NACE Journal, February 2022

Since March of 2020, colleges, employers, students, and employees have been focused on properly handling the COVID-19 pandemic. The pandemic has caused employers and individuals to alter the way they operate, both as businesses and as workers.

Businesses shifted to remote working arrangements, permitted flexible schedules, and attempted to accommodate employees as best they could to continue to operate.

Individuals had to deal with the ever-changing work requirements—social distancing, mask or no mask, and vaccine mandates—while also, for many, supervising remote-learning children. To say the least, it has been an interesting two years.

While dealing with all of the new, confusing, and sometimes controversial issues, employers and individuals cannot forget that there are still other laws that remain applicable and may impact businesses and the people who work for them on a daily basis.

One significant issue that was at the forefront of everyone’s mind not that long ago was the treatment of interns. While the focus in the mid- to late 2010s was on unpaid interns, issues related to interns as a whole were being addressed by the legal system, both by court decisions and by political action. Starting around 2011, unpaid interns were filing lawsuit after lawsuit against employers, alleging that they were being misclassified under the applicable law and were entitled to pay for the hours of work they had performed. As a result of these lawsuits, employers paid the unpaid interns significant amounts, either by settlement or court decisions. It was at this time that the U.S. Department of Labor (DOL) issued a new test that significantly limited the ability of employers to use unpaid interns. As will be discussed more fully in this article, while the lawsuits have diminished since then, employers need to be mindful of how they treat interns (both paid and unpaid) and interns need to understand the protections they are afforded by law.

FLSA and Intern Pay

The issue of whether to pay interns is governed by state and federal law. From a federal law perspective, the Fair Labor Standards Act (FLSA) provides the legal standards businesses must comply with when paying employees. The FLSA generally applies to employees employed by businesses with annual gross volume of sales made or business done of at least $500,000.

One of the questions that often arises is whether the FLSA applies to nonprofit charitable organizations. Nonprofit entities are covered by the FLSA if they engage in ordinary commercial activities that result in sales made or business done, such as operating a gift shop or providing veterinary services for a fee.

In addition to the FLSA, each state has its own set of laws that dictate how and when employees are paid. While some of those laws mirror the FLSA, there can be significant differences between state law and the FLSA. Employers are required to adhere to whatever law is more beneficial to the individual. For example, if a state law requires employers to pay employees for de minimus waiting time, but the FLSA does not, the employer would be required to adhere to the state law as it is more beneficial to the employee.

In the early 2010s, the DOL implemented a six-part test for interns, but, in January 2018, it eliminated the six-part test in favor of the primary beneficiary test to determine if an internship can be unpaid. Under the primary beneficiary test, if the company is the primary beneficiary, then the internship must be paid. If the student is the primary beneficiary, then the internship may be unpaid.

The primary beneficiary test does not include a rigid set of requirements; rather, it provides a nonexhaustive list of factors to determine who is the primary beneficiary of the internship. The factors include:

• The extent to which the intern and the employer clearly understand that there is no expectation of compensation;
• 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 an educational institution;
• 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; and
• 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.

No matter what, in order for an internship to be unpaid, it must be for the benefit of the student, not the employer.

If an internship is paid, the individual is an employee under the FLSA and likely under state law. (Note: In general, the converse is true: The unpaid intern is not an employee under FLSA.) As such, the intern must be paid at least minimum wage, which varies depending on the state, and an overtime rate of time and a half the intern’s regular rate for any hours worked over 40 in a workweek. Although there are exemptions to the general overtime rule, i.e., administrative, executive, or professional exemptions as defined by the FLSA, such exemptions are unlikely to apply to an internship as the individual would not be provided with the responsibilities or duties necessary to satisfy the standards.

In terms of paid interns, if an employer fails to pay an intern properly, the intern can file a claim with the DOL or file a lawsuit against the employer. Employers must be mindful that there is significant potential liability for failing to adhere to the FLSA and state laws. Under the FLSA, if an intern prevails with their claim, the intern would be entitled not only to the money that should have been paid but also can be awarded both liquidated damages and attorneys’ fees. Accordingly, failing to adhere to a wage and hour law is a costly mistake.

Interns and Unemployment and Workers’ Compensation

Two additional issues that arise for internships are the individual’s entitlement to unemployment compensation and workers’ compensation.

Both unemployment and workers’ compensation are state-specific laws, but there are some general standards that can be addressed. In general, in order to collect unemployment, one must first be an employee. Unpaid interns are not employees, so regardless of the situation, an unpaid intern is unlikely to be awarded unemployment compensation at the conclusion of an internship.

Additionally, to be eligible for unemployment compensation, an individual must be “able and available” for work. As a practical matter, interns, as college students, are usually not available for work at the conclusion of an internship as they must return to college. Accordingly, it is unlikely that interns, whether paid or not, will be able to collect unemployment benefits at the conclusion of an internship.

