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Paid vs. Unpaid Internships: What Are the Risks?

Offering internships can be a great way to partner with your local university to train future leaders in your field. But there’s a point of contention … paid vs. unpaid internships. So, if you’re using unpaid interns instead of putting them on your payroll, you may be running afoul of the law.

The biggest offenders are for-profit businesses, as the laws generally do not apply to not-for-profit organizations.

Traditionally, even an unpaid internship has appealed to students because, in addition to being a valuable learning experience, it can often lead to a “real job.” However, internship compensation has become a matter for the court system. Disgruntled unpaid interns who were overworked, or
given meaningless assignments, have raised complaints … and initiated lawsuits.

Paid vs. unpaid internships: A six-part test

To answer the question of internship compensation, the U.S. Department of Labor developed a six-part test to determine who’s a trainee or an actual employee (who should be on your payroll). To legally use unpaid interns, all six parts of the test must apply (briefly summarized here):

  1. The work experience is intended to benefit the student; not the employer.
  2. Interns should do work that is similar to the training they’re receiving at school.They may even receive class credit for their work with you.
  3. The employer should have no immediate advantage from the intern’s activities—their training could actually impede your workflow occasionally.
  4. The intern is not replacing an actual employee, and your employees closely supervise the student. The mentoring should be constructive and educational.
  5. There’s no agreement or promise of employment before or during the internship (of course, you can hire them afterward if they wow you).
  6. Both the employer and employee understand that no wages will be paid during the training period.

Weighing the risks

Don’t let concerns about paid vs. unpaid internships discourage you from the benefits of training an intern. In a 2016 lawsuit, the DOL rules protected the employer when the court weighed these six criteria. It was determined that the intern derived more benefit from the experience than the employer did.

The key to deciding about internship compensation is the DOL rules. As Susan Lessack, Labor and Employment Law attorney at Pepper Hamilton, told INC magazine:

“If your company doesn’t meet just one of these [DOL’s six-step test items], you could be on the hook for a whole lot of back pay and a boatload of legal costs.”

The Society for Human Resource Management (SHRM ) recommends, if you are considering paid vs. unpaid internships, that you first look at how your internship program is structured. Does the work schedule coordinate with the academic calendar? Are you giving the intern work that matches up with their course requirements? Once you’ve created your program, you can decide how you’ll find interns that are a good match for your company.

Will the legal risks make internships less common? That is unlikely according to the statistics. According to the Bureau of Labor Statistics, the unemployment rate stands at 5.0% in April 2016, but 20% of college graduates ages 21 to 24 are unemployed (Current Population Survey (CPS)). In an effort to be one of the employed graduates, students are actively looking for internships.

The value of a good internship is priceless in terms of work and life experience. But you’ll need to consider paid vs. unpaid internships, and take a close look at the DOL’s six criteria before taking on an intern. If you determine that the intern should be paid, you will want to officially put them on your payroll, pay them minimum wage, … or not use them at all.

This updated article was originally published December 3, 2010.

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