I graduated from college in May 2009. During that time, “unpaid internships” were all the rage (whether they were legal or not was another consideration all together). As the economy is going though another downturn, I suspect unpaid internships will be on the rise again. While the Department of Labor rules governing unpaid internship programs have certainly gotten more “employer friendly” in recent years, the realities and implications for employers running such programs are considerable. Read on for more information.
The 6 Part Test (DOL 2010 Rule):
Prior to January 2018, the Department of Labor used a 6 part test to determine if an unpaid intern was actually an employee, and therefore, entitled to compensation. [For the purposes of this post, and the Department of Labor regulations – an “intern” is someone who is not being paid minimum wage for the work they are doing. So, if you’re treating your “intern” as a minimum wage employee – they are just that, an employee.]
- The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
- The internship experience is for the benefit of the intern;
- The intern does not displace regular employees, but works under close supervision of existing staff;
- The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
- The intern is not necessarily entitled to a job at the conclusion 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.
The 2010 Rule was very rigid and to comply, an employer had to ensure it was following each of the 6 prongs. In the context of a for profit company, #2, #3, and #4 make it very difficult to justify an internship program from a purely economic perspective. Essentially, a company was not allowed to derive benefit from the intern’s activities and, an intern could not replace another job that the employer would usually hire for. For many companies, the math didn’t add up – run an internship program that they have to be on the losing side of — OR — pay the “intern” minimum wage and have them do real work that benefits the company. You know where this is going. Usually, it was easier, cheaper, and less risky for the company to just pay minimum wage.
Things changed in January 2018 when the Department of Labor adopted the Primary Beneficiary Test.
Primary Beneficiary Test:
- 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.
- 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.
- The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- 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.
- 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.
The Primary Beneficiary test is a “totality of the circumstances” type test. No one prong is exhaustive and each case is considered independently. Additionally, the test memorialized the “internship for credit” setup that many educational institutions were using prior to 2018 to justify the position that the internship was “paid” with credit rather than cash. Finally, it did away (in large part) with the prongs in the 2010 Rule that made it most difficult for for-profit companies to justify an internship program.
So, what now?
Practical Considerations:
The Department of Labor has made it easier for employers to hire unpaid interns – that much is undeniable. That said, there are still many practical considerations any employer creating such a program should consider:
- Is Minimum Wage a bridge too far? – Ask anyone who has ever had an unpaid internship, “would you rather have been paid?” and you know the answer. Of course! If compensating your intern is possible, I always recommend that the employer do so. New DOL test notwithstanding, paying the intern erases all risk that the internship program is not in compliance (and the math still matters!). If the intern can create real value for the company, why not pay them?
- Does the intern’s work really “compliment” work already being done, or does it replace it? Many companies hire interns with the hope of “saving on payroll.” I’d argue that if the company is “saving on payroll” they are supplanting otherwise paid positions. Under the 2010 Rule such conduct was not allowed at all – but even under the Primary Beneficiary Test (#6) – it is still an important consideration. Part and parcel with the above, if the employer derives real value, why not pay the intern?
- The employer has to be involved. No matter what, the employer has to be involved in the program and provide some educational component to an unpaid intern. This goes beyond “on the job training” like with a regular employee.
- The internship program must be formalized. This shouldn’t be a surprise coming from an attorney, but any internship program should be formalized by the employer. That means written offer letters explaining the relationship (and lack of pay) and building in the above mentioned educational component.
Hiring an intern is not as simple as hiring a minimum wage employee. If your company is hungry for growth and looking to save on payroll – the answer isn’t always an unpaid intern.