It may differ from state to state, but workers’ compensation is also generally tied to an individual’s employment status. As such, if an intern is unpaid and therefore not an employee, it may impact that person’s entitlement to workers’ compensation in the event they are injured while at work. However, if an internship is unpaid and tied to the educational experience, i.e., the student is receiving credit for the internship or it is sponsored by a college, the educational institution may be required to provide insurance coverage to the student for workplace-related injuries. It is imperative that a college understands its state-specific legal requirements when participating in such an internship program.

Regardless, if an intern is injured while at work, it is critical that the intern report the injury to the business and potentially to the college. Reporting the injury is key to preserving one’s right to workers’ compensation coverage. Once a business becomes aware of a workplace injury, regardless of whether the intern is paid or unpaid, it should report the injury to its workers’ compensation carrier to ensure that coverage is provided if applicable. If workers’ compensation is applicable in a given circumstance, that alone provides the recovery mechanism for any workplace injuries.

Workplace Safety and Negligence

Another question that needs to be answered pertains to providing a safe working environment for an intern—and whether the business or educational institution is responsible for addressing workplace safety concerns.

From an employer’s perspective, a business must comply with state and federal workplace safety laws, and providing a healthy and safe workplace for workers is imperative. The Occupational Safety and Health Administration (OSHA) provides and enforces workplace health and safety standards for most employees.

If a worker feels that there are issues with health or safety practices in the workplace, they can contact OSHA to address the concerns. If a worker files such a complaint with OSHA, they are protected from retaliation by the employer. Since the start of the pandemic, additional resources have been allocated to OSHA to investigate and address workplace concerns. Accordingly, regardless of whether an intern is paid or unpaid, a business has a responsibility to comply with OSHA standards and any state-specific laws.

In addition to the requirements set by law on a business, a college and an employer may have contractual obligations to provide a healthy and safe workplace and to address safety-related concerns. In this regard, if a college is sponsoring an internship at a business, it is recommended that a written agreement is entered into between the parties to address potential legal concerns that may arise. One such concern would be the need to address safety issues and dangerous or hazardous conditions. The agreement should specifically identify who is responsible for addressing such issues and provide indemnification language for either party if a claim is made due to the negligence or willful actions of a party.

Even with such a written agreement, a college may still have potential liability if a student intern is exposed to a dangerous or hazardous condition at a workplace if the college is made aware of the issue and takes no action to prevent a student from being exposed to the condition. For example, if a college is notified that multiple assaults have occurred at a workplace but continues to send students to the workplace as part of an internship, the college may be subjected to a claim for negligence as a result of its actions.

Accordingly, if a college is made aware of a potential safety issue at a workplace, it should take steps to ensure the issue is remedied. Such steps may be as simple as notifying the workplace of the potential concern. If the college is sponsoring or significantly involved in the internship, it may have an obligation to terminate the relationship with the workplace to prevent any future claims for negligence in the event a student is harmed or injured.

Discrimination and Harassment

Similar to safety concerns, there are legal protections afforded to individuals in the workplace who believe they are being subjected to harassment or discrimination. As it pertains to employers and employees, both federal and state statutes provide protections for individuals to be free from discrimination and harassment in the workplace. To address this issue, however, we must go back to the beginning as the key inquiry is whether the intern is an employee who is afforded the protections of the appliable laws.

To be protected by federal anti-discrimination/harassment laws, such as Title VII, the Americans with Disabilities Act and the Age Discrimination in Employment Act, an individual must be classified as an “employee.” As noted earlier, in general, unpaid interns are not considered “employees” for purpose of the FLSA as they do not receive compensation for the work performed. Similarly, in order to be a covered employee under anti-discrimination/harassment laws, the intern must be provided with substantial compensation.

This was recently addressed in June 2021, in the case of Payne v. Prevention Point Phila., Inc. In Payne, the United States District Court for the Eastern District of Pennsylvania found that an unpaid intern was not provided the protections afforded by Title VII because he was not an employee of the company. In so ruling, the Court stated that “most federal appeals courts to address the issue have applied a ‘threshold-remuneration test,’ which requires a volunteer to receive substantial compensation from the organization in order to be considered an employee.”

The Court went on to state that in order to determine whether an individual is an employee for purposes of Title VII, certain factors must be reviewed. These include the level of control the business exerted over the intern, whether compensation was paid, and who had control over daily employment activities. The Court noted that the foregoing factors suggest, as other courts have decided, that compensation or remuneration is a threshold requirement to qualify as a Title VII employee. In this case, because the intern did not receive any compensation or consideration, he was not an employee under Title VII and the lawsuit was dismissed. Other courts have made similar determinations.

Regardless of the issues presented, the key inquiry is generally whether there was remuneration provided to the intern in exchange for services. The question is what happens when the individual is not provided with pay but with other types of compensation. Courts have stated that nonfinancial benefits that create or relate to career opportunities may suffice. For example, free training and educational opportunities, such as a corporate leadership course, may establish an employer/employee relationship when the individual can demonstrate an economic dependence upon the training and not a mere pleasure from the “compensation.” Further, at least one court has found that when a volunteer was provided with a “clear pathway to employment” deriving from her position as a volunteer, she could establish the plausibility of an employment relationship under federal anti-discrimination laws. Accordingly, if an intern can establish that some form of remuneration for their services was provided, a court may find that the intern is afforded protections under federal and state anti-discrimination laws.

