When Do Interns Have to Be Paid? Revised FLSA Test May Create New Unpaid Internship Opportunities

Did you know that the Department of Labor recently changed the test used to determine whether interns are employees under the Fair Labor Standards Act (FLSA)? Though mostly overlooked, this development may significantly affect the manner in which employers provide internship opportunities. It may also encourage other employers to start their own internship programs.

In January 2018, the Department of Labor clarified that going forward, a “primary beneficiary” test will be used to determine whether interns are employees of “for profit” employers under the FLSA. Why is this a big deal? The FLSA’s minimum wage and overtime pay requirements generally apply to employees, not interns.

Educators and employers alike agree that individuals can benefit greatly from properly designed unpaid internship programs. Unfortunately, since interns are not entitled to compensation under the FLSA, they may be exploited by employers who use their free labor without providing with an appreciable benefit in education or experience. The DOL began issuing informal guidance to prevent this kind of abuse in the late 1960s.

In 2010, the DOL published a 6-factor test to distinguish between interns that don’t need to be paid under the FLSA and employees that do. One factor in particular proved to be a nearly insurmountable obstacle. “The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded.”

Since all six factors had to apply, many believed this test was too rigid, including some federal appellate courts. These courts instead opted to apply a “primary beneficiary” test that:

• focuses on what interns receive in exchange for their work;
• gives courts the flexibility to examine the economic reality of the intern/employer relationship; and
• acknowledges the uniqueness of internships in that interns agree to perform work in exchange for educational or vocational benefits.

In January 2018, the DOL essentially adopted this “primary beneficiary” test to eliminate unnecessary confusion and provide increased flexibility to holistically analyze internships on a case-by-case basis. This test includes seven factors to consider when determining whether an intern is actually an employee under the FLSA.

1. Expectation of Compensation. The extent to which the intern and the 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. Training. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including clinical and other hands-on training provided by educational institutions.
3. Education. 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. Academics. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. Duration. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. Displacement. 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. Promise of Employment. 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.

Unlike the rigid six-factor test, the primary beneficiary test is intended to be flexible. No single factor is determinative and additional factors may also be considered on a case-by-case basis when appropriate.

The FLSA’s “internship exclusion” was quite narrow under the old six-factor test. Whether this changes under the new primary beneficiary test remains to be seen. Nevertheless, employers should proceed cautiously when evaluating and determining whether someone can be treated as intern under the FLSA, rather than an employee.

The risk of employment-related claims goes up whenever laws and regulations change. Employment Practices Liability Insurance, which may include limited wage and hour coverage, can protect employers in the event of an inadvertent violation.

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