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Understanding Paid v. Unpaid Internship Rules

February 22, 2023

By Michael Burns, courtesy SBAM Approved Partner, ASE

As college students end their school year, their attention may turn to internships and co-op programs. ASE’s 2023 Salaries for Co-op Students and Recent College Graduates Survey reports that 75% of respondents employ co-ops and/or interns.

First, what is the difference between a co-op and intern program?  A cooperative education position or co-op program is where the employer and the school (colleges and universities mostly but also high school) coordinate the student’s education program with the employer’s work program, and it is for multi-term periods and often alternating with semesters at school. It is traditionally a full-time paid position.

Internship programs have the students join or be employed to perform work that is full-time or part-time but is normally a one-term work assignment often in the spring, summer, or fall semesters. Many employers have both types of programs.

Paid vs. Unpaid

So, when are internships allowed to be unpaid? First, the student worker must be legally classified as an intern. Under the Fair Labor Standards Act (FLSA) an intern can be unpaid if the internship meets the following criteria under the US Department of Labor’s (DOL) “primary beneficiary test.” This test uses seven factors:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
  2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

Under this test, no single factor is determinative. Each case may stand on its own facts. If it is determined the person is an employee and not an unpaid intern, the employer must pay minimum wage and overtime pay. If the person does not meet the criteria of being a paid employee, then the FLSA considers them as exempt from entitlement to minimum wage and overtime pay.

Also keep in mind, if an organization is a non-profit organization and uses unpaid volunteers there are criteria for properly classifying them as unpaid volunteers.

ASE’s research, as well as other studies, show employers have been moving away from unpaid internships. Lawsuits and public perception that students in these programs may be taken advantage of by employers have most employers these days paying at least minimum wage and in many cases more (including benefits). Kelly Raney, attorney and author of Should Interns be Paid or Unpaid points out, from a diversity, equity and inclusion basis unpaid internships may also disadvantage socially and economically diverse individuals. This is because unpaid internships require individuals to have both the time and the financial means to work for free.

Ms. Raney also reminds us that states such as California and New York have laws around internships that are stricter than the federal law. Employers considering unpaid internships are advised to “do their research, talk with trusted employment counsel, and weigh the pros and cons of sponsoring such a program.

Employers considering unpaid internships are advised to try to get its program eligible for college credit. This will probably involve the intern providing appropriate documentation for course credit. Course credit will be a strong indicator that it is a legitimate program supporting the classification as an unpaid internship.

Sources: Greenberg Glusker Fields Claman & Machtinger. Should Interns Be Paid or Unpaid? (2/9/2023); ASE 2023 Salaries for Co-op Students and Recent College Graduate Survey; CCH AnswersNow Library

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