Welcome to the Business Bites Podcast. The podcast for busy entrepreneurs. Whether you’re an online entrepreneur or seeking after breaking more to success, this podcast brings you quick bites of content, so you can learn and grow anywhere you are. Now, here is your host, Rachel Brenke.

Good morning guys or evening, wherever you are listening. This is the Business Bites Podcast, and I am your host Rachel Brenke. I wanted to talk a little bit with you guys today about a top question that I receive about the springtime of year when companies are starting to look for having summer interns. There is such little hustle and bustle in the legal world going on about what an intern is, should they be paid, should they not pay, what tasks can they do. I kind of wanted to present to you guys a little bit of the current information to help you sort through this information before you jump into having an intern.

Before we get into that, though, I want to reiterate again like I’ve said in multiple episodes that obviously this is a legal disclaimer of I am a lawyer, but I’m not your lawyer unless you want me to be. And then you can contact me through businessbitespodcast.com, and then we can talk from there. But we have to be in an engaged relationship, so all of this information is for educational purposes.

But on the business side, I want you guys to understand that managing people is very difficult. Depending on your management style, it can also demand or decide whether or not you’re even going to go down the path of having an intern in your business. For me, one of the hardest parts of business has been managing people. There’s personalities. There’s all sorts of managing skills that I’ve had to learn. I’m still learning to do it as I’m managing multiple teams. It’s an ongoing process, and it’s very difficult, but it can be also very rewarding.

When you finally get people who go hard for your business and stick around and become loyal to you, it is quite fabulous to have them, and some of them have started as interns. And so doing it right from the very beginning, whether they’re employee, independent contractor or an intern, is very important.

Of course, I’m going to kickoff this information with some of the legal stuff for you guys. There are two tests that are applied in the United States. A majority test which is pretty much all jurisdictions except for New York, Connecticut and Vermont, which are going to follow the minority test. These are the two different tests that you guys need to apply for where you’re at, and take some notes and apply it to what you have then and intending to have for an intern that you may be onboarding in the process.

Before I jump into the tests, I want to give my recommendation off the bat that not only is it difficult to manage people, it can be difficult and daunting to manage an intern that is coming through a course or an online format. Whether they’re virtual, they may be in-person, but they may be coming through an educational institution. That actually can be easier as you’re going to see when we dig into the tests stuff because it eliminates a lot of the legal issues.

With the majority test, we have to determine if an intern is considered an employee or not. That entire test of employee and independent contractor is a big discussion that I have a lot with my legal clients. And so there is a six-factor test that you guys can use from the Department of Labor.

If you’re a legal nut, it’s called the economic realities test. Essentially, it’s outlining the circumstances under which these individuals or interns who participate in for-profit private-sector internships, which is probably most of you guys listening. Or, training programs, it allows them to be able to do it without compensation.

The Supreme Court has held that the term “suffer or permit to work” cannot be interpreted so is to make a person whose work serves only his or her own interest as an employee of another who provides aid or instruction. Basically, this may apply to interns who receive training for their own educational benefit, but only if the training meets certain criteria. The determination of whether an internship or training program meets this exclusion depends on these facts and circumstances of each program. You have to apply the six criteria to determine whether or not this is allowed for your business.

First, you have to identify whether the internship, even though it may include actual operation of the facilities of your business, is it similar to training, which would be given in an educational environment. This is a heavy burden, I believe, for especially high-paced, high stress, quick moving businesses because it can be very difficult to curve out the time to provide the educational instruction at the level that they would have received in an educational environment.

That’s not to say that hands-on baptism by fire isn’t necessarily an educational method, but you have to ensure that you’re not just throwing tasks at an intern and leaving them to their own devices. I know one of the methods that we like to do is we give a little introductory, but then we like to see what the intern can do, how much of a go-getter they are. But it doesn’t stop there. If I just threw them in the fire and gave them tasks, and told them they need to get it done and left it at that, that would not fit this criteria.

