The payment of interns has been a much-debated and often-confusing topic recently. The standards for determining whether internships needed to be paid or unpaid have undergone some major changes over the last several years, and have left many employers—and interns—confused about employing unpaid interns.
To clarify the situation, the U.S. Department of Labor (DOL) announced on January 5, 2018, that it would adopt a new standard for determining whether interns and students are “employees” who must be paid under the Fair Labor Standards Act (FLSA).
The DOL clarified that, going forward, it would abandon its six-part test and instead adopt the “primary beneficiary” test used by federal courts.
The six-part test provides that an intern at a for-profit company is an employee unless all six factors of the test are met. The primary beneficiary test has a more flexible approach, focusing on whether the intern or the business benefits more from the relationship. It is left up to the employer to determine whether the intern or the employer will receive the most benefit from employing the intern. If the intern will receive the most benefit from the arrangement, then they can work unpaid. If the employer receives more benefit, than the intern is classed as an employee and needs to be paid.
The old and new standards are outlined below to help you see the differences between the two.
The Old Six-part Test for Determining Paid Internship
The six-part benefit test is very specific and allows for interns to be unpaid only if all of the following factors are met:
- The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment;
- The internship experience is for the benefit of the intern;
- The intern does not displace regular employees, but works under close supervision of existing staff;
- 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;
- The intern is not necessarily entitled to a job at the conclusion of the internship; and
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
The primary beneficiary test looks at the “economic reality” nature of the employment relationship and includes seven factors to consider. However, unlike the six-part test, these factors provide only a reference frame to determine who is benefiting more from the intern-employer relationship.
The seven factors are:
- 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.
- 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.
- The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- 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.
- 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.
Not every factor must be met, and not all factors must be given the same weight during the analysis. Instead, the courts will consider these seven factors and evaluate whether, in the totality of the circumstances, the employer is benefiting more from the relationship than the intern is. When an employer is the primary beneficiary of the relationship, the intern is an employee for purposes of the FLSA. When the intern is the primary beneficiary, he or she is not considered an employee under the FLSA, and can be retained as an unpaid intern.
This primary beneficiary test has been used by several federal appellate courts. To determine whether employers will be employing unpaid interns or paid interns will require reviewing and designing current and future intern programs to ensure the maximum benefit to interns.
For more information about compliance with FLSA issues, contact your benefits specialists at Roper Insurance & Financial Services by email here or by phone at 303-721-1145.