Don't Call it a Comeback: New Rules Could Revive Unpaid Internships

March 28, 2018

The U.S. Department of Labor (DOL) recently announced new guidelines regarding unpaid internships, easing standards for for-profit employers to use unpaid interns. These new guidelines may greatly benefit startups, particularly with summer just around the corner.

Much of the debate regarding unpaid internships stemmed from the DOL's 2010 adoption of a stringent test for determining if an unpaid intern is actually an employee subject to the Fair Labor Standard Act's (FLSA) minimum wage and overtime requirements. Under the 2010 test, the internship had to meet six requirements in order to validate its unpaid designation. If any of the factors were not met, then the intern was considered an employee and had to be paid. The most limiting element in this test was that the employer could not derive an immediate advantage from the intern's activities. Even where an internship was designed solely for the benefit of the intern, most employers were penalized because they, too, obtained some benefit from the intern's work.

However, the DOL has now adopted a seven-part "primary beneficiary" test that had already been implemented by the U.S. Courts of Appeals for the Second and Ninth Circuits. The focus of this test is to determine if the interns are the primary beneficiary of the intern-employer relationship. The new criteria an internship program must satisfy in order to be unpaid are:

  1. Both the employer and intern understand that there is no expectation of compensation;

  2. The internship provides training similar to that given in an educational environment;

  3. The internship is tied to the intern's formal education program or they receive academic credit for the internship;

  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 intern receives beneficial learning;

  6. The intern's work complements rather than displaces paid employees while providing significant education benefits; and

  7. Both the employer and intern understand that there is no entitlement to a paid job upon the conclusion of the internship.

Unlike the previous test, no single factor is determinative and an analysis of the factors will always depend on the particular facts of the case. That said, the new test certainly opens the door for more employers to implement unpaid internships.

Employers that rely on unpaid internships should revise relevant documentation, such as job descriptions, internship policies and recruiting materials, to comply with the seven-factor primary beneficiary test. Employers that are considering hiring unpaid interns should consider consulting with legal counsel to ensure their program meets all the necessary requirements of the new test. It is important that employers design a program that extends the intern's education from the classroom into the workplace.

© 2018 Varnum LLP