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Avoiding Liability For Unpaid Internships

The prospect of hiring interns, bright-eyed and eager to learn, is alluring.  But many employers are surprised to learn that interns cannot be employed on a volunteer basis, except in narrow circumstances.  With the U.S. Department of Labor (“DOL”) indicating a heightened interest in enforcing wage-and-hour laws with respect to interns, and given the stiff penalties that come from failing to pay wages owed, understanding the parameters concerning the employment of volunteer interns is more important than ever.

Six Criteria

Under federal law, an internship at a for-profit business cannot be unpaid unless it meets all of the following six criteria:

  1. The internship is similar to training that would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees and works under close supervision of existing staff;
  4. 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;
  5. The intern is not 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.

These factors, as well as additional state-law requirements, are discussed below.

Similar To Educational Training

An unpaid internship should provide general training similar to that which the intern would receive in the classroom, at a practical-skills seminar, or at a vocational school.  This could include formal training at the workplace or job shadowing.  However, the training should be in broadly applicable skills and knowledge.  Training concerning company-specific processes or techniques generally will not satisfy this requirement.

The fact that a school or university provides academic credit for the internship may help to satisfy this requirement.  Accordingly, employers are encouraged to explore collaborations with academic institutions when formulating unpaid internship programs.  (In Massachusetts, for-profit employers may need a formal academic affiliation before implementing an unpaid internship, as discussed below.)

Who Benefits From The Internship

A business may obtain some minimal benefits from an unpaid intern’s time with the company.  However, the focus of the internship should be training and educating the intern, not having the intern perform routine or productive work for the company.  In this regard, inefficiencies stemming from instructing the intern – such as pausing operations to explain a procedure or technique – can help establish compliance with this requirement.  (While this point seems counterintuitive – employers generally try to avoid inefficiencies – it underscores that the internship generally must be instructive for the intern, as opposed to productive for the employer, in order to be unpaid.)

Displacement And Job Entitlement

The unpaid internship will not satisfy DOL regulations if the intern displaces an employee.  Thus, an employer cannot hire interns to replace current workers or use interns during busy periods instead of hiring additional help.  Also, an employer cannot guarantee that the intern will be given a job at the end of the internship, though the intern is free to apply for a job with the employer, just like any other applicant.

Understanding Between Intern And Employer

Both the company and the intern must understand that the internship will be unpaid.  However, this alone is not sufficient.  An intern cannot waive his or her right to be paid if the other criteria set forth above have not been satisfied.

More Restrictive State Laws

Some states have additional requirements that must be satisfied in order to have unpaid interns.  For instance, the Massachusetts minimum-wage and overtime law appears to require that an unpaid internship at a for-profit institution be implemented in connection with a formal educational program.

Specifically, the Massachusetts minimum-wage and overtime statute applies to all “occupations” but excludes “persons … being … trained … in charitable, religious or educational institutions.”  The Massachusetts Division of Occupational  Safety (“DOS”), which administers this law, has opined, based on brief discussions of the DOL regulations and the Massachusetts statute, that trainees at educational institutions, as well as trainees placed in private-sector jobs through an educational institution’s cooperative learning program, may be unpaid.  It is unclear, though, whether DOS would impose the “educational” requirement on all unpaid internships at for-profit institutions, and the Massachusetts courts have not addressed this issue.

Possible Treble Damages And Other Penalties

Failure to compensate interns properly could lead to back-pay damages (including time and a half for any time worked over 40 hours in a week), liquidated damages that could double or triple the award (in Massachusetts, wage-and-hour violations are subject to mandatory treble damages), interest and attorneys’ fees.  Thus, failing to properly pay an intern could be a very expensive mistake.

Recommendations For Employers

Internships can be a valuable experience for both the intern and the employer.  But if the internship is unpaid, it must satisfy all legal requirements.  While internships can take many forms, requiring an individualized assessment of the legal implications, we recommend that employers offering unpaid internships take the following steps:

  • Require the intern to sign an intern agreement confirming that no wages will be paid for time spent in the internship and that the intern will not be entitled to employment at the conclusion of the internship;
  • Ensure that any stipend paid to the intern is structured and clearly explained as a payment to defray the expenses associated with the internship, and not as wages;
  • Structure the internship to focus on the organization’s provision of broadly applicable training to the intern, as opposed to the intern’s performance of routine tasks for the organization;
  • Provide close supervision and mentoring to the intern by existing staff;
  • Take care to avoid the appearance that unpaid interns are being used to displace or to avoid hiring regular employees;
  • Consider establishing a formal academic affiliation, as may be required or advisable under applicable state law; and
  • Confer with experienced employment counsel to ensure that the legal implications of the proposed internship are fully understood and addressed.

If you have questions about establishing an unpaid internship, or about any other wage-and-hour issue, please feel free to contact us.