The world is full of eager college students who want to have a chance at “breaking in” to a non-profit job via an internship but need some type of compensation to be able to do the work. There are plenty of non-profit employers willing to pay a stipend to get the best internship candidates and help assure commitment and dedication, but that cannot afford to pay minimum wage for the learning opportunity. Matching these needs through a below-minimum-wage stipend is the common solution – but that can lead to unintended Fair Labor Standards Act (FLSA) and tax consequences unless done correctly.
The use of the word “stipend” is not conclusive of the matter. An intern could receive a “stipend” that, if over $600 and therefore reported to the IRS, changes his or her classification to what the Department of Labor would consider an employee, and the nonprofit could owe back wages constituting minimum wage and back FICA. The question is whether the intern is a trainee on a stipend rather than an employee.
In essence, a “stipend” is compensation for services provided to the nonprofit. Those who perform work in exchange for compensation are normally employees who are paid at least minimum wage and have FICA withholdings and matches (or they are independent contractors under circumstances probably not relevant to the terms and conditions of an internship since the non-profit will probably need to control the intern’s work and work conditions). The significant exception under federal Department of Labor rules is for trainees, who, assuming they qualify, do not have to be paid a minimum wage.
To be considered a “trainee,” the internship must satisfy all six criteria developed by the Department of Labor for distinguishing unpaid trainees from employees who must be paid under the FLSA. The primary requirement is that the internship must benefit the intern – not the employer. The DOL’s criteria can be tough to meet when the non-profit is really trying to get below-minimum-wage employees. The forced solution is often to pay minimum wages but limit hours or structure an actual trainee program with the chief goal to be the benefit of the intern.
Takeaway: Nonprofits that pay interns a stipend below minimum wage should work with their employment counsel to match the internship program to the DOL’s criteria and avoid the unintended consequences of hiring a minimum wage employee rather than an intern on a stipend.