This question is answered by Lindsay Sorin, Associate for the SorinRand Law Firm.

Question:

“Many companies, especially early stage ones, increasingly turn to interns to augment limited resources. What should such employers know about unpaid internships?”

Answer:

Start up and other companies confront the issue of multiple needs competing for limited financial resources. As a result, employing unpaid interns to assist in the development of products and services seems like an ideal situation. After all, college students, and even recent graduates seeking their first opportunity in the technology or business world, are eager to gain some experience in an exciting new market. Cash-constrained companies enjoy the benefit of having additional hands on deck to accomplish the infinite number of tasks associated with starting a business (without having to utilize limited financial resources or give up equity).

While this solution makes it seem like the proverbial “win-win” situation, it turns out that using unpaid interns may result in significant cost. Under federal and state law interns generally are not exempt from the requirement that they be paid at least minimum wage. If a company violates federal and/or state wage and hour laws, it could face significant monetary fees and penalties. Further, in addition to owing back pay, an employer who knowingly and willfully violates state law may be guilty of other offenses. New Jersey’s Wage and Hour laws, for example, impose a disorderly person offense with penalties of up to $1,000 per violation.

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Therefore, before employing an unpaid intern, it is prudent for a company to review the guidelines provided by both the US Department of Labor and the Department of Labor in the state in which the unpaid interns are to be employed. Conventional wisdom notwithstanding, just because a student worker receives academic credit for an internship, it does not mean that he or she can work for free.

The factors considered when applying the “unpaid intern” exception to the minimum wage protections afforded employees under the federal Fair Labor Standards Act (the “FLSA”) are as follows:

(1) The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school;

In general, the more an internship program is structured around a classroom or academic experience, as opposed to the employer’s actual operations, the more likely the internship will be viewed as an extension of the individual’s educational experience (this often occurs where a college or university exercises oversight over the internship program and provides educational credit). Under these circumstances, the intern is not performing the routine work of the business on a regular and recurring basis, and the business is not dependent upon the work of the intern.

(2) The training is for the benefit of the trainees or students;

If the interns are engaged in the operations of the employer or are performing productive work (for example, filing, performing other clerical work, or assisting customers), then the fact that they may be receiving some benefits in the form of a new skill or improved work habits will not exclude them from the FLSA‘s minimum wage and overtime requirements because the employer benefits from the interns’ work.

(3) The trainees or students do not displace regular employees, but work under their close observation;

If an employer uses interns as substitutes for regular workers or to augment its existing workforce during specific time periods, these interns must be paid at least minimum wage. Further, if an employer would have hired additional employees or required existing staff to work additional hours had the interns not performed the work, then the interns will be viewed as employees and entitled to compensation under the FLSA.

If the employer is providing job shadowing opportunities that allow an intern to learn certain functions under the close and constant supervision of regular employees, but the intern performs minimal work, the activity is more likely to be viewed as a bona fide educational experience. Conversely, if the intern receives the same level of supervision as the employer’s regular workforce, this would suggest an employment relationship, rather than training.

(4) The employer that provides the training derives no immediate advantage from the activities of the trainees or students; and on occasion his operations may actually be impeded;

When a trainee receives direct and ongoing supervision, any productive work performed by the trainee will be offset by the employer’s burden of training and supervising the trainee. When an intern works independently, and are counted on to contribute work on a daily basis to keep the institution operational, their productive work is not offset by the necessity to supervise them.

(5) The trainees or students are not necessarily entitled to a job at the conclusion of the training period; and

The internship should be of a fixed duration established prior to the outset of the internship. Further, unpaid internships should not be used by the employer as a trial period for individuals seeking employment at the conclusion of the internship period. If an intern is placed with the employer for a trial period with the expectation that he or she will then be hired on a permanent basis, that individual generally would be considered an employee under the FLSA.

When an employer cannot distinguish between unpaid interns and paid employees who were previously interns, and where sometimes interns came to work for the employer, an inference can be drawn that interns were performing the same working that they were seeking to get paid to perform after the internship was over.

(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.

Any sort of compensation related to the amount of work performed should defeat any argument that the intern is a trainee.

Unless ALL of the factors listed above are met, an employment relationship exists under the FLSA, and its minimum wage and overtime provisions apply to the intern.

For those companies located in New Jersey, it is important to note that state regulations provide an even more stringent test than the one six-part test applied at the federal level. Unpaid interns in New Jersey must be a part of a school-to-work program, regardless of whether they are working for a non-profit or a for-profit organization. In order to employ unpaid “student learners,” the organization must meet an eight-part test:

* The student must be at least 16 years old;
* The activity must be related to a formal school-to-work transition plan for a student learner;
* There is collaboration and planning between worksite staff and school staff resulting in clearly identified learning objectives related to the non-paid activities;
* Any productive work is incidental to achieving learning objectives;
* The student learner receives credit for time spent at the worksite and the student is expected to achieve the learning objectives;
* The student learner is supervised by a school official and a workplace mentor;
* The non-paid activity is of a limited duration, related to an educational purpose and there is no guarantee or expectation that the activity will result in employment; and
* The student learner does not displace an employee.

Employer beware! Before bringing on an unpaid intern, we recommend that the company review its policies, procedures, advertisements for position, and any other contracts related to such internships to determine whether such internship meets the FLSA standards set forth above, as well as the standards of the state in which the internship takes place.

About the Advisor

Lindsay Sorin is an Associate at the SorinRand Law Firm.

Disclaimer:
The content of this article is provided for informational purposes only. It is not intended nor should it be viewed as legal advice. No one should act or refrain from acting on the basis of any information in this website without seeking the appropriate professional counsel on his or her particular circumstances.

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