What we like to do is take it another step. Once they’ve completed a task or made a substantial work towards the task, then we sit down and discuss in a debriefing, and we evaluate and give them the education for how I would have done things, why I would have done it that way. This provides that educational environment that this first criteria requires.

The next criteria is whether the internship experience is for the benefit of the intern. This cannot solely be for the benefit of the employer. Which is why I also recommend strongly that you take interns through educational programs because a lot of times you’re going to be required to submit certain paperwork to the school.

The benefit that the intern is going to receive may not be monetary compensation, but they’re going to receive educational credit if they’re through a formalized program. Yes, it’s a little bit more of a burden for you to fill up paperwork, but then they also get the benefit of not just the experience that they learned under criteria number one, but they’re also getting a benefit of educational credit.

Third criteria, the intern doesn’t displace regular employees, but works under close supervision of existing staff. This is to prevent abuse of you trying to have, for lack of a better term, slave labor, free labor that’s coming in. Getting rid of staff and having someone come in to take their place. Now, I don’t think there’s anything wrong if you have someone that goes on a maternity leave, sick leave or takes vacation, and you have an intern pick up their tasks. But they still need to have that close supervision of existing staff and your office.

The fourth criteria, the employer that provides the training derives no immediate advantage from the activities of the intern. On occasion, these operations may actually be impeded. This is actually a big thing of where I really strongly recommend you guys looking to see if you even want to take on an intern. Because if you have them through an educational program, you’re going to have to take the time to fill out paperwork.

You’re going to have to take the time to discuss and teach them. You’re going to have to take the time to do all of this for the intern. And so it may impede your operations, and that’s cool as long as you are managing the time and it’s a benefit for everyone. But it cannot be solely an immediate advantage for you based on the activities of the intern.

The fifth criteria is that the intern is not necessarily entitled to a job at the conclusion of the internship. The last one is the employer and intern understand that the intern is not entitled to wages for the time spent in the internship. And so these are just six criteria that must be applied when you’re determining whether or not an individual who participates in this for-profit private-sector internship or training programs can do so without complications and compensation. I’m sorry.

If all the factors that I just went over are met and employment relationship does not exist under the law, and the act that governs all of this will not be invoked, the minimum wage and the overtime provisions do not then apply to the intern. This exclusion from the definition of employment is necessarily quite narrow because the definition to employ can be very broad.

If you guys need a little bit more information on what it means to have an employee versus an independent contractor, check out the IRS’s website. They have a really good factor test. It’s really about a control test. But that will help you understand how an intern can also be different and not fall into those classifications.

All right, so then the minority test. There’s a little bit of difference. This is for the New York, Connecticut and Vermont. As recent as July 2015, the Second Court of Appeals has created a new legal test called the primary beneficiary test. And so in the context of these unpaid internships, we have to think of a non-exhaustive set of considerations. I’ve got seven main things to go over really quick for you.

First, the extent to which the intern employer clearly understand there’s no expectation of compensation. Any promise of the compensation, expressed or implied, would then suggest the intern is an employee and vice versa.

The second criteria, the extent to which the internship provides training will be similar to that which should be given in an educational environment. This is sounding a lot like the majority test, but keep listening. This includes clinical and other hands-on training provided by educational institutions.

The third is the extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit. That’s a difference from the majority test.

Fourth, the extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar. Again, that’s a deviation from the majority test.

Five, the extent to which the internship’s duration is limited to a period in which the internship provides the intern with beneficial learning. We don’t have that limitation on a time limit requirement up on the majority test, but we do here for the minority.

Six criteria, 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. That definitely narrows a lot of what I’ve already covered in the majority test.

The last criteria underneath the minority test, the extent to which the intern and the employer understand the internship is conducted without entitlement to a pay job at the conclusion of the internship. That’s also very similar as well.

What does all of this really mean? This means you guys need to sit down to identify first what state that you’re doing business in. Keep in mind that if you were working with virtual interns, a different test may be invoked depending on where the intern sits compared to where you sit as well.

