The Legality of Unpaid Internships: Navigating the Fair Labor Standards Act

Internships offer invaluable opportunities for students, recent graduates, and career changers to gain practical experience, develop skills, and build professional networks. Companies, in turn, can benefit from fresh perspectives, diverse skill sets, and additional support for various projects. However, the legality of unpaid internships remains a complex and often misunderstood area, particularly for for-profit organizations. The Fair Labor Standards Act (FLSA) mandates that employees of for-profit companies receive compensation for their work. Yet, internships can be unpaid under specific conditions, leading to legal and ethical considerations for both employers and interns.

The Fair Labor Standards Act (FLSA) and the "Primary Beneficiary Test"

The FLSA generally requires employers to pay employees for their work. However, it also recognizes exceptions for certain individuals, such as those volunteering for state or local government agencies or non-profit organizations for humanitarian purposes. The key to determining the legality of an unpaid internship lies in whether the intern or the employer is the "primary beneficiary" of the relationship.

To determine the primary beneficiary, courts use the "primary beneficiary test." Courts have described the “primary beneficiary test” as a flexible test, and no single factor is determinative. The "primary beneficiary test" examines the economic realities of the internship to determine who benefits most from the arrangement. If the analysis reveals that the intern is essentially an employee, they are entitled to minimum wage and overtime pay under the FLSA.

Criteria for Determining the Primary Beneficiary

The Department of Labor (DOL) provides a seven-factor test to assess whether an intern is the primary beneficiary. If an analysis of these seven points leads to the conclusion that the employer is the primary beneficiary, then the intern is an employee entitled to at least minimum wage. The tricky part is that no single factor is determinative, making the test more like a set of guidelines than a list of rules. These criteria include:

No Expectation of Compensation: The extent to which the intern and the employer clearly understand that there is no expectation of compensation. The intern is aware they will be uncompensated.
Educational Training: Training is comparable to training received at an educational institution.
Academic Tie-in: The internship is tied to the intern’s current educational program (e.g., the intern is getting academic credit). To the extent possible, an employer should work with the intern and the intern’s educational institution to provide academic credit for the internship. Offer college credit when possible.
Academic Accommodation: The internship accommodates the intern’s academic calendar.
Beneficial Learning Period: The internship is limited to the period during which the intern receives beneficial learning.
Complementary Work: The intern’s work complements (not replaces) existing employees’ work while still providing beneficial learning. Stick to general, transferable training; do not assign grunt work. The work that interns perform for your company should be …
No Entitlement to a Job: It is understood that the internship does not provide entitlement to a job at its conclusion.

If these factors indicate that the intern is the primary beneficiary, the internship can legally be unpaid. However, employers must be cautious, as misclassifying an employee as an intern to avoid paying wages can result in legal repercussions.

The Importance of Context and Economic Reality

Labels mean nothing. “If the intern performs work that benefits the employer and that would otherwise be performed by a regular employee, it is unlikely to be an internship,” Ruiz said. If the intern performs work that primarily benefits the intern and does not do work that would otherwise be performed by an employee, it is more likely to be an internship.” Simply changing an assistant’s title to “intern” does not waive their right to compensation. “Interns are not a way to get free labor,” Ruiz said. It’s fairly common for many companies to look for unpaid interns to help do some of the more menial tasks that need to be accomplished. However, the economic reality of the situation is paramount. Courts examine the true nature of the relationship, looking beyond titles and labels to determine who truly benefits. If an intern is performing work that would otherwise be done by a paid employee, it is likely that the intern should be classified as an employee and compensated accordingly.

State Legislation on Unpaid Internships

While federal guidelines provide a framework, state laws can impose additional requirements and restrictions on unpaid internships. Employers must comply with both federal and state regulations to ensure their internship programs are legal.

New York

New York, for example, includes a stipulation that internships must provide transferable (rather than company-specific) training and cannot be of any “immediate advantage” to the employer, even when the intern is the primary beneficiary. As outlined by the New York State Department of Labor, “In most circumstances, interns will require employers to dedicate resources that may actually detract from the productivity of the worksite for some period,” making it virtually impossible for a company to profit from an unpaid internship.

California

California has one of the country’s strictest stances on unpaid internships, requiring all programs to be conducted through and supervised by an accredited school or vocational program. Employers must also submit an internship proposal to the Division of Labor Standards Enforcement before hiring interns. Any internship that does not meet these standards must pay at least minimum wage. In order to hire an unpaid intern in California, the employer is required to submit an outline of the proposed internship to the Division of Labor Standards Enforcement (DLSE). Employers in California must meet two sets of standards in order to hire an unpaid intern: state law and federal law.

Benefits and Risks of Unpaid Internships

Unpaid internships can be beneficial for both interns and employers, but they also carry potential risks.

