What Are Unpaid Internships?
The concept of an unpaid internship has become a popular subject in today’s media, job-search circles and amongst young professionals. As a result, we think it is important to outline what an unpaid internship actually is and how it is relevant to our world today. At its core, the idea of an unpaid internship is very simple: an internship where an intern does not receive compensation. Who benefits from this? The current trend has seen this as a benefit for both the prospective employer and the prospective employee, but with competing benefits come competing interests.
Both sides view an unpaid internship as a positive for their respective side. Applicants tend to view unpaid internships as an opportunity to gain experience, and employers often view unpaid internships as an opportunity to understand the potential of a new hire before investing in their salary . What are the boundaries of this arrangement? With rapid change in today’s society, comes rapid change in laws and employment standards. The law is currently changing in regards to defining an unpaid internship with more clarity. As a result, both the employer and the intern need to understand their obligations when hiring or accepting an unpaid intern position.
The legal issue with unpaid internships is that there is a very fine line between an internship and a job without pay. This is a legal definition, and if the person employed does not fall under the legal definition of an intern, they may well be an employee. The difference between the two may define who pays employment standards coverage costs such as Canada Pension Plan contributions, Employment Insurance, WorkSafe, etc. If the individual is defined solely as an intern, some of the employer’s obligations to the intern may be reduced and/or eliminated.
Unpaid Internship Laws in the USA
The Fair Labor Standards Act (FLSA) provides the U.S. Department of Labor with (DOL) sole authority to determine whether internships should be compensated under the law. The DOL has set forth six criteria for determining whether an intern qualifies as a non-paid intern rather than a paid employee under the FLSA:
- The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
- The internship experience is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;
- The internship experience is focused on the benefit of the intern rather than the employer;
- The intern does not displace regular employees and works under close supervision of existing staff;
- The employer that provides the training derives no immediate advantage from the activities of the intern; and
- The intern and the employer understand that the intern is not entitled to wages for training.
To qualify for an unpaid internship, all of these criteria must be met. Shedding some light on the matter, Michele L. Ventrella, a contributing attorney from the Chicago-based law firm Poltrock & Jaffe, states that "The criteria delineated by the DOL in the FLSA are crucial for legal compliance. Companies are best advised to implement strong policies surrounding the internship process. If you don’t want to run afoul of labor laws, then essentially you have to make it a formal programs – and those that craft formal programs will find that doing so in accordance with the FLSA is not that difficult. It’s best for interns to establish that they will not be working more than 40 hours per week (and both company and intern should understand this) and to avoid being ‘on call’ at all, as those factors can weigh against a finding that the individual is a trainee rather than an employee."
State Statutes and Regulations
The variation in state requirements is another reason that employers who want to hire unpaid interns should check their state laws. For example, Minnesota specifically requires interns to at least 18 years of age and designated interns may not replace a "full-time regular" employee. Alaska’s wage orders have similar restrictions related to employment of minors. Connecticut has its own test for unpaid internships, as does Maryland. Some states, such as California, take the federal test and expand on it—California provides that internships in the "for-profit" operations of an employer are unlawful if the internship violates its six factors.
Employers with operations in multiple states should check the state laws where they operate to confirm that they are complying with both the federal rules and the requirements of any other state.
Rights of Unpaid Interns
Separate from wage and hour issues are the many "employee rights" laws that are triggered by the intern/employer relationship. Even though unpaid interns don’t qualify to receive conventional employment protections under many workplace laws, such as wage and hour or Family Medical Leave Act protections, some legal protections do attach to interns based on their status as an employee-albeit a non-paying one.
For example, interns are a protected class and because of that protection, they cannot be discriminated against by an employer, or subjected to workplace harassment, or suffer retaliation for participating in raising discrimination or harassment complaints. Class action litigation-sometimes tragic in its scope-has recently arisen over serious discrimination and harassment suffered by many different but mainly younger employees, including interns. Although these cases have been brought in different federal courts, it is perhaps the case involving the surge in unpaid interns at the film studio "Fox Searchlight Pictures" that has attracted the greatest notoriety. Two superstars of the firm, the movies Black Swan and the Wrestler, were involved in the lawsuits.
In June 2013, the Second Circuit defined when interns can sue their employers under the FLSA. In that case, the court was asked to consider once and for all whether Wall Street interns like those who had sued the investment bank Credit Suisse were employees entitled to minimum wages and overtime, or whether they were simply students learning about the industry in hope of getting hired one day. The Second Circuit ruled that internships at the major banks should qualify as employment and not as non-compensated work-study programs because no educational benefit was given to interns at Credit Suisse.
That case, like nearly all of the intern lawsuits filed across the country, ended up in settlement. $1.5 million is being paid out to former interns in the Rocker v. Kaplan Inc. case. In Glatt v. Fox Searchlight Pictures, Inc., the plaintiffs received $495,000 as a part of a class action lawsuit against the film studio. In addition, approximately $4.5 million was paid to settle the case brought by Christopher Lin an intern at Hearst Corp.’s Harper’s Bazaar.
