When companies hire interns, they need to be especially careful in regard to their payroll and employee management strategies. Simply saying the internship is to provide interns with education and experience in the industry doesn't mean businesses can get away with not paying their interns.
We talked to Alix R. Rubin, founder of Rubin Employment Law and an employee misconduct investigator at Verita LLC, to gain a better understanding about how companies' internship programs can comply with employment legislation like the Fair Labor Standards Act, and what the U.S. Department of Labor says constitutes as an internship.
Q: What types of internships are legally allowed to be unpaid?
A: It's pretty simple – it's not simple to execute. There are six requirements that the DOL says a company has to meet, and the business has to meet all six of them to have a qualified unpaid internship under the Fair Labor Standards Act.
The first requirement is: The internship has to be training in an educational environment. Whether the intern is a student or not, the employer must provide education and monitoring. I recommend weekly meetings with the intern to go over what did the person accomplished during week, what they did and – most importantly – what they learned. In essence, employers should ask, "What did you learn this week and how can I help you learn more?" Employers can have interns shadow employees for education, as shadowing helps interns gain knowledge and test their skill sets. However, it's essential that shadowing is closely supervised.
It's helpful if the internship is part of a school program, which can be through the intern's college, university or high school. If the intern is actually a student somewhere, he or she must receive academic credit and have to submit either weekly reports to whichever instructor or professor is advising the intern on the internship. The intern can also submit a paper at the end of the internship or a type of work product that would make sense in the educational environment.
One example I really like is an internship at a newspaper. If the intern is writing stories for the newspaper, he or she should submit the articles to his or her academic adviser as part of a portfolio.
The second requirement is: The internship experience must primarily benefit the intern, not the company. To me, this is the overriding requirement for the entire program. Because the company isn't paying the intern, there has to be more benefit to the intern than to the employer. When the employer gets a fresh perspective on its business and gets to give back to the community, which benefits the employer, it's considered OK. What's not OK is when interns are doing real work. If the company is making money off interns, it should be paying them.
Employers should note the first and second requirement can easily overlap, because if it's an educational experience, then it's primarily for the intern's benefit.
The third requirement is: The intern can't displace regular employees and must work under close supervision. If the company could hire a regular employee to do the intern's job, then that's really not an intern. The employer can still call it an internship if the company pays the intern either the state, city or federal minimum wage – whichever one is higher. If the intern works more than 40 hours a week, he or she will need to be paid time and a half. However, the employer does have to ensure the intern is covered by workers' compensation whether or not he or she is paid.
The fourth requirement is: The employer cannot derive an immediate advantage from the intern's activities. In fact, the intern's activities, such as shadowing, may occasionally impede operations if it interrupts workflow.
The fifth requirement is: The intern is not necessarily entitled to a job at the conclusion of the internship. While the employer is allowed to hire the intern after the conclusion of the internship or when he or she has graduated school, the company can't promise or guarantee the intern a job at the end of the internship. It can't be as if the employer and the intern are trying each other out, even if that may be the case. Sometimes, the intern wants to get experience in the industry and be able to put something on his or her resume, and that's fine as it benefits the intern.
The sixth requirement is: The intern must understand he or she is not entitled to wages. This should be in writing in a contract or an internship agreement that lays out what the intern is at the company to do, how the employer is going to benefit the intern and any tasks the intern will need to complete as part of the unpaid educational experience. Employers should incorporate as many of the six requirements into the agreement as they can, and need abide by the agreement.
Q: So if people complete an internship but it did not meet these six requirements, what steps should they take?
A: The first step is hire a lawyer and file a lawsuit. If there were a group of interns involved and they were all treated the same way, they can file a class-action lawsuit together, which has happened.
One notable case is Glatt v. Fox Searchlight Pictures Inc. The company had produced the movie "Black Swan" with the help of interns, and the southern district of New York trial court judge found the types of low-level tasks the interns completed – such as taking lunch orders, making deliveries, organizing file cabinets and making photocopies – were typically performed by paid employees. The case is currently up on appeal.
Another one is Davenport v. Elite Model Management Corp, which was the suit against Elite Model Management that ended up being settled for $450,000. There were 100-plus former interns involved in the case, and the company paid each intern between $700 and $1,750, plus the attorneys.
Q: Can you think of any challenges involved in putting interns on payroll?
A: Not really. Then the company is treating them like any other employee who is not exempt from overtime. There are basically some other exemptions as well, but the basic ones are executive, administrative and professional, and there are certain factors the company has to meet for each one to be exempt from overtime.
However, this may be changing. President Barack Obama has asked the DOL to make it harder to be exempt from overtime, and companies may have to pay interns overtime if they are eligible. It's similar to having a seasonal employee on the payroll. Employers should outline in the intern agreement or contract that the internship is for a certain term, and need to include language that says, "But we have the right to fire you at any time, with or without notice for any reason or no reason, and you can quit at any time, too." It's still actual employment, but it doesn't go beyond a certain date unless the company makes a job offer.
Q: What are some consequences of not classifying interns correctly?
A: The employer could be required to settle for a large amount, such as the $450,000 stated above, and pay every intern minimum wage plus overtime if that applies. If the company didn't keep accurate records – as many don't if they don't pay their interns – the court will go by whatever the interns say, such as many hours they say they worked. If the company is paying them, it needs to make sure to maintain timesheets either manually or electronically because the DOL requires them.
If the DOL comes in and wants to do an audit and the business doesn't have the required records, it will issue penalties even if the business is paying its interns correctly. Companies need to protect themselves, as not maintaining accurate records also leaves room for employees to take advantage. The company wouldn't have to just provide back pay and overtime, but comply with the payroll tax, unemployment insurance and disability insurance – all of employees' payroll withholdings.
The other thing is that New York City just passed new law that protects unpaid interns under antidiscrimination laws, as they weren't before. The new law states that for the purposes of discrimination and harassment, employers must treat interns like employees.
Even whistleblower laws should apply to interns, employers and HR professionals should be aware of that, too. It's a delicate balance: Employers don't want to treat interns like employee they would then have to pay the interns, but employers don't have to give interns the whole employee handbook because most of it isn't going to apply to them if they're unpaid. Employers should give interns copies of relevant policies like the company's non-discrimination, anti-harassment policy. Those are the types of things interns require.
Q: Finally, since there aren't any tests for HR professionals or employers to take, what sources would you recommend people consider before taking on an intern?
A: They should follow DOL Fact Sheet #71: http://www.dol.gov/whd/regs/compliance/whdfs71.htm
Other than that, employers should look at their state DOL website as well and see what the state requires for internships. Employers should also hire an attorney to review their internships program for employers. If employers aren't sure about how to set it up, they should really have an attorney work with them on that.