As the issue of whether an unpaid intern will be classified as an employee is a legal determination that may ultimately be made by a court, it is recommended that businesses address any complaints of harassment or discrimination made by interns, both paid and unpaid, in the same manner they would a similar complaint made by their regular employees. If a business becomes aware of a complaint of harassment or discrimination, it should investigate the complaint and take prompt action to remedy the concerns if founded. Failure to remedy the issue will likely expose the employer to legal costs and potential liability.

An educational institution also has potential responsibility to address issues of harassment and discrimination in an internship. As noted previously, if a college is aware of a safety issue, which may include issues of harassment in the workplace, and continues to send a student to a sponsored internship, it may constitute negligence and expose the institution to a claim. Additionally, the educational institution may have an obligation under Title IX to address issues of harassment and discrimination that have occurred in an internship. (Note: Title IX is a federal civil rights law that prohibits discrimination on the basis of sex in education programs and activities. All colleges and universities receiving any federal funds must comply with Title IX. Under Title IX, discrimination on the basis of sex can include sexual harassment or sexual violence, such as rape, sexual assault, sexual battery, and sexual coercion. If an internship is sponsored by an educational institution covered by Title IX, it may constitute an “educational program or activity” under the statute. As such, if the educational institution receives a complaint of harassment or discrimination arising from the internship, it must follow the requirements set forth in Title IX or face potential liability.)

Even if a claim or complaint is not covered by Title IX, if a college or university is made aware of an issue of harassment or discrimination at an internship, it should take all possible steps to protect its students. These steps may include, but are not limited to, providing the students with information on the applicable laws; assisting the student with making a complaint; or, depending on the severity of the issue, contacting local law enforcement.

Interns and Medical Leave

What happens if an intern becomes ill during the internship? Is the intern provided with any legal protections, and is the business or college required to provide leave to the individual?

There are certain laws—such as the Family and Medical Leave Act (FMLA)—that provide designated leave to employees, but again, the key word is “employee.” Unpaid interns are not likely to be covered employees under federal law. Similarly, state laws that provide both paid and unpaid leave are generally only provided to employees.

Paid interns, though likely covered by the pertinent leave laws, are unlikely to satisfy the requirements to be entitled to leave. For example, under the FMLA, an individual must work 1,280 hours in the prior year to be eligible for the leave provided by the act. It is highly unlikely that an intern would have worked the requisite number of hours and therefore would not be entitled to such leave. Applicable state laws generally have similar requirements.

Accordingly, interns, both paid and unpaid, should look to the employer’s policies to determine if they are eligible for sick time or unpaid leave and to determine how any such leave is provided.

From a college standpoint, there is generally no legal requirement to provide interns with paid leave from an internship at a third-party location.

Employment Agreements

The final issue we address here is the use of employment agreements with student interns. Although it is not a standard practice across industries or the country, some employers do require interns to sign some form of an employment agreement at the commencement of the internship. Such agreements may provide the scope of the intern’s duties, along with the inclusion of restrictive covenants. By way of example, restrictive covenants may include noncompete, nonsolicitation, or nondisclosure provisions.

The requirements for valid restrictive covenants vary by state. For example, in California, noncompete and nonsolicitation agreements are per se illegal. In other states, the provisions need to meet stringent tests to be enforceable. If an employer presents an intern with an employment agreement, the intern should have an attorney, or at a minimum, career services review the agreement and discuss any concerns.

Employers must be mindful that even if restrictive covenants are permissible in their state, it is highly unlikely a court will deem certain provisions necessary when it relates to an intern. In this regard, noncompete provisions, which prohibit an individual from working in a designated industry for an identified period of time, are unlikely to be enforced against an intern. Similarly, nonsolicitation of customer provisions, which prohibit an individual from doing business with identified customers for a period of time, may not be necessary for an intern, unless an employer can demonstrate that the intern had significant contact or exposure to clients during the internship.

Conversely, a nondisclosure agreement may not only be enforceable against an intern, but organizations would be advised to have interns execute such a document, depending on their role within the organization. A nondisclosure agreement prohibits an employee or intern from disclosing an organization’s confidential and/or proprietary information to third parties during both the tenure of employment and after termination. As such, the individual agrees not to reveal anything the company considers confidential, e.g., customer lists or research and development plans. Unlike other forms of restrictive covenants, a nondisclosure agreement does not restrict an individual’s ability to obtain work upon the termination of employment, but merely protects an employer’s proprietary information.

As interns may be provided with unlimited access to an employer’s business, a company may have an intern sign a nondisclosure agreement to protect its interests. In general, it is recommended that employers have interns sign such agreements during an intern orientation period and thoroughly explain the document to them prior to execution. Provided the nondisclosure agreement is not overly broad and is explained to an intern prior to execution, a court will likely find such an agreement valid.

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As we have noted, there are significant potential issues for internships if they are handled improperly. If handled properly and in accordance with the law, however, internships can provide the student with valuable knowledge and experience and provide the business with access to potential employees of the future.