Balancing on the Internship Tightrope 

Summer is traditionally a hot time for internships. For companies looking to bring on interns, the most important consideration is whether to make it an unpaid internship or a paid one. From the legal standpoint, “It’s a relatively new area of law that is just catching fire across the country,” says Lindsay Leavitt, an attorney in the Phoenix office of Jennings, Strouss & Salmon.

“If you don’t pay, you need to be aware of potential problems under applicable law — the most notable of which is the Federal Labor Standards Act,” says Chris Mason, shareholder in the Phoenix office of Polsinelli. Businesses should familiarize themselves with the expectations of the Department of Labor, which is concerned, essentially, with whether the internship is provided for the benefit of the intern or the entity.

Observes Leavitt, “Since the Great Recession, a lot of businesses that previously offered paid internships are now, to keep costs down, moving to unpaid. At the same time, students are looking for any experience to put on their résumé. But the vast majority of unpaid internships in the for-profit sector violate the FLSA.”

So, does the internship provide the intern with educational and knowledge development? Or is the business entity getting a lot of free labor and not providing much in return? If the latter, cautions Mason, “the DOL will declare the individual was just being used and should have been paid minimum wage and overtime.” The intern can sue for double the unpaid wages and be reimbursed for attorney fees. Plus fines and penalties if the DOL determines the mistake was intentional.

Additional costs may ensue if an unpaid intern gets hurt on the job and it is determined the intern should have been classified as an employee. “The employer’s workers’ comp insurance likely wouldn’t cover the unpaid intern, which would potentially leave the employer on the hook for the costs of the intern’s injuries,” Leavitt says.

And Mason cites what he sees as even bigger problems. There is the legal cost to the company in defending itself, a black eye to its reputation, and “the DOL does not necessarily stop at one claimant but will look at all classes of employee. Therefore, the DOL may find a whole plethora of violations, and that puts the employer at risk.”

These considerations relative to unpaid internships do not apply to nonprofits and government entities, where such positions are classified as “volunteer.”

In a paid internship, an intern becomes an employee — entitled to all employment rights. Employers need to pay unemployment taxes, withhold taxes, and add the intern to the employee rolls for workers’ comp. “If the intern is unhappy, the intern-employee can bring suit and make claims of discrimination,” Mason points out.

“In a paid internship, the intern does not have special legal status,” Leavitt explains. “A paid intern is, essentially, a temporary worker.”

Leavitt suggests employers provide their interns — paid or unpaid — a copy of the employee manual. “The intern needs to have an understanding of what is expected of employees of the employer. And the employer shields himself from future instances that can arise in the employment setting.” And if an intern will be privy to confidential information, such as intellectual property or trade secrets, Leavitt adds, “the employer may need some type of non-disclosure agreement.”

While the DOL has stringent rules on how an intern can be treated, it has no specific requirements of an internship program. Mason recommends to his clients that they register with the school that the intern attends. “It adds an element of legitimacy. Plus, the school will have well-established programs and can help put specific guidelines in place.” He also recommends businesses add an evaluation or review to give back to the educational program at the school. “It makes the internship better because it gives the employers the opportunity to figure out their program. And it helps recognize and avoid legal problems by ensuring they’re providing an educational benefit.”

Test For Unpaid Interns

To pay or not to pay? “I think the biggest struggle employers have is knowing where that line is drawn,” says Chris Mason, shareholder with Polsinelli. The DOL lists six criteria as its “Test For Unpaid Interns” with a for-profit employer, and all must be met.

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which 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, but 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 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.

Noting the DOL’s focus on benefit to the intern, Mason explains the intent is the intern’s learning continue over the course of the internship, as opposed to being taught some simple, repetitive manual labor the first week only.

The employer cannot use the internship as a try-out for a new employee, explains Lindsay Leavitt, attorney with Jennings, Strouss & Salmon. And working closely with an educational institution, he says, “will ensure an academic setting for the internship and that the intern will get academic credit.”

Lindsay Leavitt is a business litigation and employment law attorney at Jennings, Strouss & Salmon, P.L.C. He regularly represents businesses in employment-related disputes and provides advice on preventive measures. 

Chris Mason is a shareholder at Polsinelli whose emphasis is Labor and Employment, helping employers navigate the jungle of labor and employment regulation and litigation.