By Leah Shepherd

Many employers offer unpaid internships to develop relationships with young talent and build the talent pipeline within their industry. But while interns may agree to not be paid for their work, employers must still follow certain guidelines. Understanding the applicable wage and hour laws is essential for avoiding future legal challenges.

“So long as an intern is properly classified under the law as an intern, they do not have to be paid,” said Kelly Raney, an attorney with Greenberg Glusker in Los Angeles.

The “primary beneficiary test” under the federal Fair Labor Standards Act (FLSA) determines whether a person should be classified as an intern or an employee.

“The test looks at the economic reality of the intern-employer relationship to determine who is primarily benefiting from the relationship,” Raney said. “If the work performed by the intern primarily benefits the employer, the intern is an employee under the FLSA and should be paid.”

The test considers seven factors:

  • Whether the intern and the employer clearly understand that there is no expectation of compensation.
  • Whether the internship provides training similar to that which would be given in an educational environment, such as clinical and hands-on training.
  • Whether the internship is tied to coursework or the receipt of academic credit.
  • Whether the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  • Whether the internship’s duration is limited to the period in which the internship provides beneficial learning.
  • Whether the intern’s work complements, rather than displaces, the work of paid employees.
  • Whether the intern and the employer understand there’s no entitlement to a paid job at the conclusion of the internship.

Courts have described the primary beneficiary test as flexible, and no single factor is determinative, the U.S. Department of Labor noted. “Accordingly, whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case,” the department said in a fact sheet.

When an employment relationship does not exist under the FLSA, the act’s minimum wage and overtime provisions do not apply to the intern. “This exclusion from the definition of employment is necessarily quite narrow because the FLSA’s definition of employee is very broad,” said John Cascone, senior vice president of Flex HR, an HR consulting firm in Atlanta.

Receiving college credit related to the internship is a good indication that an internship can be unpaid.

“I generally advise my clients to not offer an unpaid internship unless the intern is receiving course credit and the intern can provide appropriate documentation supporting their receipt of course credit,” Raney said.

Nonprofits should adhere to a different set of rules that distinguish between interns and volunteers. For example, to qualify as an internship, there should be no expectation of being paid for work in the future, and the work performed should be on a part-time or short-term basis.

Weigh the Risks of Unpaid Internships

Employers should carefully consider the legal risks before deciding not to pay an intern.

Multistate employers wishing to have an unpaid internship program should do their research, talk with trusted employment counsel, and weigh the pros and cons, Raney recommended.

“There can be an immensely high financial burden from claims by interns that they were misclassified and should have been paid as employees under applicable federal, state and local law, which would also be coupled with the potential bad press and strain on company resources that result from litigation,” she said.

The nature of internships is changing in response.

“Because of publicized lawsuits, potential exposure and public perception, many employers are moving away from unpaid internships and instead paying interns at least minimum wage,” Raney said. She added that unpaid internships might disadvantage people from socioeconomically diverse backgrounds because these internships require individuals to have both the time and the financial security to work for free.

Certain State Laws Cover Interns

Some states provide additional protections for interns.

For example, “California requires that an internship be part of an educational program, requiring school participation or credit, that the intern not receive any employee benefits, and that the intern is trained to work in a specific industry, as opposed to for that specific employer,” Raney explained. Likewise, New York “requires that the internship provide transferable training, meaning it’s not training specific to that employer, and [it] cannot be of any immediate advantage to the employer, even if the intern is ultimately the primary beneficiary.”

In addition, some state employment laws apply to interns, as well as employees.

“California, Oregon and New York each have a law extending the states’ statutory prohibitions on sexual harassment and discrimination in the workplace to interns,” Raney noted.

Likewise, Maryland enacted a law in 2015 that prohibits employers from retaliating or discriminating against interns on the basis of race, color, religion, sex, age, national origin, sexual orientation, gender identity or disability. The law also requires Maryland employers to provide reasonable accommodations for interns with disabilities.

The trend of providing employee-like protections for unpaid interns gained momentum after a federal district court dismissed an unpaid intern’s harassment and retaliation claims in 2013 because she was not an employee, reported Thomson Reuters Practical Law. At the time of that decision, only Oregon and Washington, D.C., had laws protecting interns from harassment or discrimination. Since then, Illinois has extended sexual harassment protection to unpaid interns, according to Epstein Becker Green.