On January 5th, 2018, the Department of Labor (DOL) announced that it would be adopting a new standard for determining whether interns and students are “employees” who must be paid under the Fair Labor Standards Act (FLSA). Previously, the DOL used a very specific six-part test in which all factors had to be met in order for an intern to qualify as unpaid. Those six factors were:
- The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment;
- The internship experience is for the benefit of the intern;
- The intern does not displace regular employees, but works under close supervision of existing staff;
- 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;
- The intern is not necessarily entitled to a job at the conclusion of the internship; and
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Going forward, the new “primary beneficiary” test, which is used by the federal courts, will provide companies with more flexibility in determining whether an intern should be paid or unpaid. The primary beneficiary test considers the “economic reality” nature of the employment relationship and includes seven, non-mandatory factors that should be used as a reference when considering the intern-employer relationship. The seven factors are:
- 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.
- 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.
- The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to 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 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.
Since these guidelines do not have to be met and are provided merely as a frame of reference, companies can use their own judgment when determining how much weight to give each factor. The primary thing to consider, however, is quite simple – who benefitted more from this arrangement? If the answer is the company, then the intern should be paid. If it’s the opposite and the intern received more benefit, and at least some consideration was given to the above referenced factors, then it’s likely this position can be classified as unpaid. Want to avoid the primary beneficiary test and weighing different factors altogether? You can – simply pay your interns no less than minimum wage and the information above becomes irrelevant.