It’s the time of year when business owners are approached by college students seeking summer internships to acquire skills and bulk up their resumes.  It can be a symbiotic relationship, with the intern gaining experience in their field of study and the employer getting assistance on tasks that might not get handled otherwise.  Prior to new rules published by the Department of Labor (DOL) earlier this year, unpaid internships could be perilous territory for employers who agreed to hire interns without paying them.

The new test outlined by the DOL—called the primary beneficiary test—is used to determine if a worker can be properly classified as an unpaid intern, or instead, should be covered under the Fair Labor Standards Act (FLSA) and be paid minimum wage and overtime.  The test adopted by the DOL has already been in use in four federal appellate courts, most recently the Ninth Circuit Court of Appeals.  The DOL’s switch to the primary beneficiary test creates a nationwide standard.

Balancing vs. All-or-Nothing
Under the prior rules, the DOL set forth a six-question “all-or-nothing test.”  An employer needed to be able to say “yes, the internship does that” to all six questions to properly classify the internship as unpaid.  Otherwise the worker was to be considered an employee, earning at least minimum wage and, potentially, overtime.  The new test is a seven question balancing (or factors) test, with no single question disqualifying the worker from being classified as an unpaid intern.  The employer should look at the answers as a whole.  This test is considered by many to be much more forgiving criteria for the employer in determining paid vs. unpaid internships.The New Questions
While the new questions overlap significantly with the old questions, the major element missing from the new test is a focus on whether the intern is providing tangible benefit to the employer.  The old test required that the employer receive little to no benefit from the services of an unpaid intern, with the exception of goodwill and a qualified future applicant.  The new test doesn’t ask if the employer is receiving a benefit.

Instead, the new test places more emphasis on the academic focus of the internship.  Only one of six questions in the old test related to the training and educational aspects of the job, whereas four of seven questions in the new test talk about educational characteristics of the role.  Employers can also look at factors outside of the seven specified in the new test, but should be careful about stretching to find new questions if the listed seven lead to an answer of “paid employee.”

Under the primary beneficiary test, these are the seven factors employers should consider, including the extent to which:

  1. 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.
  2. 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 internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

For more information or assistance in determining the classification of unpaid interns, or other HR-related issues, reach out to the pros at HR Support Center.

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