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eLABORate: DOL Reduces the Risk of Employers Offering Unpaid Internships

January 25, 2018

Employers interviewing for their upcoming summer internship programs now have more flexibility and less risk of wage and hour litigation due to a significant policy turnaround by the U.S. Department of Labor (DOL).

Traditionally, unpaid internships offered college students the opportunity to gain real-life business experience in their chosen career, while for-profit employers received the benefit of additional assistance in the workplace, as well as an opportunity to assess potential new employees.

However, in 2010, this symbiotic relationship was complicated by the DOL’s institution of a strict six-factor test to determine if the individual was properly classified as an unpaid intern or an employee entitled to wages and overtime under the Fair Labor Standards Act (FLSA).

Under the former DOL test, all of the following criteria must have been met to be considered an intern by the FLSA: (1) the internship is similar to training that would be given in an educational environment, (2) the internship experience is for the benefit of the intern, (3) the intern does not displace regular employees and works under close supervision of existing staff, (4) the employer does not gain an immediate advantage from the intern's activities (and the employer’s operations may actually be impeded or hindered by the intern’s activities), (5) the intern is not guaranteed a job at the end of the program, and (6) the employer and the intern each understand that the internship is unpaid.

The 2010 test resulted in current and former interns bringing class action lawsuits against companies such as Viacom, 21st Century Fox, and fashion giant Gucci, resulting in large dollar settlements. While some companies reacted by creating internships that paid at least the minimum wage, many other companies simply eliminated internship programs out of fear of litigation.

In January 2018, the DOL released Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act, which scrapped the old test, in favor of the court-favored “primary beneficiary test” to determine if an individual is an intern or an employee under the FLSA. The new seven-factor test is as follows:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, expressed 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.

Courts have described the “primary beneficiary test” as a flexible test, and no single factor is determinative. Accordingly, whether an intern or student is an employee under the FLSA depends on the circumstances of each case.

If analysis of these circumstances reveals that an intern or student is actually an employee, he or she is entitled to both minimum wage and overtime pay under the FLSA. On the other hand, if the analysis confirms that the intern or student is not an employee, then he or she is not entitled to either minimum wage or overtime pay under the FLSA.

Employers should carefully assess their internship programs under the new criteria, and if needed, seek advice of counsel in regard to any use of unpaid interns.