2018 Update: Unpaid Intern or Employee?

Over the past six years, a wake-up call for employers who use unpaid interns had been brewing. Court cases publicized the issue, and in January of 2018, the Department of Labor (DOL) established new classification tests to accommodate court decisions.

Triggered in a 2012 case against Harper’s Bazaar, and further publicized in 2013 by a verdict against Fox Searchlight for the 2010 film ‘Black Swan’, the proper use of unpaid interns had become a matter of close legal scrutiny, and hence increasing importance for employers.

In the ‘Black Swan’ decision it was ruled that Fox Searchlight should have paid two interns on the film because they were essentially regular employees. The judge noted that these internships did not foster an educational environment and that the studio received the benefits of the work.

The matter was further addressed in court decisions and finally addressed by the DOL in January of 2018 with the update of fact sheet #71, in which new test parameters were outlined to assess who does and does not qualify for unpaid intern or student status.

How do employers avoid the risk of finding themselves on the defense in their use of interns?

Reviewing and updating internship programs and policies to comply with federal and state standards is a critical first step. To avoid liability, employers can protect themselves with a clear understanding of the definitions of “interns & students” v. “employees” as set by the U.S. Department of Labor (DOL).

Viewing unpaid internships as a way to accomplish work tasks rather than as educational programs is the wrong approach for employers.  To set the expectations, the DOL now provides a detailed test to examine a position for “intern” status and if it qualifies, minimum wage and overtime exemptions may take place.

How does an employer determine if a student qualifies as an intern versus an employee?

Fact Sheet #71 lays out the following seven factors which allows courts to examine the “economic reality” of the intern-employer relationship and to determine which party is the “primary beneficiary” of the relationship.

• 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.

If an employer’s internship program substantially meets the factors listed above, then the intern is not considered an “employee” under the FLSA and the Act’s minimum wage and overtime obligations do not apply to the intern.

Employers should keep in mind that the test is “flexible” and no one single factor is meant to control the classification decision process. This is somewhat of a change from previous versions of the DOL’s classification tests, where all factors in the test had to be met.

What specific practices can I engage in to protect myself from misclassifying positions?

• Adopt a policy that sets up appropriate supervision and training of interns and assigns a mentor.
• Train intern supervisors to actively participate with the interns.
• Document the training, monetary benefits and costs an intern brings to the company.
• As interns or students are not entitled to a job at the end of the training, draft a written agreement with the intern stating that the intern should have no expectation of employment and should not presume any guarantee of employment after the internship. (That does not mean you cannot, or should not, hire them after an internship is completed if you have openings.)
• Draft a written agreement stating that payment for the intern’s services is neither intended nor expected during the internship to ensure the student is clear at the beginning of the relationship.
• All of these steps support your intent to benefit the intern’s learning process and they set clear expectations for all involved.

The risk lies in not accepting that, as an employer, you cannot view internship or training programs as a path to free or inexpensive labor.

Like with any other employment practice, proactive vision, detailed planning, training, documentation, and execution will help to ensure that your organization can give back to your industry’s community by supporting internships. Done well, internships help to build your organization’s reputation, philanthropic efforts, culture & brand, and ultimately, your appeal to candidates in recruiting efforts.

If you wish to develop an internship program, but don’t know where to start, be sure to seek expertise from a qualified HR professional for assistance.

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