Unpaid Internships: Free Labor? Not Really …

It’s that time of year when companies start to consider internships. College students frequently look to internships to gain valuable work experience. Our current economy has created a situation in which many college students are willing to take on such internships unpaid. The interns get work experience to fill their resumes and the companies get extra help at no cost. Sound too good to be true? It is.
Although unpaid internships sound like an attractive proposition for companies, federal law places strict guidelines on the types of internships that are permitted to be “unpaid.” Under the Fair Labor Standards Act (FLSA), covered and non-exempt individuals who are permitted to work must be compensated for the services they perform for an employer. Internships in the for-profit, private sector will almost always be viewed as employment under the FLSA, unless the following test is met:
1.      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;
2.      The internship experience is for the benefit of the intern;
3.      The intern does not displace regular employees, but works under close supervision of existing staff;
4.      The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impaired;
5.      The intern is not necessarily entitled to a job at the conclusion of the internship; and
6.      The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
If all of the above factors are met, then an employment relationship does not exist under the FLSA and the internship may be unpaid. This determination is made by looking at all facts and circumstances of the internship program. If the above factors are not met, then the intern must be paid at least the minimum wage and overtime compensation for hours worked over 40 hours in a workweek.
Significantly, the definition of “an educational environment” under this test is narrow. As a general rule, interns that are engaged in the operations of the employer or are performing productive work such as filing, clerical work or customer service-type work are not excluded from the FLSA’s wage and overtime requirements – even though they may in fact be receiving the benefit of a new skill or work experience – because the employer benefits from the intern’s work. Instead, unpaid internships must be structured around a classroom or academic experience, such as internship programs that are supervised by a college or university that provides educational credit. In such situations, the intern does not perform routine work of the for-profit business on a regular and recurring basis but rather “shadows” or observes the business’s operations under close and constant supervision of regular employees.   
Unpaid internships should not be used as a “trial period” for individuals seeking permanent employment at the end of the internship period. Interns placed with the expectation that they will be hired at the successful conclusion of the trial period are generally considered employees under the FLSA.
In addition to following the FLSA’s six-part test, companies looking to create unpaid internships should also check state law requirements. In the long run, unpaid internships may be more costly than hiring interns and paying them minimum wage. Employees cannot waive their FLSA rights, even if they want to. Thus, the existence of a written agreement establishing that the internship is unpaid (mandatory under the six-factor test above) will not, standing alone, free a company from liability under the FLSA since all parts of the six-part test must be met.


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