Navigating the Legal Landscape of Unpaid Internships

The question of whether unpaid internships are legal is a complex one, fraught with legal nuances and dependent on various factors. The Fair Labor Standards Act (FLSA) sets the stage for labor regulations in the United States, stipulating that most employees are entitled to minimum wage, overtime pay, and other benefits. However, an exception exists for individuals whose work primarily benefits themselves rather than the employer. This exception is where the debate surrounding unpaid internships begins.

The Fair Labor Standards Act (FLSA) and Internships

The FLSA mandates that “for-profit” employers compensate employees for their work. To ascertain whether an intern or student qualifies as an employee under the FLSA, courts employ the “primary beneficiary test.” This test scrutinizes the “economic reality” of the intern-employer relationship to determine which party primarily benefits from the arrangement. The courts consider several factors to determine whether a worker is an employee or an independent contractor for purposes of the FLSA. If the analysis reveals that the intern is indeed an employee, they are entitled to minimum wage and overtime pay under the FLSA.

Exceptions to the FLSA

It's important to note that the FLSA provides exemptions for certain individuals. These include those who volunteer services for a state or local government agency and those who volunteer for humanitarian purposes at non-profit food banks. The Department of Labor (WHD) also recognizes an exception for individuals volunteering their time freely and without expecting compensation for religious, charitable, civic, or humanitarian endeavors within non-profit organizations.

The Primary Beneficiary Test: A Closer Look

The “primary beneficiary test” is a flexible tool used by courts, where no single factor dictates the outcome. Some key aspects of this test include:

No Expectation of Compensation: The extent to which the intern and the employer clearly understand that there is no expectation of compensation.
Educational Focus: Instead, the internship should be more educational. Interns are not there to work all day; they are primarily there to observe and learn.
Training Provided: Consistent with the requirement that an unpaid internship is primarily for the benefit of the intern, and not the company.

If, after examining these factors, all signs indicate that you should be compensated for your internship, you first want to discuss your concerns with human resources (HR).

Read also: Are Unpaid Internships Legal?

The Walling vs. Portland Terminal Company Case

The Supreme Court case of Walling vs. Portland Terminal Company in 1947 set a precedent for unpaid internships. In this case, a railroad company provided training courses for prospective yard brakemen lasting 7-8 days. Trainees who passed the course became eligible for employment when needed and received a retroactive allowance for their training time. The court ruled that these trainees did not meet the definition of an "employee" under the FLSA because they did not replace paid employees, and their presence slowed down rather than expedited the railroad's business.

Department of Labor's Six Criteria for Unpaid Internships

The Department of Labor (DOL) has outlined six specific criteria that a for-profit private sector unpaid internship must meet to be considered legal. Failure to meet all six criteria means the intern must be paid at least the minimum wage and overtime compensation for hours worked over 40 in a workweek, just like a regular employee. These criteria are detailed in Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act.

The six criteria are as follows:

The internship, even if it includes actions and responsibilities full-time employees would perform, is considered training
The internship experience is for the benefit of the intern, not the employer
The intern does not replace regular employees, but works under close supervision of existing staff
The employer that provides the training should see no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded (a.k.a. the business should not rely on interns to perform vital operational functions that impact revenue and/or performance)
The intern understands he/she is not entitled to a job at the conclusion of the internship
The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship (a.k.a. get it in writing that it's an unpaid internship)

In general, the more an internship mirrors an academic experience, the more likely it will fulfill the six criteria. Basically, the law holds that if an intern is engaged in any way with the operations of the business - clerical work, assisting customers, answering phones, etc. - then they are entitled to the FLSA’s minimum wage and overtime requirements because the employer benefits from the interns’ work.

Paid Internships: Compensation and Legal Considerations

Compensation for paid internships varies widely across geographic markets and industry. If a paid intern works over 40 hours per week, they must be paid time and a half for those hours worked in excess of 40 unless they qualify for an overtime exemption. The FLSA does not require employers to provide employees, including employee-interns, any amount of vacation.

Independent Contractors vs. Employees

An independent contractor is not an employee and, thus, is not subject to the provisions of the FLSA. Courts consider several factors to determine whether a worker is an employee or an independent contractor for purposes of the FLSA. If the intern is deemed to be an employee, they may be eligible for certain benefits under federal law, including up to 12 weeks of unpaid leave per year under the Family Medical Leave Act.

The Rise of Internships and Their Importance

The popularity and necessity of internships are growing. According to a study by the National Association of Colleges and Employers, 55% of the class of 2012 had an internship during college. A 2013 survey by Internships.com revealed that 67% of the class of 2013 had completed at least one internship during college. A 2014 Bloomberg Businessweek study showed students with internship experience are up to 43% more likely to get jobs out of college than those without.

Legal Challenges and Restructuring of Internship Programs

In 2011, two interns who worked on the movie Black Swan sued Fox Searchlight Pictures for having them do work that should have been done by paid employees. In June 2013, the court sided with them, ruling that they deserved minimum wages in exchange for their work. The lawsuit sparked an array of copycat suits filed by interns from such companies as NBCUniversal, Rolling Stone magazine, and CBS Corp. These suits and others like it have led some companies (Fox Searchlight, The Nation magazine) to restructure their internship programs to include minimum-wage pay, and made others, like Conde Nast, to cut their internship programs altogether.

Navigating the Complexities: Key Considerations for Employers

Given the legal complexities surrounding unpaid internships, employers should carefully consider the following:

Consult with Legal Counsel: Due to the complexities and potential legal ramifications, especially if you depend on unpaid interns, you might want to consult an expert.
Training: Like any other employee or volunteer, interns need to receive enough training so they can successfully meet your expectations.
Written Agreements: Volunteer status should be qualified in writing as part of your internship contract.
State and Federal Compliance: In both the federal and state context, wage and hour laws apply only to “employees”. Thus, to determine whether an intern is entitled to compensation under the FLSA, it must be determined whether the intern is an employee for purposes of the FLSA.

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