Unpaid Internships: Understanding Employer Risks

The sluggish economy has led many employers to offer unpaid internships to young people seeking practical experience. While this approach may be a good way to keep labor costs down, companies should make sure they comply with U.S. Department of Labor requirements so that unpaid interns cannot claim entitlement to wages or make other claims against the employer.

According to the Fair Labor Standards Act (FLSA), employers must pay interns unless these six conditions are met:

1. The internship provides training similar to that which the intern could receive in a vocational school.
2. The internship mostly benefits the intern, not the employer.
3. The intern does not displace a paid employee.
4. The employer does not derive an immediate benefit from the internship.
5. The employer does not guarantee the intern a job at the end of the internship.
6. Both the intern and the employer understand that the intern is not entitled to wages.

If all six requirements are not met, the intern is entitled to be paid minimum wage and the employer must withhold normal taxes.

In addition, if an unpaid intern is required to follow work rules that govern paid employees, then the intern can qualify as an "employee" for purposes of federal and state anti-discrimination and anti-harassment laws. An employer should, therefore, make an effort to train unpaid interns regarding the company's relevant policies.

An employer should also check with its insurance carrier to see if the company's workers' compensation policy includes coverage for unpaid interns who incur work-related injuries. If no such coverage exists, then the company should determine whether its general liability policy will cover any such injuries.

A company that maintains trade secrets should take extra caution to ensure that unpaid interns do not have access to confidential customer lists and other valuable intellectual property. Such trade secrets—electronic or otherwise—should be kept under lock and key to help ensure that an unpaid intern does not have unwanted access.

What should employers do to address these areas of risk? Start by asking unpaid interns to sign an agreement that incorporates the six FLSA requirements detailed above. You should also have them sign a general liability waiver and an acknowledgment that all trade secret information belongs to the employer and must be kept confidential.

For more information about the risks associated with unpaid interns and the precautions you can take to protect your business, contact an attorney.