Internships under the Fair Labor Standards Act

Look at two interns. Tim is a twenty-year old college student majoring in accounting. He expresses interest in an internship with the city’s finance department over the summer. Chris, a high school athlete, applies for a position as an intern working in the city’s summer camp program. The city offers them the internships. Tim is offered a stipend of $2,500 for ten weeks of full-time work. Chris is told he will not be paid at all. Are these arrangements lawful? It may come as a surprise, but in paying Tim a stipend of $2,500, the city is violating the Fair Labor Standards Act (FLSA). In not paying Chris anything, on the other hand, the city is in compliance with the FLSA. How can this be so? Some high school and college students land actual summer “jobs.” Employers hire them as temporary employees and pay them at least the federal minimum wage. But increasing numbers of employers and students enter into the murky relationship known as an internship: a student performs services for the employer in return for which the student may receive lump sum compensation known as a stipend, or sometimes no compensation at all. From the student’s perspective, a good internship gives something that can be more valuable than money: practical experience that may lead to a real job in a particular field after graduation. From an employer’s perspective, a good intern performs useful work at less than the cost of a full-time employee. Interns also can form a pool from which to seek new employees in the future. The FLSA and its regulations issued by the U.S. Department of Labor make no mention of interns or internships, except for one mention of “Congressional interns,” and another of medical interns who have already received their medical degrees. For this reason, many employers assume that internship arrangements are not affected by the FLSA. The fact that internships are not addressed by the FLSA, however, means something very different. It means that the FLSA does not recognize the internship arrangement as an exception to its requirement that employees must be paid the minimum wage and possibly, depending on the nature of the services, overtime compensation after 40 hours in a single workweek. Paying an Intern a Stipend Whose Pro Rata Rate of Pay is Less Than the Minimum Wage is Unlawful Let’s return to Tim. He is working what is a full-time schedule for the city -- 40 hours per week – for the ten weeks of his summer. He is being paid the lump sum of $2,500. That works out to $6.26 per hour, a full $1.00 per hour less than the federal minimum wage. “What’s wrong with that?”, many may think. After all, Tim is a college student. He hasn’t earned his degree yet and has no previous experience working in a municipal finance office. Whatever Tim learns over the course of the summer and however proficient he becomes at the particular duties he is assigned will be of no ongoing benefit to the city because Tim will go back to school at the end of the summer. However reasonable this argument may seem, as long as Tim is doing work for the city, he is “employed” within the meaning of the Fair Labor Standards Act. That is, he is “suffered or permitted to work.” Under those circumstances, Tim is an employee and he must be paid the minimum wage. This rule generally applies to internships in both the public and private sectors. Public Sector Internships May Be Unpaid Chris’s situation is altogether different. In providing services for the city’s summer camp without expectation of compensation, Chris is a volunteer, a term and concept which is addressed at length in the FLSA regulations. Under the FLSA, an individual who performs service for a public agency for civic, charitable, or humanitarian reasons, without promise, expectation or receipt of compensation for services rendered services is a volunteer if:

1. the individual in fact receives no compensation or is paid only expenses, reasonable benefits, or a nominal fee to perform the services for which the individual volunteered;
2. their services are offered freely and without pressure or coercion, direct or implied, from an employer, and
3. the individual is not otherwise employed by the local government to perform the same type of services.

Here, Chris receives no compensation for his camp counselor activities and he has offered them to the city of his own accord. He is not employed by the city. He and the city may call his position an internship for the purposes of building Chris’s resume and giving his experience working with the camp’s children a more impressive title, but as a legal matter, Chris is a volunteer. Public-sector Interns May Be Reimbursed for Expenses Could Chris be paid anything and still maintain his volunteer status? The answer to this question is “yes.” Volunteers may be paid expenses, reasonable benefits, a nominal fee, or combination of the three without losing their status as volunteers. So, for example, if the city requires its camp counselors to wear Carolina-blue colored t-shirts every day, it may give Chris and its other volunteer counselors a uniform allowance to cover the cost of five t-shirts. If Chris’s duties involve coaching softball at the camp and his pants all end up covered in dust or ripped at the knee, the city may reimburse him for reasonable cleaning expenses or for wear and tear. The city may also reimburse Chris for out-of-pocket expenses incurred while working as a camp volunteer, such as payment for the cost of meals or transportation expenses. The FLSA regulations provide several other examples of allowable reimbursements here. The most important point to remember is that reimbursements must be of actual expenses and that no amount paid to a volunteer should be based on productivity or hours of service. Look at Tim’s situation again. He could have volunteered his services to the finance department. The city could have paid him nothing. As in Chris’s case, he and the city could call his service an internship if they so choose. But as far as compensation goes, the city has a clear choice to make: it can either pay him the minimum wage for all hours worked up to 40 hours per week, and time-and-one-half overtime for any hours over 40; or it can treat him as a volunteer, paying him nothing and, at its discretion, reimbursing him for any reasonable expenses. Paying him a stipend of $2,500 (equivalent to $6.25 per hour) satisfies neither alternative requirement and violate the FLSA. Private-Sector Internships May Be Unpaid Only in Very Limited Circumstances Maybe you have heard of the U.S. Department of Labor’s test for interns. Why haven’t I used it to analyze the hypothetical examples of Tim’s and Chris’s situations? There is, in fact, a safe-harbor test for the use of unpaid interns. It is a stringent test. The catch is that it applies only to private-sector employers. It does not apply to the city where Tim and Chris are interns. The U.S. Department of Labor and the federal courts have set forth a six-part test for the use of unpaid interns by private employers. DOL’s latest articulation of this test may found herein the Wage and Hour Division’s Fact Sheet #71. Under this test, the use of unpaid interns by private employers is unlawful unless the internship arrangement meets the following requirements:

1. the internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
2. the internship experience is for the benefit of the intern;
3. the intern does not displace regular employees, but works under close supervision of existing staff;
4. the employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
5. the intern is not necessarily entitled to a job at the conclusion of the internship; and
6. the employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If any one of the above criteria are not met, then the intern is an employee must be paid minimum wage. Very few internship arrangements meet this test as most employers desire to gain some benefit from bringing an intern into the organization and many feel they must offer some form of compensation (remember, a “stipend” is just “wages” by another name). Future Public-Sector Guidance May Be Forthcoming from DOL At the bottom of Fact Sheet #71, in a footnote, the Wage and Hour Division (WHD) of DOL acknowledges the existence of the internship dilemma in the public sector and says,

The FLSA makes a special exception under certain circumstances for individuals who volunteer to perform services for a state or local government agency and for individuals who volunteer for humanitarian purposes for private non-profit food banks. WHD also recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation for religious, charitable, civic, or humanitarian purposes to non-profit organizations. Unpaid internships in the public sector and for non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible. WHD is reviewing the need for additional guidance on internships in the public and non-profit sectors (emphasis added).

Conclusion In the public sector, interns can be true volunteers or they can be employees. There is no legally in-between status of “intern.” Public employers have a choice with respect to interns. They may freely avail themselves of the services of “interns” if they treat them as volunteers and do not pay them any more than reimbursement of direct expenses or a de minimis token of appreciation. Or they may treat them as employees and pay at least minimum wage (and maybe overtime). A public employer may not pay “interns” a stipend that amounts to less than the minimum wage. If a public employer wishes to pay an intern a stipend, then the intern becomes a temporary employee, subject to minimum wage and all of the other applicable requirements of the FLSA.