Memorial Day weekend has come and gone, the weather is getting warmer, colleges are out of session, and high schools are winding down towards final exams. More than just the start of Summer, this means Summer Intern season has officially arrived. As students and job applicants are entering an ever-increasingly competitive job market, resumes beefed up with internship experiences are almost essential in most industries. Today, many go-getters are often willing to accept unpaid internships in return for the educational and first-hand learning experience they will (hopefully) receive in exchange for their labors. On the other side of the table, many employers utilize such internship programs to expose the up-and-coming members of the workforce to their companies and recruit top talent for future full-time employment opportunities.

The rise of unpaid internships, however, has left many employers in hot water by inadvertently misclassifying workers as “unpaid interns” when they are in reality being treated like any other employee of the company – but for the fact that they are not being paid. Many groups of these misclassified unpaid “interns” are suing those employers (often in high-profile class and collective action lawsuits) for wages under the federal Fair Labor Standards Act (the “FLSA”) and corresponding state wage and hour laws. It is therefore essential for savvy employers to understand who may lawfully qualify for unpaid intern positions and how employers should best structure their internship programs.

The FLSA, as a general matter, mandates that all individuals who are “employed” must be compensated for their labors. However, exemptions apply to “trainees,” or people who receive internship training while on the job which furthers their own education. According to the test established by the United States Department of Labor (“DOL”) (see DOL Fact Sheet #71), an internship may be unpaid if:

  1. The internship provides training similar to that obtained in a vocational school setting;
  2. The purpose of the internship is to benefit the intern;
  3. The intern does not displace any regular employee;
  4. The employer does not enjoy any immediate advantage from the intern’s work;
  5. There is no entitlement to a job at the internship’s conclusion (though this does not mean that a job cannot ultimately be offered or earned); and
  6. Both the employer and intern understand that the intern is not entitled to wages.

In addition to the “trainee” test established by the DOL, many states have established their own criteria that employers must consider with respect to unpaid internships. Two such states (and where I focus my practice) are New Jersey and New York. New Jersey, for example, employs the following nine-factor “trainee” test that asks whether:

  1. The training is for the primary benefit of the trainee;
  2. The employment for which the trainee is training requires some cognizable trainable skill;
  3. The training is not specific to the employer (that is, is not exclusive to its needs), but may be applicable elsewhere for another employer in another field or endeavor;
  4. The training, even though it includes actual operation of the facilities of the employer, is similar to that which may be given in a vocational school;
  5. The trainee does not displace a regular employee on a regular job or supplement a regular job, but trains under close tutorial observation;
  6. The employer derives no immediate benefit from the efforts of the trainee and, indeed, on occasion may find his or her regular operation impeded by the trainee;
  7. The trainee is not necessarily entitled to a job at the completion of training;
  8. The training program is sponsored by the employer, is outside regular work hours, the trainee does no productive work while attending and the program is not directly related to the worker’s present job (as distinguished from learning another job or additional skill); and
  9. The employer and trainee share a basic understanding that regular employment wages are not due for the time spent in training, provided that the trainee does not perform any productive work.

Similarly, New York applies a multi-factor test (as to for-profit businesses) that fully incorporates the federal DOL test, but then adds the following supplemental criteria:

  • Whether the trainee is clearly notified, in writing, that he/she will not receive wages and is not considered an “employee” for purposes of minimum wage;
  • Any clinical training must be performed under the supervision and direction of people knowledgeable and experienced in the activity;
  • The trainee receives no employee benefits (e.g., health insurance, pension);
  • The training is general and qualifies the trainee to work in any similar business;
  • The screening process for the internship program is different than that for employees; and
  • Advertisements, postings or solicitations for the internship program clearly discuss education or training, rather than employment.

With these multi-factor, fact-sensitive tests in mind, companies offering unpaid internships this Summer are well-advised to engage in a self-audit (preferably with the assistance of counsel) to ensure that their programs are in compliance with the law. If companies do not undertake that analysis, their unpaid programs may quickly lead to rather substantial and expensive litigation, penalties and fines. The “penny wise, pound foolish” concept could not be more apropos.