Unpaid internships present potentially costly legal issues for employers

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Unpaid internships are controversial. Proponents argue that they provide valuable opportunities for students to learn about an industry and for companies to scout up-and-coming talent; critics contend the practice is an unfair excuse to exploit free labor from students eager to “get a foot in the door.” 

Regardless of the pros and cons, if your company is hiring interns and considering not paying them, it is important to get up to speed and adhere to recently updated Department of Labor guidelines on unpaid internships to avoid potentially significant fines and penalties. 

In January, the Department of Labor set forth new, clarified criteria to determine whether unpaid internships are lawful. At their core, these criteria are designed to ensure interns receive a genuine educational experience during their time with your business rather than being treated as unpaid underlings. 

Wage and hour lawsuits under the Fair Labor Standards Act — the federal law that governs payment of wages — and related laws continue to be a hot topic for litigation. 

The track record of lawsuits of this nature raises a variety of questions, challenges and risks for employers in South Carolina. Over the past decade, the Department of Labor has increasingly scrutinized and cracked down on unpaid internships that did not truly satisfy the criteria. 

The Department of Labor and courts will, no doubt, continue to closely examine and scrutinize unpaid internships. 

The presumption under the FLSA is that if someone is performing work for an employer, he or she should be paid. The Department of Labor provides an exception for employers in the for-profit sector to create unpaid internships, in certain limited circumstances. 

Under the newly adopted “primary beneficiary” test, in order to determine whether an unpaid intern is truly an “intern,” as opposed to an “employee,” the following seven factors will be examined: 

The extent to which the intern and the employer clearly understand, before the internship begins, that the intern is not entitled to wages for the internship. Any promise of compensation, either express or implied, suggests that the intern is actually an employee. Clear recordkeeping that there is no expectation of compensation is important.

The extent to which the internship provides training that would be similar to that which would be obtained in an educational environment. In other words, the unpaid internship must provide the intern with a learning experience similar to what the intern would receive in school.

The extent to which the internship is integrated with the intern’s formal education program. For example, the connection may take the form of academic credit or integrated coursework. 

The extent to which the internship accommodates the intern’s academic commitments. For example, whether the internship aligns with the academic calendar.

The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning. 

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. The intern must not displace regular employees. Accordingly, employers should create and assign tasks that are designed to help the intern learn about the industry; employers should not simply just reassign work that paid employees are doing already. An unpaid internship is likely not properly classified if the intern is doing the same work as other employees and the only difference is that the intern is unpaid.

The extent to which the intern and employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship. The employer should not guarantee an unpaid intern a job at the end of the internship. In that regard, the internship should give interns an opportunity to develop transferable skills which can be used at other places of employment. 

Although no single factor is determinative and courts examine each circumstance on a case-by-case basis, in order to ensure compliance, employers should satisfy all criteria in order for an unpaid internship to be lawful. 

Simply labeling a summer position as an “internship” does not mean that an employer does not have to pay the intern. 

The crux of the analysis for whether an unpaid internship is lawful turns on whether the intern or the employer is the “primary beneficiary” of the internship. 

If the criteria are not satisfied, then interns will likely be classified as employees, who are entitled to both minimum wage and overtime for time worked. Misclassifying student workers as “unpaid interns” — when the criteria cannot, or likely cannot, be met — may result in costly private lawsuits brought by former unpaid interns who allege that they are entitled to wages for their work, not to mention some unflattering publicity. 

Penalties and additional monetary damages above and beyond past-due wages may be levied against the employer who did not properly pay wages due an employee who was misclassified as an intern.

The simplest way to avoid these issues for most private sector employers is to treat interns as employees and to pay them minimum wage and overtime. 

If your company opts for an unpaid internship program, minimize the risk of potential Department of Labor investigations and lawsuits by developing a well-thought-out internship program that includes a comprehensive compliance plan just like you do for any other regulatory matters. 
Employers should consult legal counsel and stay abreast on emerging developments in this area. 

In addition, employers should be clear in all communications with the intern about the nature of the relationship and work to be performed to prevent skewed expectations. 

Employers should be careful not to assign only undesirable or mundane tasks to cut costs or decrease the workload of other employees, neither of which make the experience educational and worthwhile.

Ashley Kutz Kelley is a partner in Womble Bond Dickinson’s Charleston office. Her practice focuses on representing companies in commercial litigation, particularly in matters of employment law. She also serves as chair-elect of the S.C. Bar, Labor and Employment Division, and chair of Charleston Women in International Trade.