In 2010 the United States Department of Labor (DOL) issued guidance severely limiting for-profit companies’ ability to have unpaid interns. However, courts routinely rejected that rigid 6-part test.

On January 5, 2018, the DOL modified its approach, adopting the “primary beneficiary” standard favored by the courts.

Which test applies and the resulting analysis determines whether a company violates the Fair Labor Standards Act (FLSA) by not paying interns minimum wage and overtime.

Unpaid Interns – 2010 DOL Test

Since 2010, the DOL had taken the position that a for-profit business must pay its interns unless all of the following 6 criteria apply:

1. The internship is similar to training received in an educational environment.
2. The experience is for the benefit of the intern.
3. The intern is not a substitute for regular employees and works under close supervision of existing staff.
4. The employer derives no immediate advantage from the intern’s activities.
5. The intern isn’t guaranteed a job at the conclusion of the internship.
6. Both the employer and the intern understand that the intern is not entitled to pay for the time spent in the internship.

“Primary Beneficiary” Test

In 2015, the United States Court of Appeals for the Second Circuit rejected the DOL’s 2010 test. Instead, it analyzed the “economic reality” of the intern-employer relationship to determine which party is the “primary beneficiary” of the relationship.

Now, the DOL formally adopts the Second Circuit’s 7-factor analysis in a new Wage and Hour Division Fact Sheet. The seven factors are

1. 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. 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 emphasizes that “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 necessarily depends on the unique circumstances of each case.”

Unpaid Interns Under Other Laws

The U.S. DOL’s position relates to whether an intern qualifies as an “employee” under the FLSA. It does not necessarily decide the question under other laws, including state minimum wage and overtime laws.

For example, the New York Department of Labor has adopted the 6 factors previously used by the U.S. DOL and adds these 5 additional factors of its own:

• Any clinical training is performed under the supervision and direction of people who are knowledgeable and experienced in the activity.
• The trainees or students do not receive employee benefits.
• The training is general, and qualifies trainees or students to work in any similar business. It is not designed specifically for a job with the employer that offers the program.
• The screening process for the internship program is not the same as for employment, and does not appear to be for that purpose. The screening only uses criteria relevant for admission to an independent educational program.
• Advertisements, postings, or solicitations for the program clearly discuss education or training, rather than employment, although employers may indicate that qualified graduates may be considered for employment.

What Should Your Company Do About Unpaid Interns?

First, remember that the above pertains to for-profit companies. Non-profits and governmental organization have more leeway. But if you are a for-profit company, you still shouldn’t rely solely on this information in deciding whether you can use unpaid interns.

Since the DOL’s new position follows several appellate courts, it seems to be reasonably safe guidance regarding minimum wage and overtime under the FLSA. But even at the federal level, other laws could still apply to unpaid employees. For example, anti-discrimination laws may still apply, including those requiring reasonable accommodations based on disability or religion. And, in some cases, a union that represents your employees might claim to represent individuals you classify as employees.

Plus, at the state level, there is not only the minimum wage/overtime issue. You must also consider the impact of employee benefit programs, including unemployment, workers’ compensation and other state-mandated coverages.

Overall, for-profit employees should start by assuming that anyone working for them is an employee. They should only treat workers differently if there is a clear exclusion, e.g., valid intern or independent contractor. An experienced labor and employment attorney can assist in making that determination.