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Unpaid Interns Can Cost You

by Anna Wang, Legal Researcher at Shake

Small businesses have long used unpaid internships as a way to lower costs. But internships are not supposed to be about free labor, and government agencies – as well as interns themselves – are cracking down on abuse.

If you’re an employer who fails to pay “interns” who are actually employees, you can be liable for unpaid wages, taxes, interest, and penalties.

So how can you ensure that your unpaid internship complies with the law?

Internship versus Employment

Under the law, regardless of what you call it, it’s not truly an “internship” unless it’s primarily for the intern’s benefit and the employer is providing training. Otherwise it’s just employment, which, among other things, generally requires that you pay the worker minimum wage.

There are two tiers of law governing whether a position is an internship or employment. The controlling law at the federal level is the Fair Labor Standards Act (FLSA). Individual states may have requirements that need to be met alongside the federal ones.

Federal Internship Requirements

The FLSA mandates that a legitimate unpaid internship meet the following six conditions:

1. The internship is similar to training the intern would receive in an educational environment.

  • The internship should resemble an academic experience as closely as possible. It helps if a university is providing oversight and offering educational credit.

2. The internship is for the benefit of the intern.

  • The skills the intern gains should be applicable in other employment settings, not just yours. The intern shouldn’t be doing routine work. The business should not be dependent on the intern for its daily operations.

3. The intern does not occupy the position of a regular employee, but works under close supervision of current staff.

  • If you’re thinking of an unpaid intern as a replacement for a regular employee, it’s a telltale sign that you’ve got a non-compliant internship. The intern should be getting training beyond what a regular employee would receive and be more closely and constantly supervised than a regular employee.

4. The employer gets no immediate advantage from having the intern; the intern may occasionally even be an impediment.

  • In a compliant internship, the time and resources the intern takes up while learning skills and shadowing others may actually slow down the employer’s operations.

5. The intern isn’t necessarily entitled to a job at the end of the internship.

  • A compliant internship is not a trial period for permanent employment. It should be of a fixed duration that is established in writing at the start of the internship.

6. The employer and the intern understand that the intern isn’t entitled to wages (something you should put in writing).

State Internship Requirements

In addition to complying with federal requirements, the internship must comply with state-specific requirements. Check your state’s Department of Labor for requirements that apply to you. In New York, for example, employers must comply with the New York State Minimum Wage Act, which requires the following:

1. Training must be supervised by people experienced in that activity.

2. The intern cannot receive employee benefits.

3. The training isn’t specific to the employer, but qualifies the intern to work in any similar business.

4. The intern screening process is separate from the employee screening process, and the screening only uses criteria relevant for admission to an independent educational program.

5. Internship advertisements focus on the education or training, not on employment.

Recap

Many people think that calling a position an internship means they don’t need to pay minimum wage. But in reality, only a very specific kind of internship – one that meets both federal and state standards – can legitimately be unpaid.

Similarly, merely calling it something other than an “internship” — for example, an “apprenticeship” or “volunteering” when at a for-profit enterprise — doesn’t exempt you from minimum wage requirements. On the other hand, if your “internship” does meet minimum wage and other state and federal employment requirements, you’re free to structure it as you like and call it whatever you want — because from a legal standpoint, it’s not an “internship” but a job.

In short, it’s the nature of the position — not what you call it — that matters.

Understanding and complying with the law can make for a more meaningful experience for your interns as well as help you avoid potentially costly problems down the road.