26 – How to hire an intern legally

Majority Test (all jurisdictions except NY, CT and VT)

For over 70 years the standard to whether or not an intern was considered an employee—and thus had to be paid by their for-profit, private sector employer—was a 6 factor test from the U.S. Department of Labor. It is called the economic realities test.

Fact Sheet #71 from the DOL[1] states the following:

There are some circumstances under which individuals who participate in “for-profit” private sector internships or training programs may do so without compensation.  The Supreme Court has held that the term “suffer or permit to work” cannot be interpreted so as to make a person whose work serves only his or her own interest an employee of another who provides aid or instruction.  This may apply to interns who receive training for their own educational benefit if the training meets certain criteria.  The determination of whether an internship or training program meets this exclusion depends upon all of the facts and circumstances of each such program.

The following six criteria must be applied when making this determination:

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
2. The internship experience is for the benefit of the intern;
3. The intern does not displace regular employees, but works under close supervision of existing staff;
4. 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;
5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If all of the factors listed above are met, an employment relationship does not exist under the FLSA, and the Act’s minimum wage and overtime provisions do not apply to the intern.  This exclusion from the definition of employment is necessarily quite narrow because the FLSA’s definition of “employ” is very broad.

Minority Test (NY, CT and VT)

In July 2015, the 2nd Court of Appeals in Glatt v. Fox Searchlight Pictures, Inc.[2] created a new legal test called the primary beneficiary test.

In the context of unpaid internships, we think a non‐exhaustive set of considerations should include:

1. 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.
2. 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.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. 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.
7. 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.

Case law for the 2^nd Circuit is only considered to be binding precedent (law that lower courts within its jurisdiction must follow) in New York, Connecticut and Vermont. It would be looked at as persuasive, but not binding, precedent in other circuits and states. Only time will tell whether other jurisdictions will adopt the primary beneficiary test.

Analysis

What does the new rule in Fox mean? It means that one must ask “who primarily benefits from the work being performed by the intern?” And is the educational experience of the internship such that the intern would be replacing work that would be done by a regular employee? If so, they must be paid like a regular employee. Under the DOL standards, all the factors need to be met. Whereas Fox allows for a balancing of the factors, as well as making the list expandable depending on the specific circumstances at hand. The Fox court stated, “The purpose of a bona‐fide internship is to integrate classroom learning with practical skill development in a real‐world setting.”

What are the types of things that under either test are NOT something that unpaid interns should be doing?

• Menial tasks such as filing or clerical work
• Work that provides no educational value or training
• Work that displaces work of paid employees
• A job that would be understood to transition to a paid position afterwards

So what can you do if you want to use interns in your own business for one of the above reasons? The easiest thing to do it to pay them for their work. Depending on your own finances this is probably minimum wage or slightly above. Although an intern will likely be delighted (and might work a little harder) if you pay them more. When you pay an intern you’ll need to make sure you comply with local, state and federal employment laws.

Another good option for an unpaid internship is to team up with a local school or college to give your intern educational credit for their work. Call up local art programs at community and junior colleges, or at universities, and ask to talk to their Career Services. Many colleges will require the student intern to either have faculty supervision or written assignments in order to get credit, but the usual feeling is that the work experience alone is the educational component.

Always make sure you properly supervise the unpaid intern and direct their learning experience. They are there to learn your area of business!

Advertising for and interviewing unpaid interns

When you advertise for an unpaid internship definitely keep the DOL and primary beneficiary tests in mind. Make sure it’s clear that the internship is unpaid and what type of work will be required of the intern. If there’s an educational credit component to the internship be sure to include that as well. As we’ve seen, you can’t just take a job description for a paid assistant and have an unpaid intern do the same work. The educational objectives of the position—even if it’s not for school credit—should be clearly laid out so both the employer and employee knows what the purpose of the internship is.

When you interview for the position make sure they understand that a job afterwards is not guaranteed and that they know they will be unpaid. Be clear about the objectives and what you want them to get out of the internship. Ask what they are looking to get out of the experience and make sure it would be a good fit for your business.

Hiring and documents

Make sure your documents are clear in that the unpaid intern is not considered to be an employee. However, they should still sign certain paperwork. A general contract defining job responsibilities is a must. You should also consider confidentiality and/or non-disclosure agreements so they can’t disclose any personal information from you, your business, or your clients. You may have them sign something that allows them a license to use certain images they take (always with client approval, of course) in their portfolios.

The Department of Labor has stated that an unpaid intern typically does not need to fill out an I-9 form because it is not considered a hired-for-work employee. You can reimburse them for expenses, reasonable benefits, a nominal fee, or any combination thereof, for their service without losing their status as an unpaid intern. See DOL Field Operations Handbook, Chapter 10, Section 10(b)-02(i)(1)[3]. You can even give the unpaid intern a small stipend (no more than 20% of what you would pay a regular employee). See opinion letters FLSA2006-28[4] and FLSA2005-51[5]. If the stipend is more than $600/year you need to report it to the IRS via a Form 1099.

Non-compete agreements are another thing to think about but they’re generally not necessary in this context. In some states, such as California, they are unenforceable under state law. Given that the unpaid intern will be working for you for a limited amount of time and be exposed to a minimal amount of your business, and because they’re doing the unpaid internship to gain experience in the field, limiting them to where and with whom they could work is not fair and may be found to be unenforceable in court.

There have been several court cases recently where unpaid interns have sued their employers (generally big companies) for not adhering to DOL guidelines, including the Fox court above, so be careful!

[1] http://www.dol.gov/whd/regs/compliance/whdfs71.htm

[2] 811 F.3d 528 (2d Cir. N.Y. 2016), available at http://www.leagle.com/decision/In%20Adv%20FCO%20160427-000005/GLATT%20v.%20FOX%20SEARCHLIGHT%20PICTURES,%20INC.

[3] http://www.dol.gov/whd/FOH/FOH_Ch10.pdf

[4] http://www.dol.gov/whd/opinion/FLSA/2006/2006_08_07_28_FLSA.htm

[5] http://www.dol.gov/whd/opinion/FLSA/2005/2005_11_10_51_FLSA.pdf