An overwhelming number of nonprofit organizations offer unpaid internships to students seeking an entre into the workforce and nonprofit sector. Often overlooked, however, is the fact that interns come with legislative strings attached, including federal and state wage and hour laws. These laws require, among other things, payment of a minimum wage for work performed by an individual. Moreover, under federal wage and hour law, there is no blanket provision exempting all interns or nonprofits from the law's grasp, yet unpaid interns abound. This begs the question: Should unpaid interns really be paid? The answer in some instances is, yes.
When determining whether federal wage and hour law requires an intern to be paid, an organization must first determine whether the federal Fair Labor Standards Act ("FLSA") is even applicable to the organization and the intern. While nonprofit organizations are generally not exempt from the reaches of the FLSA, some of their activities may fall outside FLSA coverage. Specifically, the FLSA only covers organizations that conduct commercial activities.
Irrespective of an organization's activities, an intern still may be covered by the FLSA if he is engaged in interstate commerce by virtue of the work he performs, i.e., regularly handling interstate mail and phone calls.
Given the breadth of the FLSA and the abundance of unpaid interns, a frequent assumption is that there must be an exception for interns under the FLSA. Despite its commonality in the professional vernacular, however, the FLSA does not even use the term "intern." In order for federal wage protections to attach, the intern must be an "employee," as defined by the FLSA. While the statutory language does not delineate between employees and interns or trainees, a case decided by the U.S. Supreme Court in 1947 and a six-part test subsequently developed by the U.S. Department of Labor provide helpful guidance regarding the FLSA's application to interns.
In Walling v. Portland Terminal Co., 330 U.S. 148 (1947), the individuals at issue participated in a training program that was a prerequisite to employment. The Supreme Court held that employment "trainees" were not employees for purposes of the FLSA during their training period. The Court considered the "economic reality" of their training as well as the circumstances surrounding the training, and concluded that the training program did not contemplate compensation, nor did the employer derive any immediate or direct advantage from the trainees' work.
Following Walling, the U.S. Department of Labor issued a six-part test to help determine whether an individual is a "trainee," as opposed to an employee requiring compensation. If all of the following criteria apply, the trainees are not employees within the meaning of the FLSA and need not be paid:
(1) the training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school;
(2) the training is for the benefit of the trainees;
(3) the trainees do no displace regular employees, but work under their close observation;
(4) the employer that provides the training derives no immediate advantage from the activities of the trainees and, on occasion, the employer's operations may actually be impeded;
(5) the trainees are not necessarily entitled to a job at the conclusion of the training period; and
(6) the employer and the trainees understand that the trainees are not entitled to wages for the time spent training. (Note that as an exception to this criterion, tuition assistance and nominal stipends for students are not considered wages.)
While this test is consistent with judicial interpretations, most courts do not hold that all six criteria must be met. Instead, they follow Walling's lead and analyze the economic reality of the training, focusing primarily on whether there was an expectation or contemplation of compensation and whether the employer received an immediate advantage from work completed.
Irrespective of their business purpose and practice, then, federal law permits nonprofit organizations to legally retain interns without offering monetary remuneration so long as the organizations are willing to devote time and energy benefitting the intern and his educational development. Organizations, however, should be mindful that state wage and hour laws often vary from their federal counterpart and may call for a different conclusion. To ensure jurisdictional compliance, it is recommended that nonprofit organizations consult with legal counsel.