Internship Minimum Wage Laws: Navigating the Legal Landscape

The world of internships can be a valuable stepping stone for students and recent graduates seeking to gain practical experience. However, the legalities surrounding internship compensation, particularly minimum wage laws, can be complex and often misunderstood. This article aims to clarify these regulations, providing a comprehensive overview for both employers and interns.

The Fair Labor Standards Act (FLSA) and Internships

In the United States, the Fair Labor Standards Act (FLSA) mandates that most employees receive at least the minimum wage, as well as overtime pay for hours worked beyond 40 in a workweek. However, the FLSA has certain exemptions, particularly concerning individuals who work primarily for their own benefit, rather than the employer's. This is where the concept of unpaid internships comes into play.

The "Primary Beneficiary Test": Determining Employee Status

The courts employ the "primary beneficiary test" to ascertain whether an intern or student should be classified as an employee under the FLSA. This test scrutinizes the "economic reality" of the intern-employer relationship to determine which party primarily benefits from the arrangement. It's a flexible test where no single factor is decisive.

Factors of primary beneficiary test

The Department of Labor Wage and Hour Division considers these factors to determine whether an intern or student is actually an employee under the FLSA:

Clear Understanding of No Expectation of Compensation: The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, expressed or implied, suggests that the intern is an employee-and vice versa.
Educational Training: 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.
Academic Integration: The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
Accommodation of Academic Commitments: The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
Beneficial Learning Period: The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
Complementary Work: 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.
No Entitlement to a Paid Job: 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.

If the analysis of these factors reveals that the intern or student is indeed an employee, they are entitled to both minimum wage and overtime pay under the FLSA.

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Walling vs. Portland Terminal Co.: A Landmark Case

The Supreme Court case of Walling vs. Portland Terminal Company in 1947 set a precedent for unpaid internships. In this case, a railroad company provided training courses for prospective yard brakemen lasting 7-8 days. Trainees who passed the course became eligible for employment when needed and were paid a retroactive allowance for their time during training. The court ruled that these trainees did not meet the definition of an "employee" under the FLSA because they did not replace paid employees, expedite the railroad's business, and accommodating them slowed down operations.

Paid Internships: Employee Status and Legal Obligations

It's crucial to understand that paid interns are considered employees. The term "paid intern" is simply a job title, not a separate employment class with different rules. As such, paid interns are W-2 employees with the same protections as other employees. The FLSA and state wage and hour laws apply to them, including provisions for meal and other breaks, and overtime wages, if applicable.

Under the Affordable Care Act (ACA), applicable large employers (ALEs) are generally required to offer employees who work at least 30 hours/week the opportunity to enroll in employer-sponsored group health insurance coverage after 90 days of full-time employment.

Exceptions under the ACA

There are two exceptions under the ACA to keep in mind for paid interns:

Seasonal Employees: If a company hires interns only during the summer season, they may fall under the seasonal employee exception, which generally permits employers to exclude certain categories of employees who work at the same time each year and for less than six months.
Part-Time Employees: If paid interns work less than 30 hours per week, they may not be entitled to group health insurance coverage as part-time employees.

Furthermore, a paid intern who will work for a company for no more than 90 days may not be eligible for group health insurance coverage, depending on how the applicable plan documents define the initial waiting period.

Read also: Comprehensive Internship Guide

Classification of Paid Interns: Non-Exempt Hourly Employees

When classifying a paid intern, they will likely be classified as non-exempt hourly employees. This is partly because they're likely not managing people, and their title implies that they're not exercising "independent judgment with respect to matters of significance" in the workplace.

Stipends vs. Wages: Understanding the Difference

Most interns must be paid at least the applicable minimum wage for all hours worked. Under very limited circumstances, a company may participate in an unpaid educational internship program. It is crucial to understand applicable federal and state laws and consult with legal counsel before rolling out an unpaid internship program.

Employers sometimes consider stipends for interns, wanting to provide a weekly stipend rather than regular wages. This arrangement only works in limited circumstances. If a company is participating in an unpaid educational internship program, it may be able to provide an expense reimbursement stipend under limited circumstances, including:

If the unpaid educational internship program allows stipends.
The program meets all the requirements under applicable federal and state law for the unpaid educational internships.
The stipend reimburses expenses (like food or travel) rather than pays for work performed.

It’s important to know that a stipend generally cannot be paid in place of regular wages. As mentioned above, paid interns are W-2 employees and are entitled to be paid at least the applicable minimum wage for all hours worked. While you can reimburse a paid intern for food or travel expenses, provided they give you receipts, it's generally not a good idea to provide such reimbursement by way of an upfront flat stipend.

Determining Intern Pay: Factors to Consider

Paid interns must be paid at least the applicable minimum wage for all hours worked and overtime wages if they work overtime. However, employers can always pay them more. Whether an employer pays an intern more than the applicable minimum wage will depend on the business reasons for doing so, including the market, what the employer can afford, and the employer's assessment of the value of the work the intern will be performing.

Read also: Internship Opportunities

As Moses Balian, an HR Consultant at Justworks, suggests, employers might consider paying interns at least equivalent to the highest minimum wage in the country. This ensures compliance with minimum wage requirements regardless of location and helps interns cover living expenses in major cities.

Benefits Eligibility for Paid Interns

An intern who continues to work full-time after 90 days may become eligible for benefits. However, in many cases, especially for college students who have less time to work after a paid summer internship is over and they have returned to a regular schedule of classes, a continued internship could likely involve less than 30 hours of work per week.

Navigating the Internship Search: Advice for Students

As students begin the internship search process, a few things must be considered. First, an internship should not serve the purpose of providing you with a paycheck. While many internships are unpaid, they still provide plenty of value. Future employers love to see internship experiences on resumes. Even if the internship experience is outside of the career or field the student pursues after graduation, it still provides essential work experience that may not be earned with a part-time job.

Students should ask if internships can be counted as academic credit. The internship experience shouldn’t exist outside your higher education; it should be included. Internships can also be found by networking with your friends and family, which will require you to ask them about opportunities that they know of. Finally, you can find internships through your college’s Career Center.

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