[Note: The Department of Labor guidance discussed in this article, Fact Sheet #71, has been superseded. See the discussion of the revised policy here.]
With summer vacation approaching, and with the job market being what it is, small business owners may be approached by college or high school students offering to work as undpaid interns. At first, that may seem like a great idea — the business gets free help for the summer, maybe to fill in for vacationing employees, and the student gains experience and a chance to build a resume. Sounds like a win-win situation, right?
Well, maybe not. In fact, the situation could place the business on the receiving end of a lawsuit or government enforcement action. The problem is that most interns at for-profit businesses qualify as employees under the Fair Labor Standards Act, or FSLA, and must be paid at least minimum wage and overtime compensation if they work more than 40 hours in a week). In other words, you can’t avoid paying minimum wage by paying nothing.
However, there is a very narrow exception for interns that qualify as “trainees.” Last April, the Department of Labor published Fact Sheet #71, listing the criteria for determining whether an intern is a trainee. If an internship has all six of the following characteristics, the intern is not classified as an employee under the FLSA.
- The intern receives training similar to the training he or she would receive in an educational environment. Preferably, the program should be centered on a classroom or academic setting, not on the business’s operations. Ideally, the program should be associated with an educational institution that gives the intern academic credit for the program.
- The internship is for the benefit of the intern. If the intern’s activities are primarily for the benefit of the employer (see item 5), the fact that the intern also acquires useful job skills is not sufficient to classify him or her as a trainee. Ideally, the intern will learn skills that are useful to other employers, not just to the business sponsoring the program.
- The intern does not displace employees. Instead, existing employees closely supervise the intern’s work. If the business uses an internship to supplement its staff or to fill in for employees who are absent or on vacation, the intern is an employee, not a trainee.
- The business does not derive an immediate advantage from the intern’s work; in fact, the internship may even impede the business’s operations. Although it can probably be argued that the business always derives some amount of benefit from the internship program, the internship must be primarily and predominantly for the benefit of the intern, not the benefit of the business.
- The business will not necessarily employ the intern when the internship is finished. If the business uses the internship as a trial period for prospective employees, the intern is probably an employee, not a trainee.
- The intern and the business understand that the intern will not be paid during the internship.
Given those criteria, it’s easy to understand why a Department of Labor official told The New York Times last year that most unpaid internships with for-profit businesses are not legal. (The story is different, however, for internships with governmental agencies and nonprofit organizations. That’s the topic of a future blog post.)
When the Department of Labor released Fact Sheet #71 last April, some news sources and bloggers described the six criteria listed above as “new regulations.” In fact, the criteria are are not new, and they are not regulations. They originated in 1947 with Walling v. Portland Terminal Co., a decision of the U.S. Supreme Court dealing with a training program for prospective railyard brakemen. Since then the criteria have been applied, explained, and refined by lower courts and the Department of Labor. Rather than a new regulation, Fact Sheet #71 can be seen as the Department’s warning shot across the bow of businesses that use “unpaid interns” as a source of free labor.
A note of caution about the use of these criteria. If the internship satisfies all six of the above criteria, the intern is deemed to be a trainee and not an employee, but only for determining whether the Fair Labor Standards Act applies. That’s only one of many contexts in which the categorization of a person as an “employee” carries legal significance, and different criteria apply in each of those different contexts. Even though a trainee is not an employee for FSLA purposes, he or she may be an employee for other purposes, including the relevant state labor laws.