Many employers allow students to intern in their workplaces so that the students can gain exposure to real world work, learn about a particular industry or career, or earn credit hours towards their degree requirements. If these interns are unpaid, however, employers risk liability for failure to pay minimum wage and overtime under the Fair Labor Standards Act (FLSA). Employers that enter into these arrangements without careful consideration of the FLSA risk lawsuits from former interns and United States Department of Labor (DOL) investigations.

Earlier this year, the DOL announced a new test to determine whether an unpaid intern is, in fact, an employee under the FLSA. Under the DOL’s previous guidance on internship programs, which were established during the Obama administration, six factors needed to be met for an intern who worked at a private, for-profit employer to be properly unpaid. Most notably, the employer that provided the training to the intern was not permitted to “derive any immediate advantage from the activities of the intern.” This factor was, in the eyes of many employers, unduly restrictive and narrowed the number of unpaid internships that employers could offer without violating the FLSA.

The DOL’s recent change in position is, in part, a response to a 2011 lawsuit filed by former unpaid interns. Two former interns at Fox Searchlight Pictures filed a lawsuit alleging that the company violated the FLSA by not paying them for work they did on the film “Black Swan.” The interns succeeded in district court, but the decision was reversed by the U.S. 2nd Circuit Court of Appeals, which found the DOL’s six-factor test for unpaid internships too rigid. The court established its own seven-factor criteria, which ultimately became the basis for the new DOL test.

In January of 2018, the DOL issued a seven-factor “primary beneficiary test” to determine whether an intern is an employee and therefore entitled to minimum wage and overtime under the FLSA. This new test allows courts to examine the “economic reality” of the intern-employer relationship to determine which party is the primary beneficiary of the relationship. If the employer is the primary beneficiary, the intern is an employee and must be compensated under the FLSA; if the intern is the primary beneficiary, the internship can be unpaid. The seven factors are:

  1. 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;
  2. 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;
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar;
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;
  6. 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
  7. 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.

Unlike the old test where an intern was classified as an employee if even one of the six factors was not met, none of the seven factors in the new test are dispositive. A court may even consider relevant evidence beyond the seven factors to determine how an intern should be classified. As a result, the unique circumstances of each case will determine whether an intern is an employee under the FLSA.

Although the DOL’s new test should broaden the number of internships that can be unpaid under the FLSA, misclassified unpaid internships can generate significant liability for employers.  But careful consideration and implementation of the seven factors can reduce or even eliminate the risks associated with these arrangements.