To Pay or Not to Pay

The issue of whether interns must be paid is governed by both federal and state law. From a federal law perspective, the Fair Labor Standards Act (FLSA) governs the issue of payment to interns.

At the state level, each state has its own set of laws that govern how and when employees, including interns, must be paid. While some of these laws mirror the FLSA, there can be significant differences between state law and the FLSA in this regard. Employers are required to adhere to whatever law is more beneficial to the intern/employee.

The issue of whether an intern must be paid for the internship has been subject to numerous legal tests over the past 50 years. At present, the applicable legal test is called the primary beneficiary test. Pursuant to the primary beneficiary test, if the employer is the primary beneficiary of the internship, then the intern must be paid. On the other hand, if the intern is the primary beneficiary of the internship, then the internship can 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. These 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.

In light of the foregoing, in order for an internship to be unpaid, it must be deemed for the primary benefit of the intern, not the employer.

If an internship is paid, the intern must be classified as an employee under the FLSA and state law. (Note: In general, the converse is also true: The unpaid intern is not classified as an employee under FLSA or state law). Consequently, with respect to paid interns, the employer must comply with all federal and state law requirements governing employees—hours of work, minimum wage, overtime, and so forth.

With respect to paid interns, if an employer fails to pay an intern properly, the intern can file a claim with the Department of Education (DOL) or equivalent state agency 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 with respect to the proper payment of interns. For example, under the FLSA, if an intern prevails with a 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 federal and state wage and hour law with respect to interns can be a very costly mistake.

Internships for Credit and Pay

There are no legal prohibitions regarding the payment of interns who are also receiving credit from their schools for the internship. Internships can be both for credit and pay.

The issue of credit being offered for internships is controlled by the educational institution. Educational institutions must develop the criteria and reporting requirements necessary for an intern to receive credit(s) for the internship.

Whether the internship is paid, on the other hand, is typically controlled by the organization offering the internship. While there is no law that restricts getting both pay and credit, it is worth noting that the receipt of credit for the internship is a factor that will almost always support an unpaid internship pursuant to the primary beneficiary test. Remember, however, the credit factor is just one of many that must be considered in this regard. Regardless of the credit issue, if the other factors in the primary beneficiary test suggest that the employer is the primary beneficiary of the internship, the internship must be paid.

Federal Work Study Funds and Internships

Pursuant to the federal regulations governing Federal Work Study (FWS) programs, a student may be employed under the FWS program by 1) the institution in which the student is enrolled; 2) a federal, state, or local public agency; 3) a private nonprofit organization; or 4) a private for-profit organization.

Educational institutions are permitted to use FWS funds to pay interns for work performed at an internship provided that all of the other requirements of the FWS are met.
To this end, a student can earn both FWS funds and academic credit if enrolled in an internship or practicum, or if employed in a research, teaching, or other assistantship position. For students employed in a FWS position who are also receiving academic credit for the work performed, the educational institution must ensure that the following requirements are met:

• The student cannot be paid less than they would normally be paid for the work if they were not receiving credit;
• The student cannot be paid for receiving classroom, laboratory, or other academic setting instruction; and
• The student cannot be paid unless the employer/institution would normally pay someone else to do the work being performed by the student.

For students employed pursuant to the FWS program, the educational institution must enter into a written agreement with the employing agency/organization. The written agreement must set forth the FWS work conditions. The agreement must indicate whether the educational institution or the agency/organization will pay the student.

• When the employer is a government agency or nonprofit organization, the written agreement may require the employer to pay 1) the nonfederal share of the student earnings and 2) the required employer costs, such as the employer's share of Social Security or workers' compensation.
• When the employer is a for-profit organization, the written agreement must require the employer to pay the nonfederal share of the student earnings.

The educational institution is responsible for ensuring that payment for the work performed under each agreement is properly documented and that each student’s work is properly supervised.

