The question of whether an intern must be paid is complex, regulated by federal law and often misunderstood. The U.S. Department of Labor (DOL) maintains strict guidelines determining whether an individual is an unpaid intern or an employee entitled to wages. These rules prevent the exploitation of labor and ensure the internship serves as an educational bridge to a career. Compliance with these standards is a serious legal obligation for any business offering an internship program.
The Default Rule: Interns Are Employees
The Fair Labor Standards Act (FLSA) establishes the legal premise for compensation, defining an employee as any individual whom an employer “suffers or permits to work.” If an individual performs work that benefits a for-profit employer, they are legally considered an employee. This classification requires the employer to pay at least the federal minimum wage and overtime.
An employer must actively overcome this presumption of employment to legally offer an unpaid internship. The burden rests entirely on the employer to demonstrate that the intern’s situation meets a narrow FLSA exception. Simply calling a position an “internship” is not sufficient to bypass federal wage requirements. If the individual performs routine, productive work, they are likely an employee who must be compensated.
The Primary Legal Test for Unpaid Internships
The current legal standard used by the Department of Labor (DOL) is the “Primary Beneficiary Test,” a flexible, totality-of-the-circumstances analysis. This test evaluates the “economic reality” of the relationship to determine whether the intern or the employer is the main party benefiting from the arrangement. If the employer is the primary beneficiary, the intern is classified as an employee and must be paid.
The test requires consideration of seven factors, emphasizing the educational nature of the experience over the intern’s immediate productivity. No single factor is decisive. However, the more factors that point toward the intern receiving the benefit, the more likely the internship can be unpaid.
The seven factors considered under the Primary Beneficiary Test are:
- The extent to which the intern and the employer clearly understand that there is no expectation of compensation. A mutual and explicit understanding is necessary, and any promise of compensation immediately disqualifies the arrangement. This agreement should be formalized in writing.
- The extent to which the internship provides training similar to that given in an educational environment. Training must be structured, looking for organized mentorship and structured learning modules, focusing on skills transferable to other employers in the industry.
- The extent to which the internship is tied to the intern’s formal education program by the receipt of academic credit or other means. This connection helps demonstrate that the experience is an extension of the intern’s formal learning and should be integrated into the curriculum.
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar. The schedule should align with the intern’s academic life, affirming the student-focused nature of the program.
- The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning. If the intern is kept on past the point where training is substantially complete and performs routine work, the arrangement risks being classified as free labor.
- 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. The intern should not be used to fill a vacancy or perform essential tasks, and the employer’s operations should not be dependent on the intern’s labor.
- 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. Using the internship as an extended, unpaid trial period for future employment violates FLSA rules.
Compensation Requirements in Specific Contexts
The strict FLSA rules for unpaid internships primarily apply to for-profit companies. Different regulations govern internships within the public and non-profit sectors. Government agencies and non-profit organizations may accept services from volunteers without compensation, provided the volunteers offer their time freely for civic, charitable, or humanitarian purposes.
This volunteer exception is not a blanket authorization for all unpaid internships at non-profits, especially if the organization engages in commercial activities. If the intern performs tasks related to the non-profit’s business operations or revenue-generating activities, the full Primary Beneficiary Test may apply. Academic credit received by an intern does not automatically exempt any employer from the FLSA’s requirement to pay minimum wage.
Required Payment Standards for Paid Interns
When an intern is classified as an employee, the employer must comply with standard wage and hour laws. The intern must be paid at least the applicable minimum wage for all hours worked, determined by the highest rate mandated by federal, state, or local law.
Paid interns are fully covered by FLSA overtime regulations. Any hours worked beyond 40 in a single workweek must be compensated at a rate of time and one-half the intern’s regular rate of pay. Employers must ensure that all paid interns receive appropriate documentation, including W-2 forms, and have all required payroll taxes withheld.
State and Local Compliance Issues
The federal FLSA establishes a wage floor, but many states and municipalities have implemented more restrictive labor laws regarding intern compensation. Employers must always adhere to the law that provides the greatest protection to the worker. For instance, some state laws may impose a higher minimum wage or require overtime pay for work beyond eight hours in a day, a stricter standard than the federal 40-hour workweek threshold.
States like California have particularly strict requirements for unpaid internships, sometimes requiring program outlines to be approved by a state labor enforcement agency. If an employer fails to satisfy any applicable state or local criteria, the individual must be classified as an employee and paid. Employers must proactively check with local labor departments to ensure compliance with the most stringent regulations.
The Consequences of Getting It Wrong
Misclassifying an intern as unpaid carries substantial legal and financial risks for an employer. The most immediate penalty is the requirement to pay all unlawfully withheld back wages, which can span up to two or three years. Furthermore, the FLSA allows for liquidated damages, often doubling the amount of back wages owed.
Beyond the direct costs of back pay, employers face civil monetary penalties imposed by the Department of Labor for wage and overtime violations. Misclassification often leads to expensive litigation, including class-action lawsuits filed by former interns seeking compensation. The combination of back pay, double damages, civil penalties, and legal fees makes compliance a far less costly option than facing enforcement action.