Did you know that hiring unpaid interns may actually violate state and federal labor laws? Here's how to play it safe and protect your company.

Hiring an intern at your company is a great way to give a college student or new professional some hands-on experience in your industry.

Companies often hire interns to do lower-level work in exchange for the opportunity to get a foothold into a new industry and learn from behind the scenes.

However, many companies have historically hired interns on an unpaid basis in order to save costs on jobs that would otherwise go to entry-level employees.

Though very common, the practice of employing unpaid interns may actually violate state and federal labor laws.

Here's how to hire interns, the legal way.

Psst... Hiring interns is such a popular subject, we've built a guide to help you navigate the process legally. You can download it for free here.

The Law on Unpaid Interns

Under the Fair Labor Standards Act (FLSA), most interns in the for-profit private sector will be considered employees that are subject to the FLSA’s minimum wage and overtime requirements. However, if an intern is not an employee within the meaning of the FLSA, then the FLSA’s minimum wage and overtime requirements do not apply.

The U.S. Department of Labor (DOL) applies a primary beneficiary test (outlined below) to determine whether an intern for a for-profit private sector business is considered an employee for purposes of the FLSA.

The DOL announced its switch to the primary beneficiary test from the six factor test in January 2018. If you have used the six factor test in the past for interns, be sure to review the seven factors that are included in the primary beneficiary test.

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Not all federal courts rely on the primary beneficiary test, however. And different requirements may also exist under state and local wage and hour laws. For example, the New York State Department of Labor (NYSDOL) does not use the primary beneficiary test. The NYSDOL uses a test consisting of 11 criteria, all of which must be met in order for an intern to be unpaid.

Lastly, keep in mind that the DOL’s test only applies to for-profit businesses. Unpaid internships in the public sector and for non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible.

The DOL’s Test for Unpaid Interns

The DOL will review each case individually with the primary beneficiary test, and it’s a flexible test, with no single factor being determinative. Here are the seven elements of the primary beneficiary test:

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.

As the DOL states,

"If analysis of these circumstances reveals that an intern or student is actually an employee, then he or she is entitled to both minimum wage and overtime pay under the FLSA. On the other hand, if the analysis confirms that the intern or student is not an employee, then he or she is not entitled to either minimum wage or overtime pay under the FLSA."

In addition to the DOL’s primary beneficiary test, some states, including New York, have other internship requirements that must be met to remove an intern from state wage and hour protections. Be sure to evaluate the requirements under applicable state and local laws before implementing an unpaid internship program.

Related article: 6 Simple Tips for Hiring Interns Legally

Former Unpaid Interns Suing Employers

In the past few years, some high profile class-action lawsuits have been brought against companies by former unpaid interns.

For instance, in 2015, Dualstar Entertainment Group saw a class-action lawsuit filed by over 40 past and present interns. The suit accused the company of failing to pay interns and expecting demanding, long schedules.

Laura O'Donnell, a lawyer at Haynes & Boone in San Antonio who represents management in labor disputes, warns that “this trend is probably going to expand beyond media companies and beyond New York. I think employers in all industries across the country need to take note."

Protect Your Company

If you’re planning on implementing an internship program at your company, you should consult with legal counsel to ensure compliance with all applicable laws and regulations.

When in doubt about internship regulations, it’s probably best to classify interns as employees and pay them as required under applicable federal, state, and local law.

These days, it pays to be cautious. It’s always good practice to consult a lawyer.

If you're a Justworks customer, we can provide guidance and best practices with respect to internships. Reach out to our 24/7 support team anytime with your questions.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.