Do I Really Have To Pay My Interns? What Business Owners Need to Know About Internships and Labor Laws Whether you're a new startup or a seasoned business owner, it's important to know the legalities of labor laws, especially when offering unpaid internships.

By Mital Makadia

Opinions expressed by Entrepreneur contributors are their own.

Internships are a great way for students to build new skills and gain experience. Although interns are often unpaid, internship programs are still subject to federal and state labor laws. Whether you are a new startup or a seasoned business owner, it's important to know the legalities of labor laws, especially when offering unpaid internships.

Fair labor standards act guidelines

One common misconception among employers about internships is that many think that they do not have to pay interns or can simply hire internship candidates as contractors. This isn't necessarily true. If the internship does not satisfy the test for an unpaid internship, interns must be paid as an employee. However, it's possible that an intern could be deemed a contractor, which is unlikely in most cases.

In addition to myriad changes to state and federal labor laws over the past decade, in 2018, the Department of Labor changed its test used to determine whether an internship is unpaid or not.

Related: Paying Interns Is a Good Investment In the Future of Your Business

This federal law, known as The Fair Labor Standards Act (FLSA), requires all "for-profit" companies (and some non-profit companies) to pay all of their employees. FLSA's test for employers is used to determine whether or not interns should be compensated for their work. Before 2018, the test required that all six elements be met to determine whether or not an intern should be paid.

Today's updated FLSA guidelines are more flexible; not every factor must be met. Commonly referred to as the "primary benefit test," there are now seven non-exclusive factors that may entitle interns to be paid at least minimum wage:

  • The extent to which the intern and the employer clearly understand that there is no expectation of compensation; any promise of compensation, expressed or implied, suggests that the intern is an employee—and vice versa
  • The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including clinical and other hands-on training provided by educational institutions
  • 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
  • The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job after the internship

What are the requirements for an internship?

Unfortunately, there is no clear definition of what is considered an internship regarding federal law. However, the broad definition considers paid internship (AKA apprenticeships) as allowing interns to gain practical experience by being tasked with duties typical of the day-to-day work of said profession. In unpaid internships, the responsibilities tasked must be considered adjacent to the work that is regularly done; that is, employers cannot task unpaid interns with assignments in a manner that the intern takes on the role that would have been otherwise assigned to a paid employee.

Related: 3 Ways to Make an Internship Invaluable, Regardless of Pay

While a paid intern is simply considered an employee, an unpaid intern is a student working for an employer for educational purposes. The "primary benefit test" ensures that the student is the primary beneficiary of the internship relationship. Still, there are some general rules of thumb to follow for consideration:

Is the student getting academic credit? If not, it's a strong indication that the internship should be a paid position.

In writing, has it been made clear that the internship is unpaid? Transparency is paramount. Any internship opportunities or employment offers should be in writing, and intentions should be clear. There should be no question as to whether or not the student will be paid.

Is the internship flexible? Does it allow the intern to go to classes and attend other academic commitments? It may be hard to argue that an internship is not paid employment if an employer is inflexible with a student's academic commitments.

Is the intern performing services that otherwise would be performed by employees? Unpaid Internships are not meant to displace paid work; they are meant to give students "real-life" experience in the field.

Most importantly, internships should have clear educational components — not just actionable work. The goal of an internship is to learn and gain experience. It's important to set clear expectations for potential interns. Many may expect their internship to turn into full-time employment, so it is key to explain in writing that there is no guarantee of employment after the internship or after graduation. Like any other employment, you should make clear employment is "at will."

Related: You Get What You Pay For: Making The Case For Paid Internships

Mital Makadia

Entrepreneur Leadership Network® Contributor

Partner at Grellas Shah LLP

Mital Makadia is a partner at Grellas Shah LLP and co-founder of startup dispute mediation service Solvd4. A TechCrunch-verified lawyer, she provides counsel on a variety of corporate and transactional matters, equity financings, M&A and commercial and intellectual property for her clients.

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