Hunton Employment & Labor Perspectives

With a dearth of job openings for recent college graduates, many have pursued unpaid internships while continuing to search for fulltime employment.  A 2008 survey found that half of all college students hold at least one internship before graduating.  In light of the 18.8% March unemployment rate for American workers aged 16-24—nearly double the 9.7% unemployment rate for the workforce at large—this practice can be beneficial for interns, who gain experience and contacts, as well as for employers, who can benefit from having eager interns ready to learn and contribute.

Officials in several states, as well as the U.S. Department of Labor, however, are now taking a very close look at employers whose internship programs may violate minimum wage laws.  The influx of internships in recent years, combined with layoffs and downsizing, has made regulators suspicious of employers seeking to illegally use internships for free labor. Consequently, employers should be sure to adhere to local and federal wage and hour laws when administering internship programs.

The federal Department of Labor looks to six criteria, as outlined in Walling v. Portland Terminal Co., 330 U.S. 148 (1947), to determine whether interns are exempt from minimum wage coverage under the Fair Labor Standards Act (“FLSA”).  None of the individual criteria are dispositive, and they should be viewed together to reflect the totality of the circumstances.

Private employers seeking to maintain unpaid internship programs in which participants do not qualify as employees under the FLSA, but do receive training and experience relevant to their studies or career goals, should strive to adhere to the following suggestions:

• The program should provide interns with training similar to what they would learn in school, only with the benefit of hands-on experience.
• The main beneficiaries of an unpaid internship should the interns, who must derive more than a minimal benefit from their exposure to the workings of the business.  Where the unpaid intern is the party receiving the program’s predominant benefit, there is generally no employment relationship.
• Interns should not displace employees; rather, they should work under employees’ close supervision in order to acquire and learn skills useful in the employer’s field.  Close supervision—rather than independent work that would typically be performed by employees—requires substantial investment on the part of the employer and may offset any economic advantage conferred upon the employer.
• If the intern performs the main work of the business, be sure to keep detailed records of regular employees’ time spent supervising and training interns.  Employers who can demonstrate that they suffered impediments like the consumption of a supervisor’s time in educating interns, even if the company ultimately experienced an economic advantage from training the interns, are more likely to prove that it was the unpaid intern who benefitted most from the valuable on-the-job experience.
• Though employers may use internship programs to assess potential employees, they should make it sufficiently clear to interns as well as regular employees that interns are not entitled to positions with the company at the conclusion of the internship.
• Be sure that interns understand they are not entitled to wages.  Reasonable stipends are not wages, and do not create an employment relationship.