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Unpaid Internships: Pitfalls and Solutions

BY JOHN BALITIS
FENNEMORE CRAIG LAW FIRM

With summer in full swing, businesses that engage seasonal interns should review their internship programs to ensure compliance with applicable wage and hour laws. Under these programs, unpaid interns can gain important experience, and employers often receive valuable free labor in return. But recent developments show that the intern arrangement is not that simple. Multiple class action lawsuits have been prosecuted by former unpaid interns in recent years alleging they actually were “employees,” and therefore entitled to minimum wage and overtime pay.

Although unpaid internships and volunteer programs in the public, civic and charitable sectors generally are permissible, similar arrangements in the for-profit private sector are another matter. An intern in the for-profit private sector generally is entitled to minimum wage and overtime pay under the federal Fair Labor Standards Act (FLSA), just like any regular employee, unless the internship meets the specific criteria discussed in this article.

Employers can avoid liability in connection with unpaid interns by meeting six specific requirements. It is important to note that although some courts treat the requirements merely as factors to consider, the Department of Labor (DOL) takes the position that all of them must be met to keep unpaid internships legal.

1. 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 more an internship involves skills that are transferrable to other employers or industries, rather than the employer’s own operations, the more likely it will be viewed as training. Likewise, if an internship is structured around a classroom or academic experience, as opposed to an employer’s operations, it is more likely to be viewed as an extension of the intern’s academic experience. To meet this requirement, employers should allow interns to observe a broad range of functions within the organization, regularly speak to interns about the business in a classroom-type setting, or create projects for interns that simulate (but do not involve) the actual work of the business.

2. The internship experience is for the benefit of the intern.
This requirement is less burdensome than some of the others because providing an intern the opportunity to perform real-world tasks benefits the intern through the development of new and useful skills. That said, to remain lawful, the internship cannot provide a substantial benefit to the employer. The employer’s benefit must be secondary.

3. The intern does not displace regular employees, but works under close supervision of existing staff.
If an employer substitutes interns for regular workers to increase its capacity during busy seasons, the interns must be paid a minimum wage. In other words, if the employer would have hired other workers or required its existing employees to work additional hours but for the presence of interns, then the interns likely will be viewed as employees.

In addition, employers should provide more supervision to interns than to regular employees. Interns who receive the same level of supervision as regular workers are more likely to be considered employees. By contrast, interns who mostly observe or shadow regular employees are less likely to be considered employees themselves.

4. 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.
Interns clearly derive a benefit from performing actual work for an employer, but the DOL’s position on this point is clear: “If the interns are engaged in the operations of the employer or are performing productive work (for example, filing, performing other clerical work or assisting customers), then the fact they may be receiving some benefits in the form of a new skill or improved work habits will not exclude them from the FLSA’s minimum wage and overtime requirements because the employer benefits from the intern’s work.”

Nonetheless, if an employer provides job shadowing opportunities to an intern, under the supervision of a regular employee, and the intern performs minimal work, it is much less likely that the intern will be considered an employee. Unfortunately, satisfying this requirement means not only avoiding a benefit to your business, but actually placing a burden on it.

5. The intern is not necessarily entitled to a job at the conclusion of the internship.
The internship should be for a specific time period, agreed upon in advance. Do not use unpaid internships as a recruiting tool for vetting potential new employees.

6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Employers should ensure that the terms of an internship are clear, including the lack of compensation, by putting the terms in writing and requiring the intern to sign off on the terms. Good documentation is critical.

CONCLUSION
The DOL takes the position that internships in the for-profit sector most often will be considered employment subject to the FLSA. Employers who have unpaid internship programs should assess the programs with the DOL’s six-factor test in mind, and should consult legal counsel to ensure that any unpaid internship safely falls outside of the employment relationship.


John Balitis, Jr.

John Balitis, Jr.

John Balitis chairs the Employment and Labor Relations Practice Group at Fennemore Craig, an Arizona Builders Alliance member, where he has practiced for the last 25 years. Balitis can be reached at 602-916-5316 or jbalitis@fclaw.com. For more information about Fennemore Craig, visit www.fclaw.com.