May an Internship be Unpaid?

July 10, 2016

Topics: Pay Practices

Several years ago, two unpaid interns sued a movie production company, claiming they were actually employees and were entitled to the rights and benefits of employees, including being paid at least minimum wage.   The case has wound its way through the New York federal courts since then.  Most recently, in July 2015, the Second Circuit Court of Appeals issued a decision shining a new light on the question:  when can a company hire an intern without pay or benefits?

In theory, an unpaid internship sounds like something that would benefit both the employer (who gets free labor in exchange for teaching the intern about its field), and the intern (who learns about his or her field of interest and possibly makes connections with people in the field, while offering free labor).

Years ago, the federal Department of Labor articulated a six-prong test for determining whether the theory behind this exchange – labor for learning – played out in practice.  Under this test, interns do not have to be paid when:

  1. The internship provides training similar to training that would be given in a vocational school;
  2. The internship is for the benefit of the trainees or students, not the company;
  3. The trainees or students do not displace regular employees, but work under close supervision;
  4. The employer that provides the training receives no immediate advantage from the activities of the trainees or students and, on occasion, his or her operations may even be impeded;
  5. The trainees or students are not necessarily entitled to a job at the end of the internship period; and
  6. The employer and the trainees or students understand that the trainees or students are not entitled to wages for the time spent in training.

If an internship program fails the DOL’s test, then the intern is an employee who must be paid at least minimum wage per hour, and overtime compensation for each hour worked over 40 in a workweek.  The “intern” would also be entitled to all the other protections of the federal and state wage and hour laws.

But in July the Second Circuit questioned the DOL’s test and determined that it may not be the right test for internship programs in New York, Connecticut and Vermont (the areas under this court’s jurisdiction).  Rather, the court held that when examining whether an individual was in a position for which they were required to be paid, the key question is:  who is the primary beneficiary of the relationship, the employer or the intern?  To determine the primary beneficiary, the court will look at factors similar to the ones listed by the DOL, but will weigh and balance them to come to a determination.

Whether evaluated under the DOL’s test or the “primary beneficiary” test, an internship program is most likely to pass muster if it is connected to an educational institution that provides credit for the internship, receives reports on the program and encourages mentoring and training.  If the appropriate test is satisfied then, yes, an internship can be unpaid.

Alternatively, employers can avoid potential problems by providing interns with a minimum wage for all hours worked and overtime compensation when necessary, as well as any compensation or benefits required by state or local laws for similar employees.