Employers: Is Your Unpaid Internship Program Legal?

Summer is quickly approaching, and so is the time for summer internship programs that college students rely on to gain valuable professional experience. Employers may want to offer those internships without compensation, but is it legal? Here are some things to consider.

When developing an unpaid internship program and related policies, employers should ensure they're in compliance with federal, state and local laws that govern whether their program participants truly are interns, said Camille Olson, an attorney with Seyfarth Shaw in Chicago, Los Angeles and San Francisco. Interns may be entitled to various benefits or guarantees under local laws regardless of their status as a paid or unpaid intern. For example, all interns are protected from workplace harassment and discrimination under the New York State Human Rights Law.

[SHRM members-only toolkit: Employing Interns]

Employers would be well-served to focus recruiting efforts for unpaid internship programs on individuals who will receive a demonstrable training or educational benefit from the internship, according to Kristy Offitt, an attorney with Ogletree Deakins in Atlanta.

However, employers should strongly consider paying interns minimum wage and limiting their hours, she noted.

Olson said many employers are examining their internship programs and determining that they do not meet the applicable legal tests for unpaid internships and are therefore converting those programs into paid internships.

"It's important to note that those interns must be paid minimum wage under the same standards as an employee would be," she said.

Legal Tests

The U.S. Department of Labor (DOL) has a six-factor test that requires the following criteria to be met for an unpaid internship:

• The internship is similar to training that would be given in an educational environment.
  
• The internship experience is for the benefit of the intern.
  
• The intern doesn't displace regular employees and works under close supervision of existing staff.
  
• The employer doesn't gain an immediate advantage from the intern's activities—and on occasion the employer's operations may be impeded by the intern's activities.
  
• The intern isn't guaranteed a job at the end of the program.
  
• The employer and the intern each understand that the internship is unpaid.
  

"The goal … is to ensure that companies are not getting around minimum wage and other employee protection laws by calling workers 'interns,' when the work and conditions under which the work is being performed is no different than that of actual employees," Olson said.

The DOL's test, however, has been criticized as being too rigid.

"One criticism of the six-factor test is that it is outdated and no longer reflects the realities of the 21st-century workplace," Offitt noted.

For example, she said, it's highly unlikely that companies would take on the risk, costs and detriments of an internship program without deriving any benefit—so it's difficult to meet the fourth prong of the test.

That's why the 2nd and 11th U.S. circuit courts of appeals have observed a "primary beneficiary" test. Under this test, a company can gain some benefit from an intern, as long as the intern remains the primary beneficiary of the program, Offitt explained.

This test evaluates a set of flexible, nonexhaustive factors, such as whether:

• The intern and the employer understand that there is no expectation of compensation during the internship and no job guarantee thereafter.
  
• The internship provides similar training to that given in an educational environment—like clinical training.
  
• The internship is tied to the intern's formal education program through integrated coursework or academic credit.
  
• The internship is aligned with the academic calendar.
  
• The intern's work complements—rather than displaces—paid employees' work and provides significant educational benefits to the intern. 
  

"This test is more employer-friendly than the DOL test, and places more of a focus on the extent to which the internship program is tied to an academic pursuit," Olson said.

She noted, however, that the DOL's test is still used in most states, other than those in the 2nd and 11th circuits. Federal district courts in Connecticut, New York and Vermont are in the 2nd Circuit, and district courts in Alabama, Florida and Georgia are in the 11th Circuit.

Federal district court judges in California and Illinois have also adopted the primary beneficiary test, and these cases are currently on appeal to the 9th and 7th circuits. "Should those appeals courts affirm the lower court rulings, the primary beneficiary test would replace the DOL six-factor test in states in those circuits as well," Olson said.

Tips for Employers

Employers should consider paying interns the minimum wage, limiting their work hours and complying with all applicable employment laws.

If employers still want to proceed with an unpaid internship program, they should make sure it has a strong educational component.

"The DOL's Wage and Hour Division appears to equate the training component of an unpaid internship with the training that an intern would receive in an educational environment," Offitt said. "As such, the unpaid internship should include an educational component, which can be best-established where it is coordinated with or approved by a school for academic credit."

Merely being associated with a school or providing college credit, however, doesn't make an unpaid internship legally sound.

"A program that would fail the test on all other factors will not be permissible just because it provides course credit," Olson said.

Offitt suggested that employers consider the following steps if they decide to make their internship program unpaid: 

• Create a formal internship program with scheduled start and end dates.
  
• Maintain records of hours worked.
  
• Emphasize and put into practice the training and supervisory characteristics of the program.
  
• Ensure that the internship isn't being used as a substitute for regular, paid employees or as a trial period.
  
• Provide a written offer letter to the student intern, stating that the internship is unpaid and that a job is not guaranteed.
  
• When publicizing the internship, state that applicants who will receive college credit are preferred.
  

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