Regardless of the student's employer, the student's work must be governed by employment conditions, including pay, that are appropriate and reasonable in terms of type of work; geographic region; employee proficiency; and any applicable federal, state, or local laws.

FWS employment may not:

• impair existing service contracts;
• displace employees;
• fill jobs that are vacant because the employer's regular employees are on strike;
• involve the construction, operation, or maintenance of so much of any facility as is used or is to be used for instruction that is predominantly devotional and religious or as a place for religious worship, except to the extent that excluding such work would impose a substantial burden on a person's exercise of religion; or
• include employment for the U.S. Department of Education.

Interns and Unemployment/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 governed by state-specific laws. In general, however, in order to collect unemployment, one must first be an employee. Because unpaid interns are not employees, they cannot receive worker’s compensation at the conclusion of an internship (unless they were improperly classified and should have been paid as an employee based on the primary beneficiary test).

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.

Similarly, workers’ compensation is also generally tied to an individual’s employment status (although this issue will be governed by the law of the state where the internship occurs). As such, if an intern is unpaid and therefore not an employee, the intern is unlikely to be entitled to workers’ compensation in the event they are injured while at work. In this regard, 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 an educational institution, the institution may be required to provide insurance coverage to the student for workplace-related injuries. It is imperative for educational institutions to understand their state-specific legal requirements regarding workers’ compensation when participating in an internship program.

Notwithstanding the foregoing, if an intern is injured while at work, it is critical that the intern report the injury to the business and the educational institution. Reporting the injury is key to preserving the intern’s right to workers’ compensation coverage (if any). 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, the intern’s financial recovery for the injury will be limited to workers’ compensation benefits.

Workplace Safety and Negligence

Another question that needs to be answered pertains to providing a safe working environment for an intern: Is the business or educational institution responsible for addressing workplace safety concerns?

All employers must comply with state and federal workplace safety laws requiring a healthy and safe workplace for all employees and interns. In this regard, the Occupational Safety and Health Administration (OSHA) provides and enforces workplace health and safety standards for most employers.

If any worker (employee or intern) feels that there are issues with health or safety practices in the workplace, the worker can contact OSHA to raise these concerns. If a worker files a complaint with OSHA, the worker is protected from retaliation by the employer.

In addition to the legal requirements imposed upon employers, an educational institution and an employer may have contractual obligations to provide a healthy and safe workplace and to address safety-related concerns for employees and interns. In this regard, if an educational institution is sponsoring an internship at a business, it is recommended that a written agreement be entered into between the parties to address all potential legal issues that may arise, including workplace safety issues. The agreement should specifically identify who is responsible for addressing safety issues and dangerous or hazardous conditions and provide indemnification language for either party if a claim is made due to the negligent or willful actions of the other party.

Even with such a written agreement, an educational institution may still have potential liability if a student intern is exposed to a dangerous or hazardous condition at a workplace where the educational institution was made aware of the condition but took no action to remedy the condition and/or protect the student from being exposed to the condition. For example, if an educational institution is notified that multiple assaults have occurred at a workplace but continues to send its students to the workplace as part of an internship, the educational institution may be subject to a claim for negligence as a result of its actions.
Accordingly, if an educational institution is made aware of a potential safety issue at a workplace where its students are interning, it should take steps to ensure the safety issue is remedied. Such steps may be as simple as notifying the workplace of the potential concern and demanding that it be promptly addressed. If the educational institution is sponsoring or significantly involved in the internship, it may have an obligation to terminate the relationship with the employer to prevent any future claims for negligence in the event a student is harmed or injured.

Discrimination and Harassment

Similar to safety concerns for interns, there are legal protections afforded to individuals in the workplace who believe they are being subjected to harassment or discrimination. In this regard, both federal and state statutes provide protections for employees to be free from discrimination and harassment in the workplace. As such, an intern will likely be able to pursue a harassment or discrimination claim against an employer only if the intern is deemed an employee.

