Summer Interns, don't get burned! What employers need to know about unpaid internships

The Nutshell:

In January 2018, the Department of Labor announced new guidance for determining when an intern becomes an "employee" entitled to minimum wages and overtime pay under the Fair Labor Standards Act.  Relying upon court decisions, including those from the Fourth Circuit Court of Appeals that decides Virginia cases, DOL developed the "primary beneficiary test," which establishes seven factors for distinguishing interns from employees.  Unlike the old six-factor test used by DOL before, which required that all six factors be met, the primary beneficiary test is more flexible and no single factor is determinative.

Who is the primary beneficiary?

The DOL has identified the following seven factors as part of the primary beneficiary test:

1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation.  Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

Who does it apply to?

The primary beneficiary test applies to "for-profit" and other employers who are required to pay employees for their work.  The FLSA exempts certain people who volunteer to perform services for a state or local government agency or who volunteer for humanitarian purposes for non-profit food banks.  DOL also recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation, for religious, charitable, civic, or humanitarian purposes to non-profit organizations.  Unpaid internships for public sector and non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally allowed.

TIP:

Develop a memorandum of understanding between your company and the intern that tracks the seven factors contained in the primary beneficiary test.  Engage in an interactive process with the intern in which you document in the memorandum how the intern's unique circumstances apply to the seven factors.  The memorandum should state that the internship is being granted without compensation or expectation of receiving a paid job.  Also, the memorandum should document what educational opportunities will be offered to the intern, how those opportunities relate to the intern's field of study or educational requirements, and establish the duration of the internship.  Once the company's and the intern's expectations are documented, both should sign the memorandum.