Apply the criteria just as a checklist format. I’m going to put it on to the website, rachelbrenke.com/epi26. You’re going to be able to find all the notes of this, and I’ve got it all outlined for you. This way you’re able to apply these tests properly before you move forward with the intern process.

What are some of the types of things that these interns should be doing? Tasks such as filing and clerical work, but it needs to have some educational value. You may be thinking, “Oh, I want someone who’s a social media manager,” but are they learning about marketing strategy at the same time? Because just inputting into Twitter is not going to teach them anything. But if you supplement that with the educational value and training of being a social media manager, then you start giving them the benefits.

I recommend that you guys sit down, checkout all of these. Before you ever go and advertise for unpaid interns … Because when you advertise for an unpaid internship, you definitely need to keep these Department of Labor tests and primary beneficiary test in mind. Make sure it’s clear that the internship is unpaid. Make sure it’s clear what type of work will be required. If there’s an educational credit component to the internship, be sure to include that as well. Open yourself up and say, “Hey, I’m willing to connect with any of the local schools.”

You don’t necessarily have to go to the school and be an approved education. I know a lot of students can seek out internships outside, and then ask for that to be an approved internship for credit through the school. When you interview for the position, make sure that they understand that a job afterwards is not guaranteed, and make sure they know that this will be unpaid. Always be clear about the objectives of which you want them to get out of the internship, but also ask what they’re looking to get out of the experience, and make sure it will be good fit for your business.

The last little bite that I want to give you guys for this is the hiring and documents process. Make sure your documents are clear. That the unpaid intern is not to be considered an employee at all. This is where the lawyers are going to come in to help you a little bit. But make sure that the interns are signing this certain paperwork. A general contract defining job responsibility is definitely a must, especially if they’re going for academic credit.

You should also consider confidentiality and/or non-disclosure agreements, so they can’t disclose any personal proprietary information from you, your business or the clients that you’re working with. You may have them sign something that allows them a license to use certain images, or a copy, or a text that they have created. Of course, always with client approval. But you need to make sure that is outlined in text and everyone has agreed to it.

The Department of Labor has stated that an unpaid intern typically does not need to fill out an I-9 Form because it’s not considered a work for hire employee. But you can reimburse your interns for expenses, reasonable benefits, and nominal fee or any combination thereof for their service without losing their status as an unpaid intern. You can checkout the Department of Labor Field Operations Handbook chapter 10, section 10 B, blah, blah, blah. I’ll put it on rachelbrenke.com/epi26 for you.

But then you can also give an unpaid intern a small stipend of no more than 20% of what you would pay a regular employee. They wouldn’t be necessarily considered a compensated employee at that point. We still are going to apply all the tests. You can give them a small stipend. We’re going to outline all of this into our agreement that we have with the intern. Keep in mind if the stipend is more than $600 a year, then you need to report it to the IRS via a Form 1099.

One of the last things I want to leave you with, non-compete agreements are another thing to think about, but they’re generally not necessary in this context of interns. In some states, not just California, they are unenforceable under state law anyways. Given that the unpaid intern will be working for you for a limited amount of time and really 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 whom they can work with is not fair and really may not be found enforceable in court anyways.

I’ve encouraged you guys go forward. Teach what you can to other people. It is our time to mold, and shape and give to these generations. I’m not going to say younger because your interns could be any age, but these generations that are wanting to learn the business that you’re doing. I feel like as business owners, we have a responsibility to give back, impart our wisdom. We can help set the tone for the future. A rising tide lifts all ships, so I encourage you guys seek out go in the intern way. I’ve given you all the tips that you need to hear of the majority test, the documents you need to use and advertising tips. Go use it and best of luck.

Thanks for joining Rachel on this episode of the Business Bites. For show notes, a list of recommended tools, or referenced episodes, you can find them at businessbitespodcast.com. Until next time.

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:

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;
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.

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:

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.

Case law for the 2nd 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