As summer approaches and college and high school students are seeking paid and unpaid internship opportunities as a source of work or to gain useful experience. The economy is improving and employers in all sorts of industries are hiring especially for entry level positions. Many employers have customarily used internships as informal apprenticeships or to offer students real work experience. While this might seem like a win-win situation for employers and students there are potential pitfalls with these arrangements. To avoid these problems employers should get acquainted with federal and state legal standards concerning whether internships must be paid, or may be unpaid. These standards essentially address whether or not the person who is interning should be deemed an “employee” of the employer. If so, the employer generally needs to treat the intern as an employee and pay the intern at least the applicable minimum wage and, when due, overtime pay. This article summarizes criteria that an employer should consider when it evaluates whether an internship should be paid or unpaid.
The Fair Labor Standards Act
The federal Fair Labor Standards Act (“the FLSA”) sets forth minimum wage and overtime pay requirements that an employer must meet in compensating covered employees. These requirements are premised on the fact that there is an employer-employee relationship between the employer and the individual who performs services. In the context of analyzing an internship arrangement, the employer must determine if six (6) criteria developed by the U.S. Department of Labor Wage and Hour Division have been satisfied concerning the potential intern. The U.S. DOL developed these criteria in relation to for-profit private sector employers because the FLSA makes some exceptions for volunteer services relating to public sector employers or certain non-profit organizations or endeavors. If all of the six criteria have been met, the intern is not considered an employee and the employer can have an unpaid internship arrangement with him or her (assuming any state law standards for unpaid internships are also met). If the employer doesn’t satisfy the U.S. DOL’s six criteria, then the intern will be considered an employee, the internship should be structured as a paid internship, and the employer must pay the intern a minimum wage and, if applicable, overtime.
These six criteria are found in “Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act” which was issued by the U.S. DOL in April 2010. As explained in Fact Sheet #71, the FLSA broadly defines the term “employ” to include a person who is suffered or permitted to work for an employer and an employee must be compensated for services he or she performs for the employer. Therefore, internships in the for-profit private sector will likely be deemed employment unless the following six part test set forth in Fact Sheet #71 is met:
- The internship, even though it includes actual operations of the facilities of the employer, is similar to training which would have been given in an educational environment— As the U.S. DOL noted in Fact Sheet #71, generally “the more an internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience…” Also, if the internship provides the intern with skills he or she can use in multiple employment settings and not just in the employer’s business, it is more likely that this would be considered training.
- The internship experience is for the benefit of the intern— The U.S. DOL illustrates this requirement in the converse. If interns are engaged in the employer’s operations or performing productive work for the employer, such as doing clerical work or assisting customers, “then the fact that they may be receiving some benefits in the form of a new skill or improved work habits will not exclude them from the FLSA’s minimum wage and overtime requirements because the employer benefits from the interns’ work.”
- The intern does not displace regular employees, but works under close supervision of existing staff— Again, the flip side of this requirement is when the employer either uses interns to substitute for regular workers or to increase its existing work force, then the interns are employees and should be paid at least the minimum wage and overtime for hours worked over 40 hours in a workweek. The same holds true if the employer would have needed to hire additional employees or ask existing employees to work extra hours if the interns hadn’t performed the work. As for supervision, the intern’s activity will more likely be viewed as an education experience if the intern is allowed to learn certain functions under the “close and constant” supervision of regular employees but the intern performs no work or minimal work.
- The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may be actually impeded— This requirement emphasizes the fact that the training is truly for the benefit of the intern and, by providing the training, the employer doesn’t have any immediate advantage and may actually be impeded in its operations.
- The intern is not necessarily entitled to a job at the conclusion of the internship— The U.S. DOL clarified that the internship should be of a fixed duration which is established before the internship begins. Also, an employer should not use an unpaid internship as a trial period for persons who are seeking employment at the end of the internship period. As noted in Fact Sheet #71, if an intern “is placed with the employer for a trial period with the expectation that he or she will then be hired on a permanent basis, that individual generally would be considered an employee under the FLSA.”
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship— Obviously, it is critical that both the employer and the intern understand that the internship is unpaid and the intern is not entitled to any wages. However, the fact that the employer and the intern are in agreement as to this point will not save the day if any of the other five criteria are not met.
In Fact Sheet #71, the U.S. DOL emphasized that each case turns on its own set of facts and circumstances. Therefore, if an employer satisfied the six criteria for one person’s internship, and that internship was appropriately unpaid, this does not automatically mean that the employer will be able to have an unpaid internship arrangement with another intern who is being differently trained or who has a different set of circumstances. The employer should analyze each internship on a case by case basis.
Even if the employer is confident that it has satisfied the six criteria and an unpaid internship is appropriate under the FLSA, the employer should also verify that an unpaid internship is appropriate under applicable state law. Even employers who are well-versed in the factors set forth in Fact Sheet #71 can sometimes overlook state law requirements.
In New Hampshire, RSA 279:22-aa sets forth the circumstances in which a participating employer may apply to the Commissioner of N.H. Department of Labor ( N.H. DOL) to establish a “sub-minimum wage rate, or no rate, for high school or post-secondary students working for practical experience, if circumstances warrant.” This statute makes clear that “[n]o such student shall be allowed to replace an existing worker or laid-off worker,” much like the third criteria in the U.S. DOL test.
The key is that the employer needs to apply to the N.H. DOL for permission to have an unpaid internship arrangement before entering into an unpaid internship arrangement. The N.H. DOL has a form entitled “Approval Form for Non-Paid Work-Based Activities Under RSA 279:22-aa” which the employer must complete and submit to the N.H. DOL. The form requires the employer to include information about the type of placement (an internship is just one possibility); the career interests and objectives; whether academic credit is given; the details of time to be spent at the business site and supervision; whether the employer has a safety program; details about any hazardous equipment involved and safety training; and information about the business(es) participating in the placement.
The N.H. DOL has administrative regulations which govern this application process. These detailed regulations are found at N. H. Admin. Rules Lab. 805. In addition to explaining what an employer must do to properly apply for an unpaid internship, these regulations helpfully set forth reasons why an application may be rejected by the N.H. DOL. An employer can avoid problems with its application by reviewing these regulations before submitting the application to the N.H. DOL.
Federal and state wage and hour laws broadly interpret who is an “employee” and as a result in many instances an intern will be deemed an employee and the internship should be a paid internship in order for the employer to be compliant with the FLSA and state wage laws. If an employer and the intern wish to enter into an unpaid internship arrangement, the employer should confirm that it meets the FLSA and applicable state law criteria and that the employer has obtained any necessary pre-approval.