Navigating the Fair Labor Standards Act: A Guide to Unpaid Internships

Unpaid internships are a widespread practice, offering companies potential benefits and providing college students or recent graduates with valuable practical experience. However, the legality of these arrangements often comes under scrutiny, with many employers unknowingly exposing themselves to legal risks. A common misconception is that offering experience in exchange for free labor is mutually beneficial and harmless. This article clarifies the requirements for unpaid internships under the Fair Labor Standards Act (FLSA), helping employers and interns understand their rights and responsibilities.

The "Primary Beneficiary" Test: Determining Trainee vs. Employee Status

The Department of Labor (DOL) plays a crucial role in setting the standards for internships. On January 5, 2018, the DOL adopted a new "primary beneficiary" test to determine whether an intern should be classified as an "employee" or a "trainee" under the FLSA. This distinction is critical because trainees can legally perform unpaid work, while employees are entitled to minimum wage and overtime pay. These guidelines specifically apply to for-profit, private-sector employers.

The primary beneficiary test assesses which party benefits the most from the internship relationship. Courts have emphasized that this test is flexible and that no single factor definitively determines whether an intern should be paid.

If the analysis reveals that the intern is essentially an employee, the intern is entitled to both minimum wage and overtime pay under the FLSA. Employers failing to comply with DOL regulations may face administrative penalties and potential lawsuits, including owing back pay, unpaid taxes, and Social Security and unemployment benefits.

Factors Considered Under the Primary Beneficiary Test

The DOL considers the following factors when applying the primary beneficiary test:

The extent to which the intern and the employer clearly understand that there is no expectation of compensation. This means the intern should be fully aware that the internship is unpaid and that there is no guarantee of future employment. Any hint of promised compensation can lead to the intern being classified as an employee.
The internship provides training that is similar to what would be given in an educational environment. This includes actual clinical training and academic instruction.
The internship is tied to the intern's formal education program by integrated coursework or the receipt of academic credit. Collaboration with the student's university can ensure that the internship provides the training needed to be an educational experience. Schools often sponsor internships and may offer course credit to the student.
The internship accommodates the intern’s academic commitments by corresponding to the academic calendar. The internship schedule should work around the intern's classes and other academic obligations.
The internship’s duration is limited to the period in which the intern receives beneficial learning. The internship should not extend beyond the point where the intern is gaining new skills and knowledge.
The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern. The intern should not be used as a replacement for regular employees.
The intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship. There should be no implied or explicit promise of employment upon completion of the internship.

How to Structure a Compliant Unpaid Internship Program

To ensure compliance with the FLSA and the primary beneficiary test, employers should take the following steps:

Work with the student’s university: Coordinate with the school to ensure the internship provides necessary training and is an educational experience for the student.
Focus on transferable skills: Ensure the intern learns skills applicable in multiple job settings, not just specific to the company.
Offer observational opportunities: Allow interns to observe various aspects of the company’s operations through job shadowing without always needing to engage in active work.
Set clear expectations: Make it clear before the internship begins what the responsibilities and expectations will be, that the internship is unpaid, and that there is no expectation of a job offer once the internship is over.
Maintain thorough records: Keep records of written expectations, documentation describing the intern's activities, available training, and supervision provided. Document any disruption to the company or time commitment from employees due to the internship program.

Scenarios Where Unpaid Internships May Violate Federal Law

While unpaid internships can be beneficial, they often violate federal wage and hour laws, particularly in states like Ohio. The FLSA mandates that employees receive wages for their work. An unpaid internship is only legal if it doesn't have a traditional employment structure where the intern is an employee of the company. The internship must primarily benefit the intern, not the employer.

Here are key questions to determine the legality of an unpaid internship:

Is the internship connected to the student’s coursework?
Is the intern aware that they are not necessarily entitled to a job at the conclusion of the internship?

If the answers to these questions are not affirmative, the internship may be in violation of the FLSA.

Overtime Rights and Compensation: What Interns Need to Know

At lawful unpaid internships, interns are not owed compensation for hours worked and do not have overtime rights because they are not employees. Paid interns, however, are owed overtime pay. It’s crucial for interns to understand their rights to avoid exploitation.

The Significance of 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 and were paid 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 displace paid employees or expedite the railroad's business.

Summer Interns and Child Labor Laws

Employers hiring minor-aged interns during summer break must also comply with child labor laws. The FLSA governs the employment of minors:

Workers aged 14 and 15: Federal law limits the number of jobs these minors may perform. While school is not in session, the FLSA allows these workers to work eight hours per day, up to 40 hours per week.
Workers aged 16 and 17: Under the FLSA, these minors can work in any occupation not specifically declared hazardous by the Secretary of Labor.
State law restrictions: States may have their own child labor prohibitions, exemptions, and special meal and break requirements that differ from federal law requirements.

Additional Considerations for Employers

Tax and Accounting Research: Utilizing resources like Checkpoint Edge and CoCounsel can provide access to AI-assisted research, expert-approved answers, and tools like Advisory Maps and State Charts for tax and accounting research.
Advocacy for Federal Legislation: Organizations like the National Association of Colleges and Employers (NACE) advocate for federal legislation that would make unpaid internships illegal.

Intern Rights and How to Avoid Exploitation

Interns should understand their rights to avoid being taken advantage of. While many employers offer wonderful internship opportunities, some may be unaware of the laws or willing to exploit students.

Consider these points when searching for an internship:

Purpose of the Internship: An internship should not primarily serve the purpose of providing a paycheck.
Value of the Internship: Even unpaid internships provide value by offering essential work experience that enhances resumes.
Academic Credit: Ask if the internship can be counted as academic credit to integrate it into higher education.
Networking: Find internships through networking with friends and family or through college career centers.

The "Economic Reality" of the Intern-Employer Relationship

Courts use the "primary beneficiary test" to examine the "economic reality" of the intern-employer relationship. This test determines which party primarily benefits from the relationship. If the analysis reveals that the intern is actually an employee, they are entitled to minimum wage and overtime pay under the FLSA.

Read also: Are Unpaid Internships Legal?

Exemptions Under the FLSA

The FLSA exempts certain individuals who volunteer to perform services for state or local government agencies or for humanitarian purposes for non-profit food banks. It 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.

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