Interns…To Be or Not to Be…Paid

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As the summer months approach, many students will begin looking for work and some will offer to work for free as an “unpaid” intern, to gain experience in their chosen field.  Employers beware as there are very few instances in which an “intern” need not be paid.

If a worker is misclassified as an “unpaid intern” and they really should have been a paid employee, the employer can be exposed to potential liability for a variety of wage and hour violations, not the least of which is unpaid wages, possible overtime and missed meal and rest break penalties.

Recently, the U.S. Department of Labor (DOL) revised its long-standing test of unpaid internships and issued new rules.

Previously, the DOL had used a 6 part test to determine who could properly be treated as an unpaid intern; this 6 part test was also adopted by the California Division of Labor Standards Enforcement (the Labor Commissioner).

The Old Test

Under the prior DOL test, if all of the following six factors were met, an individual could be treated as an unpaid intern under the Fair Labor Standards Act (FLSA):

1. The internship, even though it includes actual operation of the employer’s facilities, is similar to training that would be given in an educational environment;

2. The internship experience is for the intern’s benefit;

3. The intern does not displace regular employees, but works under close supervision of existing staff;

4. The employer that provides the training derives no immediate advantage from the intern’s activities, and on occasion its operations may actually be impeded;

5. The intern is not necessarily entitled to a job at the conclusion of the internship; and

6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

The New Test – The Primary Beneficiary Test

Under the new test, the key factor is who is the “primary beneficiary” of the work performed by the intern. The “primary beneficiary test” came out of several recent court decisions in various jurisdictions involving students working at businesses, such as cosmetology schools and movie studios, to name just a few.  The DOL stated that the new test is “a flexible test, and no single factor is determinative . . . whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case.”

There are seven factors to consider:

1. 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;

2. The extent to which the internship provides training similar to that given in an educational environment, including the clinical and other hands-on training provided by educational institutions;

3.  The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;

4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar;

5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;

6. 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;

7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the internship’s conclusion.

In the case involving the cosmetology students, the Ninth Circuit Court (which covers California) found that, after considering all of the 7 factors, under the Fair Labor Standards Act (Federal Wage & Hour Law) and Nevada law, the students were properly classified as interns. The students then argued that they were employees under California law since California uses the 6 part test (the “old test” noted above). The court rejected that argument asserting that the California Supreme Court would follow a test such as the “primary beneficiary test” — not the DOL’s six-part test — because “it is better adapted to an occupational training setting than the DOL factors.” The court held that under such a test, the students would not be employees subject to California wage and hour law protections.

Best Practices:

Before offering an unpaid internship to any student, undertake an analysis of the above 7 factors, determine who is the “primary beneficiary” of the work to be performed and structure the “internship” accordingly to avoid or minimize the risk of a legal challenge to the unpaid status.

This Newsletter is intended as a brief summary of employment law.  While every effort has been made to ensure the accuracy of the information contained herein, it is not intended to serve as “legal advice,” or to establish an attorney-client relationship.  If additional information is needed on any of the topics contained herein, please contact our office. All rights reserved.  ©2018.