Did you know that the Department of Labor recently changed the test used to determine whether interns are employees under the Fair Labor Standards Act (FLSA)? Although mostly overlooked, this development can significantly affect how employers provide internship opportunities. You can also encourage other employers to start their own internship programs.
In January 2018, the Department of Labor clarified that in the future, a “primary payee” test will be used to determine whether interns are employed by “for-profit” employers under the FLSA. Why is this such a big deal? The FLSA’s minimum wage and overtime pay requirements generally apply to employees, not interns.
Educators and employers alike agree that individuals can benefit greatly from properly designed unpaid internship programs. Unfortunately, since interns are not entitled to compensation under the FLSA, they can be exploited by employers who use their free labor without providing an appreciable benefit in education or experience. The DOL began issuing informal guidance to prevent this type of abuse in the late 1960s.
In 2010, the DOL published a 6-factor test to distinguish between interns who should not be paid under the FLSA and employees who should. One factor in particular proved to be an almost insurmountable obstacle. “The employer providing the training does not derive an immediate advantage from the intern’s activities; and sometimes his operations can be hampered.”
Since all six factors had to be applied, this test was believed by many to be too rigid, including some federal appellate courts. Instead, these courts chose to apply a “principal owner” test that:
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focuses on what interns receive in return for their work;
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gives courts the flexibility to examine the economic reality of the relationship between the intern and the employer; and
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recognizes the uniqueness of internships in that interns agree to perform a job in exchange for educational or vocational benefits.
In January 2018, the DOL essentially adopted this “primary payee” test to eliminate unnecessary confusion and provide greater flexibility to look holistically at internships on a case-by-case basis. This test includes seven factors to consider when determining whether an intern is actually an employee under the FLSA.
- Compensation Expectation. The extent to which the intern and employer clearly understand that there is no expectation of compensation. Any promise of compensation, expressed or implied, suggests that the intern is an employee and vice versa.
- Training. The extent to which the internship provides training that would be similar to that which would be provided in an educational setting, including clinical and practical training provided by educational institutions.
- Education. The extent to which the internship is linked to the intern’s formal education program through integrated coursework or the receipt of academic credit.
- Academicyes The extent to which the internship accommodates the intern’s academic commitments by matching the academic calendar.
- Duration. The extent to which the duration of the internship is limited to the period in which the internship provides the intern with beneficial learning.
- Displacement. 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.
- Employment Promise. The extent to which the intern and the employer understand that the internship is carried out without the right to paid work at the end of the internship.
Unlike the rigid six-factor test, the principal beneficiary test is intended to be flexible. No single factor is determinative and additional factors may also be considered on a case-by-case basis where appropriate.
The FLSA’s “internship exclusion” was fairly limited under the old six-factor test. Whether this changes under the new primary beneficiary test remains to be seen. However, employers should proceed with caution when evaluating and determining whether someone may be treated as an intern under the FLSA, rather than as an employee.
The risk of employment-related claims increases every time laws and regulations change. Employment practices liability insurance, which may include limited wage and hour coverage, can protect employers in the event of an inadvertent violation.