Did you know that the Department of Labor recently changed the test used to determine if interns are employees under the Fair Labor Standards Act (FLSA)? Although mostly overlooked, this development can significantly impact how employers provide internship opportunities. You can also encourage other employers to start their own internship programs.
In January 2018, the Department of Labor clarified that a “principal beneficiary” test will be used in the future to determine whether interns are employees of “for-profit” employers under the FLSA. Why is this a big problem? The FLSA’s minimum wage and overtime pay requirements generally apply to employees, not interns.
Educators and employers alike agree that individuals can greatly benefit from properly designed unpaid internship programs. Unfortunately, since interns are not entitled to compensation under the FLSA, they can be exploited by employers who use their free labor without providing them with appreciable benefit in education or experience. The DOL began issuing informal guidance to prevent this type of abuse in the late 1960s.
In 2010, the DOL published a 6-factor test to distinguish between interns who should not be paid under the FLSA and employees who should. One factor in particular proved to be an almost insurmountable obstacle. “The employer providing the training does not gain immediate advantage from the intern’s activities; and sometimes his operations can be hindered.”
Since all six factors had to be applied, this test was believed by many to be too rigid, including some federal courts of appeals. Instead, these courts chose to apply a “principal beneficiary” test that:
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focuses on what interns receive in exchange for their work;
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gives courts the flexibility to examine the economic reality of the relationship between the intern and the employer; and
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recognizes the uniqueness of internships in that interns agree to do work in exchange for educational or vocational benefits.
In January 2018, the DOL essentially adopted this “principal recipient” test to eliminate unnecessary confusion and provide greater flexibility to holistically look at internships on a case-by-case basis. This test includes seven factors to consider when determining whether an intern is truly an employee under the FLSA.
- Compensation Expectation. The extent to which the intern and 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.
- Training. The extent to which the internship provides training that would be similar to that which would be provided in an educational setting, including clinical and practical training provided by educational institutions.
- Education. The extent to which the internship is linked to the intern’s formal education program through integrated courses or receipt of academic credit.
- Academics. The extent to which the internship is tailored to the intern’s academic commitments by matching the academic calendar.
- Duration. The extent to which the duration of the internship is limited to the period in which the internship provides the intern with beneficial learning.
- Displacement. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while also providing important educational benefits to the intern.
- Employment Pledge. The extent to which the intern and the employer understand that the internship is taking place without the right to paid work upon completion of the internship.
Unlike the rigid six-factor test, the primary beneficiary test is intended to be flexible. No single factor is determinative and additional factors may also be considered on a case-by-case basis where appropriate.
The FLSA’s “internship exclusion” was fairly narrow under the old six-factor test. Whether this changes under the new primary beneficiary test remains to be seen. However, employers must proceed with caution when evaluating and determining whether someone may be treated as an intern under the FLSA, rather than as an employee.
The risk of employment-related claims increases every time laws and regulations change. Employment practices liability insurance, which may include limited wage and hour coverage, can protect employers in the event of an inadvertent violation.
