Summer will be here soon. It’s a time when many high school and college students, and even college graduates, look for summer jobs and internships. They are looking for work experience, and you need the help. So hiring a few of them as unpaid summer interns seems like a great idea; they’ll get the experience they need, and you’ll get an extra set of hands to help out for a few weeks or months. If the interns do a good job, you may even be able to offer them a position when the internship is finished. It’s a win-win situation, right?

Not so fast.

Most “Interns” at For-Profit Businesses Must Be Paid Minimum Wage & Overtime

Under the federal Fair Labor Standards Act (FLSA), employers must compensate workers for the services that the workers are employed to render. The FLSA’s definition of when an individual is “employed” is very broad. As a result, most internships offered by for-profit businesses in the private sector will be viewed as “employment” under federal law and, therefore, subject to minimum wage and overtime pay requirements.

An exception does exist for interns who qualify as “trainees” under a six-factor test published by the Department of Labor (DOL). If the six factors are met, then an employment relationship does not exist under the FLSA, and the intern does not have to be paid in accordance with federal minimum wage and overtime law.

In order to pass the test, all six of the following criteria must be met:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

The test is rather stringent, and the exemption is quite narrow. Most interns working for for-profit employers will not qualify as “trainees,” and must be paid at least minimum wage and overtime in accordance with state and federal laws – just like any other regular employee. Therefore, if your company is considering starting an internship program, make sure you have a clear understanding of what classifies an intern as a “trainee” using the DOL’s six-part test. If the internship does not pass the test, then you must compensate your interns in accordance with the FLSA, just as you would a regular employee. That means paying them at least minimum wage plus overtime.

If your company already uses interns, now is a good time to conduct an audit of existing programs – especially if you have unpaid interns. Among other things, the audit can be helpful in determining whether there is an appropriate educational purpose for your internships, whether interns are performing duties that would otherwise be done by regular employees, and whether interns are performing activities that benefit the intern and not the company.

As you evaluate your use of interns, don’t forget about state laws. Not only do some state wage and hour laws mandate that employees be paid more than federal law requires, but some states also have stricter tests for unpaid interns than the test articulated by the DOL. New York, for example, has an 11-factor test that includes the DOL’s six-factor test plus five additional criteria that must be met in order for an internship to qualify as exempt from state minimum wage requirements.

Interns Are Suing – And the Stakes Are High

Companies that improperly classify their internship programs as exempt from the FLSA’s wage provisions are exposed to costly litigation, and to liability for back wages (including overtime pay), liquidated damages in an equal amount, and attorney’s fees and costs. A series of recent class action cases illustrates the dangers of engaging unpaid interns.

In February 2012, a former unpaid intern at Harper’s Bazaar magazine filed a class action complaint against the Hearst Corporation (owner of Harper’s Bazaar). The intern claimed she worked more than 40 hours per week, but received no compensation, which violated the FLSA and state labor laws. The lawsuit was later amended to add claims that other interns who were paid some compensation were unlawfully paid less than minimum wage.

In March 2012, a former unpaid intern filed a class action lawsuit against “The Charlie Rose Show.” She claimed that she worked 25 hours per week without pay, and that she was not given any training. The case was settled last December for approximately $250,000, plus $50,000 for the plaintiffs’ attorney’s fees.

In July 2012, a former unpaid intern (the same woman that sued Hearst) filed suit against Dana Lorenz and Lorenz’s company Fenton Fallon. The intern claimed that she was not paid for 50+ hour weeks where her duties included purchasing materials from jewelry-supply stores, negotiating prices, and constructing jewelry. The parties settled the case in September 2012.

In February 2013, a former unpaid intern filed a class action lawsuit against Elite Model Management, alleging that she and other interns worked more than 40 hours per week, and that they had been deliberately misclassified as exempt from federal and state wage requirements. The suit seeks $50 million for violations of the FLSA and state labor laws.

Just last month, a class-action lawsuit was filed by a former unpaid intern against the Portela Law Firm in Manhattan for violations of the FLSA and state labor laws. The suit, filed on behalf of at least 40 former unpaid interns of the law firm, claims that the firm provided no academic or vocational training to its interns, and that the interns performed basic office and administrative tasks for at least 40 hours per week without any compensation.

It’s not just the unpaid interns who are suing; paid interns are also hopping onto the lawsuit wagon. In December 2012, for example, a former Hamilton College athletic intern who served as an assistant football coach and assistant women's basketball coach filed a class action suit. Although he had been a paid intern, he alleged that the college failed to pay him minimum wage and overtime in accordance with the FLSA and state labor laws, willfully misclassified paid interns as exempt from wage and hour laws, and classified interns as parttime even when they were working in excess of 40 hours a week – and in some cases 90 hours per week or more.

