Unpaid internships can be seen as a rite of passage for certain industries. In media and fashion, for example, unpaid interns are a common presence. And while internships can be a great way for college students or recent grads to get professional experience, as an employer you need to be careful about how you treat these positions.
You might think that giving someone a “foot in the door,” is compensation enough, but hiring an unpaid intern to do work that would otherwise go to an entry-level employee actually violates labor laws on various levels.
Here’s how you can go about hiring interns for the summer — the ethical way.
The Fair Labor Standards Act
The Fair Labor Standards Act, or FLSA, stipulates that most interns working at private, for-profit companies are considered employees. This means that interns are subject to the overtime requirements and minimum wage set forth by the FLSA.
Of course, an intern might not be considered an employee under the FLSA, depending on certain factors. Let’s review the U.S. Department of Labor’s six-factor test that determines whether an intern is considered an employee under the FLSA.
The Six-Factor Intern Status Test
An intern can only be unpaid if the DOL determines that an employment relationship does not exist. If each of the following factors are met, the intern likely does not need to be compensated:
1. The internship must be educational in nature, and provide a training experience similar to that of an educational environment.
2. The internship is for the intern’s benefit.
3. The intern works under existing staff’s close supervision and does not displace a regular employee position.
4. There is no immediate advantage provided to the employer from the intern. In fact, the business’ operations might occasionally be impeded by the intern’s presence.
5. The performance of an internship does not guarantee a job offer upon completion.
6. Both the employer and intern understand that the intern is not entitled to monetary compensation for their time.
Exceptions to the Six-Factor Test
You should know that state and local wage and hour laws have their own requirements, and not all federal courts rely on this six-factor test. The test also only applies to businesses that are for profit; non-compensated intern volunteers are generally allowed in the public sector and not-for-profit organizations. Also, some states have their own internship requirements that must be met in order to exclude the intern from hour and wage protections. Be sure to review your state’s specific requirements before moving forward with hiring an unpaid intern.
The Risks of Hiring Unpaid Interns
By offering an unpaid internship, you could be weeding out your best potential applicants. Most interns, especially if they’re in-demand or have limited financial means, will turn down unpaid internships to make time for a paid opportunity.
But the biggest risk in taking on an unpaid intern is the potential for a lawsuit. If the intern(s) find out down the road that their non-employee status was unlawful, your company could be sued. Media companies have been particularly notorious for illegally taking on unpaid interns, and this kind of lawsuit can be both time-consuming and costly.
How to Hire Unpaid Interns the Right Way
Of course, even if they don’t perform the duties of an entry-level employee — which they shouldn’t — unpaid interns can provide a great, refreshing presence in your office. Students are often excited to learn through hands-on methods in their industry, but your business shouldn’t depend on the performance of an intern to operate.
The right way to establish an internship program is to set it up like an educational experience. Internships are not meant to employ individuals, but to train them in professional skills that will help their future careers. A program with a heavy job-shadowing component is also more likely to qualify for unpaid status. If you take on an unpaid intern, don’t treat it like a trial period — and never hint to your intern that you might hire them in the future, no matter how well they are progressing.
Summer internships can be an incredibly positive experience for students and employers alike, but you don’t want to be caught violating employment and wage laws. Before you decide to take on an unpaid intern for the summer or school semester, be sure to seek legal counsel. You want to be very clear on the state and federal legal requirements surrounding unpaid internships wherever you live to avoid a costly mistake.
Meredith Wood is the Head of Content and Editor-in-Chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages financing columns on Inc, Entrepreneur, HuffPo and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA and many more.