Benefits for Interns

Professional Experience: Meaningful professional experience makes unpaid internships worthwhile for college students hoping to launch their careers. Internships have been proven greatly beneficial to college students, recent graduates, and anyone trying to get their foot in the door of a new industry.
Skills Development: Interns gain valuable skills and knowledge in their chosen field.
Networking: Internships provide opportunities to build professional connections.
Resume Enhancement: Robust, internship-filled resumes that stand out are incredibly valuable for young professionals. College students who complete internships are 15% more likely to find employment after graduation than their peers, according to Zippia.

Benefits for Employers

Fresh Perspectives: Interns offer new ideas and approaches to projects.
Varied Skill Sets: Interns bring diverse skills and knowledge to the workplace.
Additional Support: Interns can assist with various tasks and projects.

Risks for Employers

Legal Challenges: Non-compliance with the FLSA and state laws can result in lawsuits and penalties. Even legal unpaid internships tread a fine line of compliance, where failure is costly.
Quality Issues: Unpaid interns may be less motivated and committed than paid employees.
Reputational Damage: Offering illegal or unethical unpaid internships can harm a company's reputation.

Risks for Interns

Exploitation: Interns may be taken advantage of and assigned tasks that do not provide meaningful learning experiences.
Financial Burden: Unpaid internships can be financially challenging for students from low-income backgrounds.
Deportation: What’s more, if the Department of Labor finds an international student’s internship to be in violation of the FLSA, that intern could be violating the terms of their immigration status. In such cases, the employer may not be the only one punished; the intern may be at risk of deportation.

Unpaid Internships and Economic Inequality

Unpaid internships can exacerbate economic inequality by creating barriers for students who cannot afford to work without pay. Those from lower-income backgrounds may miss out on valuable opportunities, perpetuating a cycle of disadvantage. It’s important to keep in mind that your intern’s well-being is not the only moral issue at stake.

Unpaid internships can create a vicious cycle: They reward students who are already economically advantaged while ramping up the competition for everyone else. Consider how unpaid internships affect students who cannot afford to work for free. For lower-income students, the price of an unpaid internship is not just time but the opportunity costs of the wages they could earn in another part-time or full-time role. Upon graduation, when these students have less industry experience than those with the financial security to accept unpaid work, their disadvantage becomes even more apparent.

Tips for Hiring Unpaid Interns (Legally and Ethically)

If you decide to offer unpaid internships, follow these tips to ensure compliance and create a positive experience for interns:

Consult Legal Counsel: Businesses still keen on hiring unpaid interns should contact their nearest Department of Labor Wage and Hour Division agency to determine whether the FLSA applies to their proposed internship.
Develop a Written Agreement: Put all understandings about compensation and commitment in writing. Ensure that all terms of the internship are signed by both the intern and their supervisor. Even with unpaid interns, you should create offer letters delineating the requirements of the internship.
Adhere to the Primary Beneficiary Test: Ensure that the internship primarily benefits the intern.
Provide Meaningful Learning Experiences: Offer opportunities for skill development and professional growth.
Offer Academic Credit: Work with educational institutions to provide academic credit for the internship.
Keep a Log of Hours and Overtime: Keep a log of hours and overtime.
Avoid Grunt Work: Stick to general, transferable training; do not assign grunt work.
Consider Your Values: Think about what values are important to your office when communicating with students and employers about creating inclusive, equitable workplaces that are going to create high-quality experiences for students.
Work with Faculty: Help ensure everyone is on the same page by including faculty in the affected programs.
Have a Formal Policy: Having a formal policy helps with consistency when considering postings seeking interns.
Where to find unpaid interns: There are plenty of places to look for new intern hires. In general, internships appeal to young people who are still pursuing education and experience in their chosen field. This means colleges and trade schools are great places to start your search. Both may hold virtual or in-person job fairs. The future of recruiting is digital, so be sure to use online job boards, such as Indeed.com, to help with your search. You can also look for industry-specific job boards to improve your prospects. Your contacts may be able to connect you with students who are seeking internships, their own prior interns or maybe even their own applicant pool. Direct references, such as connections from your college alumni network, can streamline the recruitment process.
How to develop an internship program: Developing an internship program can be a small or monumental effort, depending on your company’s needs and scale. Identify your specific goals for the internship program. Are you trying to get interns to fill needed roles or complete certain tasks in your organization? Do you want to foster talent for future hires? Once you’ve outlined your goals for the program, the next step is to design it. There are a few components that are vital to any successful internship program. First, there needs to be an orientation plan. Interns are not seasoned professionals; they need straightforward communication about expectations and objectives. You should be prepared to work with your interns and make sure they have clear metrics of success at your company. Furthermore, aspects of the internships should be tailored to their own professional goals and interests. They also need good mentors who can ensure they receive the attention they need to succeed not only in this role but in their later professional endeavors. Developing concrete goals and success metrics for your company's internships, as well as conducting formal exit interviews with your interns, will help you maintain a strong program that serves your business and your interns.

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