From the November 1997 issue of Entrepreneur

Your brainstorm about relieving your overworked employees without additional costs sounds flawless: Bring in some students from the local college as unpaid interns, promise them valuable experience and perhaps some college credit, and put them to work on routine chores. Better think twice, though, or you'll risk running afoul of the Fair Labor Standards Act (FLSA).

A public relations agency in Atlanta learned the hard way after billing clients for work performed by its interns. The U.S. Department of Labor investigated and found the agency had violated one of the six criteria for distinguishing interns from employees: The business must not gain immediate advantage from the interns' work. The Labor Department extracted a settlement requiring the agency to pay interns $31,520 in back wages and to pay current and future interns the federal minimum wage.

Donald T. O'Connor, an attorney with law firm Buchanan Ingersoll PC in Pittsburgh whose labor and employment law practice focuses on wage and hour issues, notes that interns can be ideal workers--hungry to learn, eager to make good impressions and willing to perform the most menial tasks. And an internship program gives your company a pool of potential employees who already know your business. "You can see how they perform and how they take instructions," O'Connor says. But, he adds, it's a mistake to think of interns as cheap labor.

Unless your internship program is essentially educational, your interns may look suspiciously like employees, who are entitled to the federal minimum wage. (The FLSA, which established the minimum wage and overtime requirements, applies to all companies with two or more employees and annual sales of at least $500,000.)

The Big Six

The Labor Department's Wage and Hour Field Operations Manual sets six criteria for distinguishing interns from employees:

1. Although the training might include equipment and procedures specific to this employer, it must consist primarily of experiences similar to those offered in a vocational school. It's not enough just to put the interns to work with supervision. For instance, when a snack-food distributor merely had interns help a driver service a regular route for a week, the Labor Department required the employer to pay them for the work.

2. The intern must not displace regular employees and must work under close observation. Farming work out to unpaid interns after a regular employee quits would raise a red flag.

3. The interns are not necessarily entitled to a job at the completion of the internship. If they are, the experience looks more like the training period at the start of a new job, for which they'd be entitled to fair wages.

4. Both the employer and the interns must understand that the interns are not entitled to wages for the time spent in training.

5. The training must be primarily for the benefit of the intern. That means, O'Connor says, that your interns can't just be making coffee, running errands or catching up on filing. Although such tasks might be incidental to the position, the majority of the experience must be designed with the intern's education in mind.

6. The employer providing the training must derive no immediate advantage from the activities of the intern, whose presence may on occasion actually impede the employer's operations. Although an internship program will benefit your business over the long term by providing a pool of trained applicants with familiar work habits, it's not meant to be a source of free labor.

Greater benefit

While the Labor Department closely adheres to its six criteria, courts tend to look at the spirit of the internship program as a whole. Is it basically an educational endeavor with side benefits for the business, or more like a job that trainees learn? Who benefits most from the arrangement? For instance, a fire department in Colorado required all job applicants who had passed a battery of tests to enroll in its firefighting academy for 10 unpaid weeks of training. Four firefighters later appealed to the Labor Department, claiming they should have been paid minimum wage for those 10 weeks.

The Labor Department sued the fire department, claiming that the academy didn't count as an internship because the trainees fully expected to be hired at the end of the training period. The U.S. District Court for the District of Colorado dismissed the case. The 10th Circuit U.S. Court of Appeals upheld the dismissal decision, noting that on the whole, the academy was more like schooling than like a job. The program was similar to vocational firefighting courses, and the skills taught were transferable to other fire departments. The trainees' expectations of jobs at the end of the program weren't enough to entitle them to wages.

Although few small businesses would run a training academy, the basic question is the same if you're bringing in a few interns: Is this an educational experience primarily for the benefit of the interns or a cheap way to get your extra work done? "If all you're doing is having them do file clerk work, that's not an internship," O'Connor says. Employers often argue that the educational aspect is the students' exposure to the work environment, but if that's all they're getting, it's not educational enough.

When an internship is set up through a local college or university, students can often obtain academic credit for their effort. The fact that they're receiving credit, though, doesn't mean they're not also entitled to minimum wage if your business derives immediate benefit from their labor. Check with the administrator of internships at the college to make sure your program meets their criteria and doesn't break any laws. O'Connor warns against being a "nice guy," however, and volunteering a small stipend to interns because it looks suspiciously like you're offering a below-minimum wage. Offer benefits or a gift if you like, he says, but avoid payments of money unless they're at least minimum wage.

Equal rights

In general, unpaid interns have the same legal rights as your employees. They may not be discriminated against because of race, gender, religion or national origin; they have a right to request reasonable accommodation under the Americans With Disabilities Act; and they may seek damages if they experience sexual, racial or ethnic harassment. It's best to cover them for workers' compensation, too, because if they're injured on the job and not covered, they can sue your business for medical expenses and possibly for negligence, which can subject your business to unlimited damages.

Because of the temporary nature of a student internship, though, you don't have to pay unemployment compensation premiums for interns. Nor do you need to go through the usual termination procedures if the student isn't working out; a simple explanation to the student and the school will suffice.

Even if students eagerly offer to work without pay and sign a contract waiving their right to the minimum wage, the Labor Department may insist they be paid anyway if their efforts benefit your business. So if your goal is cheap labor, better pay minimum wage. But if you'd really like to help students learn while you test-drive some potential employees, call your local college about a genuine internship.

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

Contact Sources

Buchanan Ingersoll PC, 1 Oxford Ctr., 20th Fl., 301 Grant St., Pittsburgh, PA 15219, oconnordt@bipc.com