Implications of Internships
Violations of unpaid internship regulations can result in a wide array of civil and criminal penalties. For example, interns, groups of interns, or others (such as the federal or state governments) may sue the company for violation of wage laws – seeking back wages, damages, or both. Until 2018, the particular law providing for such liability in California permitted employees to recover up to four years of unpaid wages, and presently employees can recover up to three years of unpaid wages. Some interns even have been able to recover restitution of overtime, waiting time penalties , and other statutory penalties. Penalties over the years have reached into the millions of dollars; "back pay" awards have been as high as $5 million and "waiting time" penalties have reached $20 million. Since many unpaid interns are college or graduate students, legal violations may raise questions concerning financial aid disbursements and benefits such as student health care. If an intern obtains college credit for an internship but does not receive wages, then the Department of Education could require the institution to repay grant funds or lose eligibility to participate in federal financial aid programs.
Best Practices for the Employer
If you are structuring an unpaid internship program, careful planning can save your organization many headaches down the road. Here are some best practices:
Plan to comply – Before you enter into a job placement agreement, it is recommended that you consult with counsel or a compliance professional to understand the applicable law and be sure you adequately disclose the details of the position and its relationship to any applicable CBA, EAP or other plan. You can also contact the Department of Labor for guidance.
Document everything – While in some jurisdictions such as California, job placement agencies must maintain records of how a candidate learned about an internship, other jurisdictions may not have specific documentation requirements. That said, it is always good practice to document the agreement with the intern regarding the unpaid nature of the position and the educational value of the work. Maintaining the signed job placement agreement as well as an Intern Handbook that outlines unpaid internship policy is also a best practice.
Train your interns – What has previously been seen as a best practice is to conduct an initial orientation session with the interns to outline workplace expectations as well as to gauge interest in the content of the internship. If an intern wants to take a deeper dive on items covered in the orientation, use that as an opportunity to craft a custom training plan. Send out training materials before the start date and conduct regular check-ins with the intern throughout the internship. Finally, issue periodic 360-degree performance reviews (interns reviewing you) to ensure learning objectives are being met.
Focus on education and professional development – Since the primary focus of an unpaid internship is education, the position must be designed to foster professional development. Recurring meetings to provide feedback to the intern, hold him or her accountable for completion of assignments and to demonstrate the relevance of the work to his or her academic program, can help ensure the internship is mutually beneficial.
Internship Law Trends
As with any area of the law, the most important compliance factor is clarity, and a move toward more clarity is on the horizon. Internships by their nature require a dynamic approach to meet the varying needs of employers, educational institutions and students. The Department of Labor, other government agencies and the courts have struggled for years to evolve a set of practical guidelines to allow these varied interests to coexist. Long term, one can envision a more regulated internship system, in which all internships implemented after a certain date must follow these formal pragmatic guidelines in order to be considered lawful. In the short term, however, employers should not panic and react internally with their own rules that are too rigid. In fact, over-regulation by an employer – such as in cases where an employer drafts its own test to measure the academic value of the internship, but the test is so difficult that no intern could pass it – opens an opportunity for a lawsuit. This is because section 558 of the Fair Labor Standards Act reasonably suggests that the DOL will sanction employers who try to get too cute in manipulating an intern’s educational experience to produce free work. Such a situation would certainly run afoul of the regulations’ requirement that "other than for expenses or fees, [the intern] does not do work of immediate advantage to the employer." This and other DOL regulations might be reviewed and interpreted differently in the next round of litigation or rulemaking.
One way to avoid uncertainty in the future is to seek out education programs that provide college credit for your interns. Of course, there is a lot of room for abuse here. Colleges and universities have a strong incentive to "give" credit to students who pay tuition; many high school counselors have strong incentives not to pressure students to seek paid work (an action which may put the student at a disadvantage). As a result, academic credit is not always a guarantee that the internship is educational in nature. However, if an employer can get accreditation from a state college that the internship meets certain criteria, that’s an endorsement that can be relied upon in any wage and hour dispute with an intern. In theory, this significantly reduces the ambiguity in unpaid internship law, and provides a level of protection the employer could not attain on its own. With concessions to the educational institution, such as a donation, an employer might be able to convince a vocational school to provide similar accreditation.
Another alternative gaining popularity is making all internships paid, not just those which meet the above exemptions. There has been a vigorous debate on both sides about whether it is even possible to remove all unpaid internships in a practical way. Yet, that is what the progressive mainstream press and business groups have been repeatedly calling for. Employers may choose to comply with new laws, or to cease the use of unpaid internships for now — until there is a definitive answer to this debate.
Final Thoughts
In conclusion, now that you have a basic primer on unpaid internships, let’s recap what you should take away from our discussions about them. Unpaid internships are actually a dignified and positive tool if properly performed. Unfortunately, too many organizations fail to follow the law in setting them up, and that leads to a constant barrage of DOL investigations, lawsuits, and news stories.
Even if your organization is not for profit , there are still standards to be met to ensure compliance. Because unpaid internships are so essential to nonprofits and the business community as a whole, it is critically important that the law is adhered to so that we can all play a part in ensuring great internship experiences continue after this degree of scrutiny.
If you are unclear about any of the regulations discussed here, or are looking to institute best practices into your existing unpaid programs, I highly recommend consulting experienced counsel early in the process.