Many businesses for years have taken on interns to fill positions and paid less than minimum wages or no wages at all. I recently ran into a couple of college graduates who’ve been unpaid interns. Those meetings prompted me to clear up the rules on internships. And since the rules governing these relationships have changed, a review is in order.
Prior to an executive order issued by President Barack Obama in 2010, the rules regarding the relationships of interns to employers were pretty loose. A lot of employers were getting free labor from a lot of college kids looking for experience. These interns did, in fact, provide valuable labor, but weren’t compensated. Moreover, this relationship also affected their ability to receive workers compensation or unemployment benefits. Compared to normal entry level employees, interns didn’t enjoy the same employment protections. As much as I hate to say it, this was one executive order from Obama that was both fair and needed.
As a result of the executive order, the Labor Department published a fact sheet defining the new rules. I will cover the high points, but the complete fact sheet is worth reading if you’re using interns. Getting this right is important considering an audit that finds your business not to have paid folks you should have paid can result in a requirement to re-pay all of the interns affected for several years in arrears; pay all of the associated employment taxes; and, of course, pay the penalties associated with the infraction. This really adds up and could be catastrophic for a businesses.
Here’s an overview of the rules:
“Employ” is defined as “suffer or permit to work.” By law, those who are employed must be compensated for services performed for the employer. Employers may have an intern work on an unpaid basis, however, for the purpose of the “education” of the intern. But if the work is seen as being done for the benefit of the employer, the work must be paid according to the standard rules of employment.
If you bring on an intern who’s an accounting major because you have an abundance of filing that needs to be done and the job consists of cleaning up and alphabetizing your paperwork, this doesn’t qualify. It does not substantially add to the education of the intern. If the intern works under close supervision for the purpose of education, they might qualify to work on an unpaid basis.
To qualify for “unpaid” status as an intern, all of the following six criteria must be met:
Even though it includes actual operation of the facilities of the employer, an internship must be similar to training offered in an educational environment.
The internship experience is for the benefit of the intern.
The intern doesn’t displace regular employees, but works under close supervision of existing staff.
The employer that provides the training derives no immediate advantage from the activities of the intern and on occasion its operations actually could be impeded.
The intern is not necessarily entitled to a job at the conclusion of the internship.
The employer and the intern understand the intern isn’t entitled to wages for the time spent in the internship.
Remember, again, that all six factors must be fully met. Internship activities should be for the benefit of the intern and should be primarily of an educational nature.
When work activities are overseen by an educational institution, they’re more likely to qualify as non-paid. If the intern performs productive labor that benefits the employer — such as filing, general clerical work or assisting clients — this will most likely not qualify for non- paid status. This is because it’s the kind of work that a paid staff member might do and isn’t primarily “educational.” The fact an intern is developing “good work habits” won’t meet the criteria.
If you “un-employ” someone and replace a paid employee with an unpaid intern, you’re asking for trouble. While some employers traditionally have taken on unpaid interns during a trial period prior to paid employment, this doesn’t meet the standard, either.
If your company uses interns or plans to do so, look up the new Labor Department rules and make sure you qualify. One thing’s for sure, the penalties aren’t worth getting this wrong.