Is an unpaid internship illegal? Find out

are unpaid internships illegal

Eric Glatt worked as an unpaid intern for Fox Searchlight Pictures on the Black Swan movie. In 2012 he sued the company, saying he should have been paid per the Fair Labor Standards Act (FLSA). Fox disagreed. Originally, Glatt won a summary judgement in 2013 when a judge determined that Fox “received benefits of the interns’ unpaid work” and thus the interns should have been paid. But are unpaid internships always illegal?

Not necessarily. According to the Society for Human Resource Management (SHRM), an internship is “work by an intern for free or for the applicable minimum wage in exchange for exposure to, and training in, a particular field of work.” But how do you know if you should pay your intern(s) or not?

It might seem easy to take advantage of interns, generally they are young and inexperienced. It can feel like a win-win, interns have the opportunity to get valuable, real-world employment experience, specialized training or education and networking opportunities, and have the potential to be hired full-time after internship is complete. As an employer, you get free or cheap labor instead of having to hire a regular employee. But this could present a lot of challenges for employers trying to figure out what they should do.

What’s the big deal?

We can look back at Glatt v. Fox Searchlight Pictures Inc. to see how complicated the issue can be. After the interns victory, Fox quickly appealed and the U.S. 2nd Circuit Court of Appeals in New York overturned the previous ruling. The Court found that the previous six criteria test was “too rigid.” The internship testcase instead revolved around whether the intern or the employer is the primary beneficiary of the relationship. In this case, the intern benefitted the most so Fox was not liable to pay. This case was one of the first to reexamine the intern-employer relationship.

In January 2018, the Department of Labor stopped using its six-part test to determine whether a worker was an intern or an employee, a rule that has been in place since 2010. The old rule “hinged on the idea that employers may derive “no immediate advantage” from the work performed by unpaid interns.” The DOL replaced that rule with the seven-factor “economic realities” test called the “primary beneficiary” test. Employers must use the seven factors to determine whether interns meaningfully contribute to your business. If they do, they are entitled to be paid at least the appropriate minimum wage.

How does the “primary beneficiary” test work?

The test is based on this primary question: who benefits most from this relationship (between an employer and intern) – the employer or the intern? If the employer is the primary beneficiary, the intern must be paid as an employee with at least the applicable minimum wage. If the intern primarily benefits from the relationship, the internship can be unpaid.

The seven factors to help determine who the “primary beneficiary” is include:

  • Both parties understand that the intern is not entitled to compensation.
    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.
  • The internship provides training that would be given in an educational environment.
    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.
  • The intern’s completion of the program entitles him or her to academic credit.
    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 internship corresponds with the academic calendar.
    The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  • The internship’s duration is limited to the period when the internship educates the intern.
    The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  • The intern’s work complements rather than displaces the work of paid employees while providing significant educational benefits.
    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.
  • The intern and the employer understand that the internship is conducted without entitlement to a paid job at the internship’s end.
    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.

See the DOL Fact Sheet here.

primary beneficiary internship test

Will this make it easier or harder to distinguish between interns and employees?

There is some debate as to whether this new rule will make distinguishing between interns more difficult and therefore opens them up to exploitation, or whether the old rule created an undue burden for employers to comply with. Fans of the new test have said the former 6-factor test was rigid, and this new law is more flexible. All six factors of the old test had to be met in order for a worker to be considered an intern instead of an employee (even if only one of the factors was met).

Distinguishing between employee and intern is not as easy as going through all seven factors and checking boxes. You can’t check the majority of the boxes on the list and then have a cut and dry answer. As the DOL says, “No single factor is determinative.” Employers must take into consideration the “totality of circumstances” in order to make the best and most informed decision.

This new test makes identifying interns a case-by-case process. Determinations might not be consistent across the same industries or even interns working with the same employer. The test also doesn’t necessarily lower the risk of lawsuits, or make distinguishing less ambiguous. Misclassifying interns is still a scary reality for employers. You should have a standard process in place, even if the even if the determinations/circumstances vary.

Some no-brainers:

  • Make sure your interns are age 18 or older. There are child labor laws.
  • Don’t discriminate based on age. Internships are not only for the young.
  • If you do pay interns the minimum wage, pay them the legal wage for your state or locality.