Does Your Intern Program Make the Grade?

By Clay Creps

July 26, 2018 is National Intern Day – the perfect day to take a look at the employment law issues that impact internships! The primary issue employers need to be concerned about is whether an unpaid or stipend “intern” is actually an “employee” and therefore legally entitled to minimum wage and overtime pay. That is, will an employer be required to comply with the Fair Labor Standards Act's (FLSA) pay requirements for its “summer interns?”

There has recently been a significant shift in the way the U.S. Department of Labor (DOL – the agency charged with enforcing FLSA's pay requirements) is looking at internships. Under the Obama Administration, the DOL issued Fact Sheet #71, which contained six criteria that an employer was required to meet for an unpaid internship to be excluded from FLSA's pay requirements. However, following the issuance of Fact Sheet #71, a number of Federal Circuit Courts rejected those criteria. This led to the DOL issuing a revised Fact Sheet #71, which is a significant departure from the prior standard.

The DOL now has a "primary beneficiary test," adopting the name from the opinions of the Circuit Courts which rejected the old six-prong test. Under this test, if an intern is the "primary beneficiary" of the internship experience, then the intern will not be entitled to either minimum wage or overtime pay under FLSA. However, if the "employer" is the "primary beneficiary," it likely will be required to treat the intern as an employee for purposes of pay.

 The new test states that employers should consider the following seven factors to determine if an intern is actually an employee:

  1. "The extent to which the intern and 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."

The DOL describes this test as "flexible," where "no single factor is determinative." Rather, "whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case." Thus, even if some of the factors are not present, if the factors which are present are particularly strong, the relationship can still qualify as an internship with no requirement of pay.

The DOL indicates that this test is applicable in situations where a student or intern works for a "for-profit" employer. Thus, internships in the public sector and at nonprofits are "generally permissible" and likely will not be subjected to the same type of scrutiny as internships in the "for-profit" arena.

Also note that the "primary beneficiary" test relates to compensability of work in an internship under federal law. State and local jurisdictions are free to impose different and tighter restrictions on employers.

Finally, an employer's internship program is much more likely to pass muster if the employer has clear policies and agreements in place regarding its internship program and the employer follows these policies in implementing the program.

If you have questions about the issues raised here, please contact any of the attorneys in Tonkon Torp's Labor & Employment Practice Group. And Happy National Intern Day to all!

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