As Spring is fast approaching, so is the race to hire interns for the summer season. As companies work through their internship budgets, there may be good news from the Department of Labor (DOL) due to updated guidance on internship programs the department issued in January 2018.
Previously, courts used a six-factor test to determine if an intern or student working for a "for profit" company was actually an employee of the company, who was required to be paid minimum wages and overtime compensation under the Fair Labor Standards Act (FLSA). Essentially, if a company derived any benefit from having the interns work there, it had to pay them. This test made it difficult for companies to justify having unpaid internships under most circumstances.
Previously, courts used a six-factor test to determine if an intern or student working for a "for profit" company was actually an employee of the company, who was required to be paid minimum wages and overtime compensation under the Fair Labor Standards Act (FLSA). Essentially, if a company derived any benefit from having the interns work there, it had to pay them. This test made it difficult for companies to justify having unpaid internships under most circumstances.Who Benefits More?
The DOL's new guidance, which is based on several recent appellate court rulings on the issue, instructs that courts are now applying a "primary beneficiary test" to determine if an intern should be paid as an employee of the company or not. They will examine the "economic reality" of the intern/employer relationship to determine which party is the "primary beneficiary" of the relationship. Basically, if the internship supports the student's learning or is needed as part of their education, the internship can be unpaid. The new test doesn't prohibit a company from deriving a benefit from the internship; it just establishes that the student must be the primary beneficiary.
According to the DOL, courts have identified the following seven factors as part of the 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.
As the DOL points out, this is a "flexible test" and no single factor is determinative. Instead, the determination will be based on an analysis of the "unique circumstances of each case." To the extent a company can connect the internship to one or more of the above factors, the more likely it is that the interns or students will not be found to be employees of the company. Of course, the more factors it meets, the stronger the case for making the internship be unpaid.Just Because You Can Doesn't Mean You Should!
While the new rule makes it easier for a company to justify not paying their interns, that doesn't necessarily mean that it shouldn't pay them for other reasons. Some considerations to keep in mind:
- Some schools may require internships to be paid. Companies with unpaid internships may not be able to recruit interns from desired schools;
- Even if the schools don't require internships to be paid, professors will most likely direct their best students to the companies that do offer paid internships;
- Since students shop around for internships, the ones that are paid may be more attractive to them;
- A company that doesn't pay its interns may develop a negative reputation that will resonate with students when they are looking for positions after they graduate.
While unpaid internships may be budget friendly, they may come at the cost of losing top talent. To avoid this outcome, consider options such as having a smaller internship program that is paid rather than unpaid; or lowering the amount that you will pay each intern. Keep in mind, however, that once you start paying your interns, they are more likely to be found to be employees under the FLSA, which means that they must be paid minimum wages and overtime.Excelerator Consulting Can Help
Excelerator Consulting, a HR and Business consulting firm, is experienced in helping companies set up and evaluate their internship programs. Getting it right can ensure both a compliant and enriching program. Reach out to us to learn more.
Established in 2014, Excelerator provides HR and Business services to companies of all sizes in a diverse set of industries. Our clients include startups to multibillion dollar global companies. Ask us how we can help.