Internships can be hugely beneficial to both the businesses who offer them and the students who accept them.  The student gains access to a workplace in a field of interest, valuable work experience in that field, mentoring from experienced professionals and sometimes even academic credit, while the business gets weeks or months of work performed by a qualified student, the opportunity to vet the student for potential employment, a chance to build or strengthen partnerships with educational institutions, and the satisfaction of being a good corporate citizen and investing in future workforce development.

Historically, internships were usually unpaid, providing an additional, substantial benefit to employers.  Over the past 20 years, however, the U.S. Department of Labor (“DOL”), state labor departments, and the courts have substantially narrowed the definition of an “intern” for purposes of the Fair Labor Standards Act (“FLSA”) and its state law counterparts.  The rules changed again this week.

Until recently, the DOL relied on a strict six-factor test to determine whether interns and other student workers at a for-profit business were true interns or employees entitled to wages.  For the worker to qualify as an intern:

  1. the internship had to be similar to the training the worker would receive in an educational or vocational environment;
  2. the internship had to be for the benefit of the intern;
  3. the intern could not displace regular employees, but had to work under close supervision by existing staff;
  4. the employer could derive no immediate advantage from the intern’s activities and its operations may actually be impeded on occasion;
  5. the internship could not automatically entitle the intern to a job upon its conclusion; and
  6. both the employer and the intern had to understand that the intern was not entitled to wages for the time spent in the internship.

Under the DOL’s version of the test, all six factors had to be met for the worker to be considered an intern rather than an employee.

 

On January 8, 2018, the DOL announced that it is abandoning the six-factor test and replacing it with the “primary beneficiary” test, which has been adopted by four U.S. Courts of Appeal in recent years.  Under the “primary beneficiary” test, an intern or other student worker at a for-profit employer must be considered an employee under the FLSA if the employer, rather than the student, is the “primary beneficiary” of the relationship.  To make this determination, the DOL will consider the “economic reality” of the relationship based on the following seven factors:

  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 that would be similar to that which would be 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 conclusion of the internship.

Unlike the DOL’s previous test, no single factor is determinative.  Instead, the DOL will weigh the unique circumstances of the particular relationship to determine whether the student is a true intern or an employee for purposes of the FLSA.

As a practical matter, the tests are not as dissimilar as they may first appear.  In both cases, the employer must consider the totality of the circumstances of the unique relationship.  In both cases, both the employer and the intern must understand that the intern will not be compensated.  In both cases, the intern cannot displace existing workers.  In both cases, the internship cannot automatically result in a job offer.  And in both cases, the internship must provide training similar to training the intern would receive in an educational environment.  Enrollment in a formal training program is not an express prerequisite under the FLSA, but the “primary beneficiary” test is more likely to be satisfied if the internship is “tied to” such a program and “accommodates” the intern’s “academic commitments.”

As for work performed at non-profit institutions, for purposes of the FLSA, the DOL has made clear that unpaid internships at non-profit institutions will not be governed by the “primary beneficiary” test.  Instead, such internships are “generally permissible” provided that “the intern volunteers without expectation of compensation.”