Internships: To Pay or Not to Pay?

As your business grows, it’s inevitable that you’ll need extra help. And often, you’ll need this help before your business can really afford to hire extra help. Enter: Unpaid Internships. Your small business gets free labor, and the intern gains valuable experience for their resume and (hopefully) a good reference for later on down the road.

But like so many things, the law isn’t so simple. All employees are entitled to at least minimum wage under the Fair Labor Standards Act (FLSA), and the FLSA determines who is an employee (regardless of what you might call the worker). So the question for you as a small business owner is whether or not your intern will be considered an “employee” under the FLSA.

Non-Profit Caveat: While most of our blog posts apply equally to both for-profit and non-profit entities, this one is an exception. The Department of Labor recognizes that individuals may freely volunteer their time to non-profit organizations. Because of this, unpaid internships are generally permissible in the non-profit sector. However, non-profit organizations should still be careful with paying stipends because they can call into question whether the person is still a volunteer or is now an employee.

7 Factor Primary Beneficiary Test

In determining whether someone is an employee, the law considers the following 7 factors to determine who the “primary beneficiary” of the relationship is:

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. Because of this, we don’t recommend offering interns “stipends.” Not only do they suggest that the intern is really an employee, but they also raise a question regarding whether the stipend was at least minimum wage when compared to the number of hours worked.

2. The extent to which the internship provides training that would be similar to what a student would receive in an educational setting.

3. The extent to which the internship is tied to an educational program (i.e. coursework or academic credit).

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

Don't miss out on new blog posts, webinar announcements, and other valuable content for serious entrepreneurs!

Join the List

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. This is especially tricky for small businesses who “hire” interns in lieu of hiring paid staff.

7. 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. Using an internship as a trial run or probationary period before hiring a worker often doesn’t pass the “smell test.”

In theory, this test considers the “economic reality” of the relationship. It sounds simple enough—if the business is benefiting financially from a person’s labor, that person is probably an employee entitled to at least minimum wage. But in reality, every case turns on its own unique set of facts. And these factors apply, not just to disgruntled former interns, but even workers who weren’t paid for time spent in training, or interns who were asked to go above and beyond the educational portion of their internship and do other tasks that benefited the employer. 

Webinar Replay

Bottom Line: Unpaid Internships Are More Trouble Than They're Worth

The bottom line is that no one factor can answer the question: Is this worker really an employee? As a result, small businesses are better off avoiding unpaid interns. Otherwise, you might find your business in time consuming and expensive litigation trying to prove that the intern was the “primary beneficiary” of their relationship with your business.

If you do decide to use an unpaid intern in your small business, then you should:

• Clearly document the nature of the unpaid internship.
  
• Insist that the intern be a part of an educational program for which they are receiving academic credit.
  
• Limit the internship’s duration and tie the duration back to the academic calendar.
  
• Don’t use traditional job ads that emphasize what the worker must do to benefit your business.
  
• Instead, document what the intern will learn from working in your business.
  
• Don’t offer the intern a job at the conclusion of the internship.
  

Schedule a Consultation