the interns are doing the work normally performed by regular employees. Further, if the program is unpaid, the business should strongly consider asking interns to sign an agreement acknowledging the educational nature of the program, the program is unpaid, and the internship is not a direct route to employment. Additionally, if the employer provides a stipend, the business should ensure the stipend covers or comes close to covering minimum wage obligations and the phrasing of the stipend does not preclude the employer from defending a claim for alleged unpaid wages. Finally, if the employer decides after legal analysis to treat interns as unpaid, a best practice is to limit hours to reduce potential liabilities and help dispel any notion that the intern is being taken advantage of by the business.

A determination of employee status has many implications. In addition to being entitled to withheld minimum wage and overtime pay, an intern found to be misclassified could be entitled to other damages, including “lost” employee benefits, meal and rest periods, and penalties.