Unpaid internship programs at companies are fairly common, and, for startups with little on-hand cash, the idea of securing free labor may sound appealing. However, a lawful unpaid internship program requires more than hiring people to do work and not paying them. This article breaks down the benefits, risks and legal requirements of unpaid internship programs, provides tips for structuring the internship program and offers a few alternatives to unpaid internship programs.

A startup may want an unpaid internship program for a variety of reasons. The program could be a means of recruiting and promoting the company, a great way to network and another avenue for securing additional staff while avoiding the expense that accompanies hiring new employees. However, unpaid internship programs also include significant legal risk if a company is not careful. If the unpaid interns are actually acting as employees, a company runs the risk of costly employment lawsuits or government penalties.

The most important factor with an unpaid internship program is the classification of individuals as unpaid interns, and not employees. If the individual is functioning as an employee, a company will be required to pay the individual at least minimum wage, and will need to follow all other employment laws (including overtime, paid rest breaks and unpaid meal periods).

Both US federal and state laws and regulations govern the classification of employees. In order to avoid the employee classification, federal employment law requires the following:

  • The internship must be primarily for the benefit and education of the intern, not for the benefit of the company.
  • The internship must be similar to the training the individual would receive in an educational environment, although the internship can also include work that a company traditionally performs, as long as the work is for training or educational purposes.
  • Interns should not displace regular employees (or headcount), and should work under the close supervision of employees.
  • Interns must not be entitled to an employment position at the conclusion of the internship.
  • A company must derive no immediate economic advantage from interns’ work. In fact, the time and resources necessary to train and supervise interns may impede a company’s work and efficiency.
  • Both the interns and the company must clearly understand that the interns are not entitled to wages for the time spent in training.

Some state laws (such as those in California) apply very similar standards to the aforementioned federal requirements in determining if an individual is an employee or an intern. However, other state laws apply more stringent standards in considering the bona fides of an unpaid internship. For example, New York state law also requires that (i) an unpaid intern receives no employee benefits, (ii) the type of work is applicable to any similar business and is not unique to the company, (iii) the screening process is not the same as for employment and (iv) all advertisements for an internship clearly discuss education or training rather than employment. Massachusetts law generally forbids unpaid internships. In Massachusetts, interns must be paid at least minimum wage unless they are participating in a training program for a charitable, educational or religious institution.

A company needs to consider both federal and state employment laws  in each state in which a company plans to offer unpaid internships.

If a company determines that offering unpaid internships is beneficial and appropriate, and can meet the federal and applicable local criteria, then the company should consult with counsel and consider the following tips to keep interns from being classified as employees.

  • Develop Specific Program Materials and Offer Letters for Internship Program: Companies should develop specific program materials for the internship program — including brochures, advertisements, training manuals and course materials — to increase the likelihood that individuals’ classifications as unpaid interns and not employees are legitimate. Additionally, a company should have separate forms of offer letters for unpaid interns and employees, both letters clearly identifying the terms of engagement.

    Both the program materials and offer letters should include specific language to the effect that the internship program is designed as an educational experience, does not guarantee an offer of employment and that an intern will not be paid.
  • Work with Colleges and Universities: Developing and coordinating an internship program with colleges and universities will also increase the likelihood that the individuals a company hires will qualify as unpaid interns and not employees. Coordinating with educational institutions shows that an internship program’s primary purpose is to advance an intern’s education and training.

    Furthermore, ideally interns would receive educational credit for an internship from a college or university, and that college or university would exercise some oversight on the internship program.
  • Differentiate the Work of Interns and Employees: As previously discussed, a company should avoid any effort to derive direct and immediate benefit from an unpaid intern. This means that a company should avoid routinely engaging an intern in any type of project or administrative work that is similar to the duties and responsibilities of a regular employee.

    Instead, a company should focus on giving an unpaid intern a broad-based experience, and emphasizing the skills and knowledge the intern is gaining. If an unpaid intern works in a narrow capacity, he or she should also receive close supervision and training, preferably related to the unpaid intern’s area of study. Any productive work should be incidental to the intern gaining knowledge and experience.

    Regardless of an unpaid intern’s scope of work, supervision is an important area of focus to avoid the classification of employee. Rather than giving interns the same type of supervision as regular employees, a company should provide interns with opportunities to shadow regular employees under close supervision, allowing interns to gain specific skills and knowledge.

While determining the details of an internship program, anything a company can do to differentiate the experience and work of an intern from that of an employee, and to structure the internship program with specific guidelines, the more likely the individual will qualify as an unpaid intern.

If the criteria discussed in this article seems too burdensome to follow, or if a company simply wants to avoid the risk that comes with unpaid interns, then the safest alternative is to hire paid interns or temporary employees. If a company hires paid interns or temporary employees it must comply with the applicable wage and hour and tax laws. Hiring individuals in this manner may not only be less risky, but may also attract more qualified candidates.

Properly designing an internship program and deciding how to classify the individuals a company hires (whether as unpaid interns or employees) is both a fact- and law-intensive exercise. A company looking to go down this road should contact counsel for assistance in designing the internship program and deciding whether interns should be paid or unpaid.

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