Over the last several years, the popularity of unpaid internship programs for college students has soared. Both public and private employers offer students the opportunity to gain real life experience, buff up their resumes and get a foot in the door. Employers get a chance to try out new employees and get the benefits of a bright, eager-to-please work force, all for free. These interns often end up working alongside regular staff, and their duties and responsibilities often include those assigned to a paid employee.

Internship programs, however, carry certain risks. Both federal and state statutes have minimum wage laws that require all persons who render services to an enterprise to be compensated at no less than the minimum wage. Failure to abide by the minimum wage laws can subject an employer to multiple damages as well as attorney’s fees. Additionally, investigations into possible violations of the wage laws can go back several years, resulting in substantial judgments.

The good news is that these consequences can be avoided with a carefully-designed program that allows the employer to classify the student interns as outside of the scope of the federal wage and hour laws. However, employers need to proceed with caution, especially because most states have their own wage and hour laws which may provide broader coverage than federal law and should also be considered when designing an internship program.

The Fair Labor Standards Act (“FLSA”) is the federal law which establishes the baseline minimum wage and overtime rates that all employers must pay their employees. It provides strict penalties for employers that do not comply with its terms. Under the FLSA, “any individual employed by an employer” qualifies as an “employee” and, therefore, is entitled to earn minimum wage and to receive overtime compensation. 29 U.S.C. § 203(e)(1). Despite this seemingly broad definition, 60 years ago, in the case of Walling v. Portland Terminal Company, 330 U.S. 148 (1947), the U.S. Supreme Court held that an individual may work on the premises of another for his or her own advantage without any express or implied compensation agreement and not be considered an “employee” within the meaning of the FLSA. Therefore, it is possible for a company to operate an unpaid internship program without running afoul of the FLSA.

To determine whether a student working in an unpaid internship is not an “employee” and, therefore, does not fall within the minimum wage and overtime requirements of the FLSA, the Wage and Hour Division of the United States Department of Labor (“WHD”) examines six criteria, which are derived from the Supreme Court’s decision in Walling. The facts and circumstances of each case will be viewed separately, and all six criteria do not necessarily have to be met in order to be able to exclude student interns from the definition of “employee” under the FLSA. Of course, the more criteria that are met, the less likely that an employment relationship will be found to exist. As set forth in WH Publication 1297, the six criteria are as follows:

  • The training that the internship provides must be similar to that which would be given in a vocational school, even though it may include the actual operations of the facilities of the company;
  • The training must be for the benefit of the student, not the company;
  • The student must not displace any regular employees, but rather must work under close supervision;
  • The company sponsoring the internship must derive no immediate advantage from the activities of the student and, on occasion, the company’s operations may actually be impeded;
  • The student must not be entitled to a job at the completion of the internship (although there is no prohibition on subsequently hiring the student); and,
  • The company and the student must both  understand that the student is not entitled to wages for the time spent in training.

An opinion letter from the WHD illustrates how strictly the agency views these criteria. On May 17, 2004, the WHD issued an opinion letter in which it declined to confirm whether a particular internship program qualified as exempt under the FLSA.

The company requesting the opinion letter operated an internship program through which students were able to learn marketing, promotion and statistical analysis in a real-world setting. The company hired students to work approximately seven to ten hours per week, without pay, to perform various duties that regular staff members also performed, including acting as field marketing representatives for the company on campus, testing and using various Internet marketing strategies and compiling data from various sources to predict trends. The internship program was open only to students who would receive college credit, and a faculty coordinator was responsible for advising the student interns and communicating with the company supervisor on a regular basis regarding the interns’ performance. The company was neither obligated to hire any student at the end of the program, nor was any student required to accept employment upon completion of the internship.

The WHD was unable to determine from these facts whether the company could classify the student interns as exempt from the FLSA. The WHD did find that the internship program likely met the criteria concerning training similar to that of a vocational school, training for the benefit of the students, no expectation of compensation and no obligation of hiring. However, the WHD found that it was unclear whether the students were displacing regular employees and whether the company was deriving an immediate benefit from the students’ efforts, particularly since the company had described the internship program as allowing students to assume the role of regular staff members. Accordingly, the company was left in doubt as to whether its student interns were exempt from the FLSA.

In light of these applicable legal standards and the WHD’s opinion letter, there are several steps that a company can take to minimize the chance that its unpaid interns would be classified as “employees” under the FLSA. These include:

  • Developing and adhering to a written internship policy which defines in detail the duties and responsibilities that the intern will perform and establishes strict supervision of the intern’s activities, perhaps even assigning a “mentor” to help distinguish interns from employees;
  • Communicating clearly to potential interns that they will not receive any pay during the internship and are not guaranteed a job at the end of the internship (a written agreement or policy statement given to each intern may help in this regard);
  • Ensuring that the intern, rather than the company, receives the primary benefit of the internship and that the intern’s work is not something that the company would otherwise assign to a regular employee (i.e., “internships” that consist of filing and other clerical work likely will not be viewed as benefiting the intern); and,
  • Coordinating with local colleges and universities to allow the student interns to receive academic credit for the internship (which would help to establish that the internship experience is similar to that which would be received at a vocational school). Alternatively, the employer should have some structured program that shows that interns are getting some educational component; for example, a series of lunches with internal speakers who talk about issues particular to the industry.

Adhering to these guidelines when developing an internship program should help a company steer clear of any unwanted legal ramifications.