As explained above, unpaid interns are generally not considered “employees” for purposes of the FLSA because they do not receive compensation for the work performed. Consequently, in order to be a covered “employee” under federal and state antidiscrimination/harassment laws, the intern will likely need to establish that he or she was paid by the employer.

According to the U.S. District Court for the Eastern District of Pennsylvania in Payne v. Prevention Point Phila., Inc., an unpaid intern was not an employee and therefore was not provided the discrimination/harassment protections afforded by Title VII. In so ruling, the court stated that “most federal appeals courts to address the issue have applied a ‘threshold-remuneration test,’ which requires an [intern] to receive substantial compensation from the organization in order to be considered an employee.” (Emphasis added.)

The Payne court held that in order to determine whether an individual is an employee for purposes of Title VII, certain factors must be reviewed. These factors include the level of control the business exerts over the intern, whether compensation is paid, and who has control over the intern’s daily 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.

The question is more complicated when the intern 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 be sufficient to establish employee status. For example, free training and educational opportunities, such as a corporate leadership course, may establish an employer/employee relationship. Further, at least one court has found that when an intern was provided with a “clear pathway to employment” as a result of her position as an intern, she could establish an employment relationship under federal antidiscrimination laws. Accordingly, if an intern can establish that some form of remuneration was provided, a court may find that the intern is protected under federal and state antidiscrimination laws.

Because employment status is a legal determination that will ultimately be determined by a court, it is recommended that all employers address complaints of harassment or discrimination made by interns, both paid and unpaid, in the same manner they would address a similar complaint made by a regular employee. To this end, if a business becomes aware of a complaint of harassment or discrimination made by an intern, it should investigate the complaint and take prompt and appropriate corrective action if the complaint is deemed to have merit. Failure to do so may expose the employer to significant potential legal costs and liability.

An educational institution also has potential responsibility to address issues of harassment and discrimination in an internship. Similar to the workplace safety issue, if the educational institution is aware of a harassment or discrimination issue involving an intern and continues to send the student to the internship, the educational institution may have potential negligence liability to the student (or to other students sent to the same employer). Additionally, the educational institution may have an obligation under Title IX to address issues of harassment and discrimination that have occurred in an internship.

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 include, but are not limited to, providing the student with information on the applicable laws, assisting the student with making a complaint, or contacting local law enforcement depending on the severity of the allegations.

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 deemed employees, may be unable to satisfy the other legal requirements to be entitled to leave. For example, under the FMLA, an individual must work 1,280 hours in the prior 12 months to be eligible for FMLA leave. Because it is highly unlikely that an intern would have worked the requisite number of hours to qualify for FMLA leave, this is an issue that most employers will probably not encounter with interns.¹

In light of the foregoing, interns, both paid and unpaid, will need to look to the employer’s policies to determine if they are eligible for sick time or unpaid leave during the internship.

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

Employment Agreements

Although not a standard practice across all industries, some employers require interns to sign some form of an employment agreement at the commencement of the internship.² 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 will likely be difficult to enforce many restrictive covenants against 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, will also be difficult to enforce against an intern unless the employer can demonstrate that the intern had significant contact or exposure to the organization’s clients during the internship.

Conversely, confidentiality and/or nondisclosure agreements will likely be enforceable against interns. To this end, employers may want to require such agreements with interns if they have access to the employer’s confidential, proprietary, or trade secret information. Unlike other restrictive covenants, a nondisclosure agreement does not restrict the intern’s ability to obtain work upon the termination of the internship. It simply protects the employer’s confidential information.

As interns may be provided with access to an employer’s confidential business information during the course of the internship, many employers require an intern to sign nondisclosure agreements to protect their interests. 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 and enforceable.

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As noted above, there are significant potential legal issues for educational institutions and employers if internships 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 organization with access to potential employees for the future.

Endnotes

¹ Applicable state family and medical leave laws generally have similar requirements.

² In this event, it is likely the intern will be deemed an “employee” of the employer.