10 Ways to Reduce Potential Liability If You Have an Unpaid Intern Program. If you have reviewed the DOL’s six-factor test along with any relevant state laws, and think that your interns qualify as “trainees,” then you are on the right track for using unpaid interns at your company.

Like it or not, however, you are still taking on a significant risk by hiring interns without providing them compensation for their work. Here are ten steps you can take to reduce your company’s potential liability should one of those trainees later come a-suing.

  1. Have interns sign a written agreement specifying that the internship will be unpaid and that the intern is not guaranteed a job after finishing the internship; specifying the training that will be provided to the intern and the educational purpose of the internship; stating that the intent of the internship is to benefit the intern and not the company; delineating the exact duration of the internship and the limited scope of activities to be performed by the intern; and highlighting the intern’s obligation to promptly report the assignment of any activities that fall outside the identified scope of their internship duties.
  2. Have a clear, well-written policy addressing your company’s internship program. At a bare minimum, the policy should require all internships to be approved in advance by human resources, and should mandate that all internships be conducted in compliance with state and federal wage and hour laws.
  3. Train any supervisors who will be working with interns to ensure that the supervisors understand both the purpose of the internships and the limited scope of activities that may be performed by interns. Make sure to document that this training occurred, and follow up to ensure that supervisors are acting in compliance with your internship policy.
  4. Keep time records for the hours worked by interns. If any former interns sue you, and successfully argue that they were entitled to be paid minimum wage plus overtime for their services, having a contemporaneous record of their hours worked will be critical. It is the employer’s responsibility to keep time records for its employees. If those records do not exist, the intern will typically be allowed to estimate the number of hours he or she worked – an estimate that can only be refuted if the employer can prove the inaccuracy of that estimate.
  5. Provide training sessions for interns that are structured and academic in nature. According to the DOL, the more an internship program is structured around an academic or classroom experience, rather than around an employer’s actual operations, the more likely it is that the program will be viewed as an extension of the intern’s educational experience. Additionally, internship programs are more likely to qualify as exempt from the FLSA if interns are taught skills that can be used in multiple employment settings, rather than just in a single employer’s operations.
  6. Unpaid interns should not be assigned to do basic administrative or clerical tasks. That means that your interns shouldn’t just be go-fers if you want to avoid FLSA liability. Avoid having interns do copying, filing, clerical work, or other duties that would typically be performed by a regular employee. Remember, the internship experience must benefit the intern – not the employer.
  7. Don’t displace regular employees by using interns. Make sure you aren’t using unpaid interns as substitutes for regular employees during certain time periods or busy seasons. As a general rule, if you would have hired additional employees or required existing staff to work extra hours if the interns had not performed the work, then your interns are entitled to compensation for their services.
  8. Avoid hiring interns to work for you immediately after their internships end. Under the DOL’s internship test, trainees are not necessarily entitled to a job when their internship is finished. This doesn’t mean that you can’t hire an intern after they complete their internship. It just means you have to be careful how you do it. You can reduce your liability by making sure interns understand that they should not expect a job upon completion of their internship. You can also reduce your liability by ensuring that interns go through the company’s regular application, interview, and hiring process if they want to be considered for regular employment
  9. Work with educational institutions. It can go a long way toward showing that your internship program qualifies as exempt from the FLSA’s requirements if you work with an educational institution willing to offer oversight and school credit for students who complete an internship. This can include working with a student’s college advisor or professor, to whom the company can report on a student’s progress.
  10. Review your internship program with an attorney who specializes in employment law to make sure your program is properly structured, and to make sure you understand the risks.

What about Non-Profit Organizations and Volunteers?

The FLSA draws a distinction between trainees and volunteers. Both groups are generally considered exempt from the FLSA’s wage and hour provisions. As discussed above, interns may qualify as “trainees” under the FLSA if their work at a for-profit business meets the DOL’s six-factor internship test. Individuals who qualify as “volunteers” are also considered exempt from the FLSA’s wage provisions, but their service does not have to pass the internship test in order to qualify.

The “volunteer” exception applies to non-profit charitable organizations and to public sector agencies. As a general rule, unpaid internships in the public sector (e.g., at government agencies)and at nonprofit charitable organizations, where interns volunteer without expectation of compensation, are generally permissible. More specifically, the DOL recognizes this exception for people who volunteer their time to non-profit organizations, freely and without anticipation of compensation, for religious, charitable, civic, or humanitarian purposes.

Any internship program comes with risk, regardless of whether the interns are paid or unpaid. Particularly in light of the recent increase in litigation regarding how interns are paid, all internship programs should be carefully structured to ensure that they do not violate federal or state labor laws. The attorneys on LeClairRyan’s Labor and Employment team are available to assist you in structuring a new internship program, evaluating current programs, or answering any other questions you might have.