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Internship Programs Face Increased Regulatory Scrutiny

May 20, 2010
Related Topics: Staffing and the Law, Wages and Hours, Featured Article
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At this time of year, many firms take on interns, typically undergraduate students who perform a variety of tasks for the company. In many instances, these interns are unpaid or receive only a modest stipend. With the recent economic downturn, more companies than ever are tempted to use unpaid interns to supplement their existing paid workforce.

In recognition of that reality, the U.S. Department of Labor has recently announced that it will be stepping up enforcement efforts in this area. To that end, the DOL issued a fact sheet in April reminding employers that interns must be paid in accordance with federal law, unless the strict requirements of a six-part federal test are satisfied. Although the federal test is not new, employers that either have unpaid internship programs or are contemplating instituting such programs should examine the program carefully and assess whether it would be able to withstand increased regulatory scrutiny.

This article examines the applicable federal test and offers practical guidance for how that test is likely to be applied in the current regulatory environment. Employers should also be aware that state regulation in this area may impose additional restrictions, and that the applicable state and local laws for the employer’s location should be carefully vetted as well.

The Department of Labor test
The Labor Department applies a six-factor test in determining whether an intern is an “employee” for purposes of the Fair Labor Standards Act. That test reads as follows:

1. Whether the training is similar to that which would be given in a vocational school;

2. Whether the training is primarily for the benefit of the intern;

3. Whether the intern does not displace regular employees, but instead works under their close observation;

4. Whether the company derives immediate advantages from the activities of the interns, and whether on occasion its operations might actually be impeded;

5. Whether the intern is necessarily entitled to a job at the conclusion of the training period; and

6. Whether the company and the interns understand that the interns are not entitled to wages for the time spent in training.

The DOL’s position is that all six of the above criteria must be met for an individual to be considered an intern. Especially in light of the increased scrutiny the Labor Department has recently given to this issue, the prudent employer should strive to have a program that meets all six criteria.

 Compliance issues and recommendations
The following are tips for maximizing the likelihood that your intern program will be considered to be in compliance with each component of the six-part test set forth above:

1. Training similar to vocational school: If the intern receives training in the types of skills or intellectual prerequisites for success in your field, it will enhance the likelihood that you will satisfy this criterion. For example, it would be helpful to hold periodic internal seminars or colloquia for the benefit of the interns. Certainly, if the internship is conducted in conjunction with an academic program for which the intern is required to write a paper or provide periodic written reports, this will further aid in satisfying this aspect of the test. However, if the intern is mainly performing basic clerical work—such as answering phones and handling mail—this would not be characteristic of vocational school training. The DOL’s recent fact sheet stresses that the intern should be learning skills that can be applied in multiple employment settings, and not merely being trained in the employer’s specific operations.

2. Training for the benefit of the intern: There must be some indication that the intern is benefiting from the program, in terms of training, exposure to the industry and contacts for potential job opportunities. If your interns are earning academic credit, this criterion is more likely to be satisfied. The focus of the internship should not be on the free labor that the intern is providing. Rather, the focus should be on the educational benefit to the intern. Communications to the intern should stress the value of the program to them, not how valuable they are to your business. Fairly or unfairly, your communications to the intern could convey the erroneous impression that the program is primarily for the company’s benefit.

3. Interns do not displace regular employees, but rather work under their close supervision: If interns are involved with tasks such as answering phones, handling or delivering mail and other clerical activities, it could be perceived that they are lightening the workload of existing paid employees. If the intern is working under the close supervision of an employee who is taking time out from his or her own work to monitor the intern, then displacement is less likely to be found. A further aid in satisfying this component of the test would be to assign someone for the intern to shadow, for at least a portion of the intern’s day, for the purpose of learning aspects of the business. The DOL has recently emphasized that if the intern receives the same level of supervision as the employer’s regular workforce, then this would be suggestive of an employment relationship, rather than education or training.

4. The company derives no immediate advantage from the intern’s activities, and on occasion operations may actually be impeded. This component of the test is similar to items 2 and 3 discussed above. If the company is primarily utilizing the interns to get needed work accomplished, it looks like it is deriving an immediate economic advantage from the intern’s presence. Instead, to satisfy this component, there should be more of an emphasis on the learning opportunity for the intern, the training afforded by the company and an indication that the company is committing some of its scarce resources to such training, perhaps to the short-term detriment of the company’s operations.

5. Interns are not necessarily entitled to a job at the conclusion of training: In many instances, the intern hopes that the experience will lead to a position with the company. Understandably, many companies view the internship program as a low-risk opportunity to evaluate potential candidates for full-time employment. While it is not impermissible to give consideration to your interns when assessing your employment needs, there should be no guarantee of employment at the end of the internship. This should be clearly communicated to the intern at the commencement of the program.

6. Interns understand they are not entitled to wages: This final part of the test is self-explanatory. The best practice would be to set forth this understanding in a written disclaimer as part of an introductory letter to the intern that describes the nature of the program.

To avoid misunderstandings and enhance the likelihood that your internship program will survive scrutiny by the DOL test, the best practice would be to provide the intern with a written description of the program at the outset of the internship.

The written description should emphasize the benefit to the intern, the training afforded by the program and stress the fact that the internship is either unpaid or accompanied by a small stipend to cover expenses. The consequences of a finding of noncompliance by the DOL could be considerable, depending upon the size of your internship program. Your company could end up owing back wages, including possible overtime pay, to all of its interns. Because of the technical nature of the DOL test, and the possible overlay of state and local regulation in this area, it is best to seek the advice of knowledgeable employment counsel when structuring and implementing your company’s internship program.

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The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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