HR Hotline: Do We Have to Pay Our Summer Interns?

HR & Safety

Q: With summer approaching, we’re exploring how we might use student interns to fill in for vacationing staff while simultaneously providing some learning opportunities for potential future employees. Any guidance to keep us on the right track?
A: Traditionally, internships have been used to provide students with real-world experience and provide employers with inexpensive or free labor. It’s this latter aspect that can get employers in trouble.
The cleanest way to go—and avoid a possibly expensive encounter with the Labor Department and tax authorities—is to engage interns as temporary employees, paying at least minimum wage as part of a regular paycheck.
At the end of a paid internship, interns may be eligible for unemployment benefits unless they return to school full-time and are not available and actively seeking suitable employment.
Unpaid internships are permissible, but only if properly arranged, which is not always an easy task.
The legal elements necessary to establish an unpaid internship can be confusing, even though they are explicitly stated in an updated U.S. Department of Labor Fact Sheet.
If those criteria are met, an intern may not be eligible for unemployment benefits at the end of the engagement since he or she was not technically an employee.
The standard for determining if an intern is, in fact, an employee under the Fair Labor Standards Act is commonly referred to as the “primary beneficiary test.”
This test considers the “economic reality” of the intern-employer relationship to determine which party is the primary beneficiary of the relationship, applying the following seven factors, taking into account 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—and vice versa.
2. The 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 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 the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

Flexible Test

The primary beneficiary test has been characterized as a flexible test, with no single factor determinative, and is therefore dependent on the unique circumstances of each case.
If analysis confirms that the intern is not an employee, then he or she is not entitled to minimum wage or overtime pay under the FLSA. But if analysis reveals that an intern is actually an employee who has not been treated as such, then he or she is entitled to both minimum wage and overtime pay under the FLSA.
Also, if audited by the state or federal government, an employer could face liability for back taxes and penalties.

Playing catch-up on wage, tax, insurance, and other mandatory obligations is not a pretty picture.

Events that often trigger regulatory scrutiny of an impermissible unpaid internship include the student worker filing for unemployment benefits at the end of the internship or getting injured on the job and filing for workers' compensation.
Playing catch-up on wage, tax, insurance, and other mandatory obligations is not a pretty picture, so proceed carefully and do your research before taking on an intern.
Work with the intern's academic institution to coordinate the arrangement and content of the work, but do your own research from the employer perspective.
Consider adopting a student intern policy that will guide your supervisors on how best to manage interns so the scope and nature of the assigned work and the oversight provided is appropriate for the circumstance.
Call the CBIA HR Hotline for a sample policy and further guidance.

HR problems? Email or call Mark Soycher at the HR Hotline (860.244.1900) | @HRHotline


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