Do unpaid interns benefit the company’s bottom line? If the answer is “yes,” then your company may be violating the federal Fair Labor Standards Act. For-profit companies are treated differently than the government and non-profit organizations when determining whether interns or volunteers are “employees.” The fact that a family member or friend may have worked as an unpaid intern for a government entity does not mean you can treat them the same in your business.
The safest way for a for-profit company to maintain an internship program under the FLSA is to: (1) pay interns the applicable minimum wage for time worked (and for any overtime), or (2) if you decide not to pay them, then you must comply with each of the following six factors established by U.S. Department of Labor:
-- The internship must be similar to training which would be provided in an educational environment (i.e., classroom settings, broad training, college-supervised).
-- The internship must be (at least primarily) for the benefit of the intern (i.e., any contribution to the employer’s operations or productive work should be a minimal and incidental result from the training).
-- The interns must not displace regular employees, and should work under close supervision of existing employees (i.e., interns cannot be a substitute or supplement to the work force).
-- The company must derive “no immediate advantage” from intern activities, and “its operations may actually be impeded” on occasion by the presence of interns.
-- Interns must not be entitled to a job after the internship (although the possibility of a job with the same company through the ordinary application process is permissible).
-- There must be a mutual understanding that the intern is not entitled to wages for internship time.
This exacting standard has long been used by the Department of Labor, and can be traced to the U.S. Supreme Court’s 1947 decision in Walling v. Portland Terminal Co. While Walling did not expressly hold that compliance with all six factors is required for an employer to lawfully use unpaid interns under the FLSA, its factual discussion of an eight-day training program for prospective railroad yard brakemen touched on each of them.
In addition, the Supreme Court’s holding that the FLSA did not apply to the situation with the brakemen cited the fact that the railroad received no “immediate advantage” from the trainees. After Walling, a DOL publication revised in 1980 required consideration of “all of the circumstances surrounding [intern/trainee] activities” on a company’s premises. That publication listed six nearly identical factors, stating that if all of them are met, then the FLSA does not apply to interns/trainees — without expressly stating that if any one of the factors is not met, then the FLSA does apply.
Subsequently, some courts have required satisfaction of all six factors, some have rejected the use of them and focused on the totality of the circumstances, and some have looked to the party who benefited primarily from the internship — the intern or the business.
While not new, the unpaid intern issue recently has been revitalized by lawsuits brought under the FLSA, by the DOL’s issuance of the 2010 Fact Sheet reiterating the six factors, and by interest groups such as Occupy Wall Street’s Arts & Labor Group. The question left open since 1980 remains unanswered: If any one or more of the six factors is not fully satisfied, must interns be treated as “employees” who are entitled to minimum wage and overtime under the FLSA?
It remains to be seen how this issue will be definitively resolved by higher appellate courts or, ultimately, Congress. Nonetheless, there are steps companies should take to review existing and prospective paid and unpaid internship programs to assess risk and compliance. Industries known to utilize interns include sports, modeling and fashion, health care, marketing, publishing, entertainment, and TV/radio networks.
Businesses utilizing internships should consult with counsel to determine whether they are subject to the FLSA or comparable state law minimum wage and overtime requirements.
Kenneth B. Hodges III, a partner in the law firm of Ashe Rafuse & Hill LLP, writes a periodic column on business law for The Albany Herald. He is the former district attorney for the Dougherty Judicial Circuit. He can be contacted at kenhodges@AsheRafuse.com.