Unpaid Internships: Are They Legal or Not?

Studies show that the recent decline in the U.S. economy has led to an upswing in the number of available unpaid intern positions. Unpaid internship programs allow companies to train and develop potential employees while providing the interns, who are typically college or graduate students, more experience in the work place. Companies should be careful, though, not to use such programs simply as a means of acquiring free labor.

Employers and students often do not realize that most unpaid internship programs violate the Fair Labor Standards Act (FLSA), which requires that nonexempt employees receive the minimum wage for all hours worked. In the last few years, the U.S. Department of Labor and its state counterparts have began to investigate such internship programs. Investigations in Oregon, California, New York and several other states have led to significant fines for the employer and the payment of wages to the supposed intern.

Based on the U.S. Supreme Court’s interpretations of the FLSA, the Wage and Hour Division of the Department of Labor has established a test for determining whether an intern truly is a trainee or is an employee who is entitled to payment. The test requires that each of the following statements about the intern’s engagement be true:

1. The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school;
2. The training is for the benefit of the trainee;
3. The trainee does not displace regular employees, but instead works under their close observation;
4. The employer providing the training derives no immediate advantage from the activities of the trainee, and on occasion, the employer’s operations are actually impeded;
5. The trainee is not necessarily entitled to a job at the conclusion of the learning experience (though the employer may offer a job to the trainee); and
6. The employer and the trainee understand that the trainee is not entitled to wages or other compensation for the time spent in training (though a stipend may be paid for expenses).

If any of the above statements are false with respect to the intern’s engagement, then that person is entitled to payment under the FLSA, which includes payment of the minimum wage and overtime compensation. However, it should be noted that the Department of Labor does not interpret the fourth prong of the test to mean that the intern cannot provide any benefit to the employer. The intern’s benefit from the internship must simply outweigh the employer’s benefit.

With the summer season for unpaid internships underway, now is the time to assess your company’s compliance with the FLSA. Employers wishing to use unpaid interns should tailor their internships to comply with the Department of Labor’s six-prong test. If the employer cannot satisfy the DOL test, then the employer must compensate the person in accordance with the FLSA.