The question of whether an internship must be paid is governed by federal regulations that distinguish between a legitimate educational experience and an employment relationship. While many organizations choose to pay their interns for competitive and strategic reasons, the legal requirement ultimately depends on whether the intern is considered an employee under the law. For-profit companies face the highest burden of proof, as the default assumption is that any individual performing work that benefits the business is entitled to compensation. Navigating this distinction requires a careful analysis of the arrangement’s primary purpose and the specific benefits accrued by both the intern and the organization.
The General Legal Requirement for Compensating Interns
The federal law governing wages and hours, the Fair Labor Standards Act (FLSA), establishes the principle that employers must pay employees at least the federal minimum wage for all hours worked, plus overtime pay for hours exceeding forty in a workweek. The FLSA broadly defines an “employee” as any individual whom an employer “suffers or permits to work.” This expansive definition means that most interns in the private, for-profit sector are legally considered employees unless they meet a narrow exemption.
If an intern is classified as an employee, the company must comply with all applicable wage laws. Failure to classify an intern correctly exposes an organization to significant legal liability, including back wages, penalties, and potential lawsuits. The determination hinges not on the title given to the position, but on the “economic reality” of the relationship, which the Department of Labor (DOL) uses a specific test to analyze.
Determining Compensation Using the Primary Beneficiary Test
The DOL and federal courts use the “primary beneficiary test” to determine whether the intern or the organization is the main recipient of the benefits derived from the relationship. This flexible, seven-factor test evaluates the totality of the circumstances, recognizing that no single factor is dispositive. If the analysis reveals that the organization is the primary beneficiary of the work performed, the intern must be compensated as an employee.
The extent to which the intern and the employer clearly understand that there is no expectation of compensation.
Clear communication at the outset is important, as any express or implied promise of wages suggests an employment relationship. Documentation should explicitly state that the intern will not receive compensation for the time spent. However, this understanding alone does not override the other factors if the work primarily benefits the employer.
The extent to which the internship provides training that would be similar to that which would be given in an educational environment.
The program must include structured, formal training that is comparable to instruction received in a classroom setting. If the intern is primarily performing routine tasks or productive work with little dedicated instruction, this factor weighs heavily toward an employment classification.
The extent to which the internship is tied to the intern’s formal education program by way of integrated coursework or the receipt of academic credit.
Connecting the internship to the intern’s academic program, such as requiring integrated coursework or awarding academic credit, provides strong evidence that the arrangement is educational. This factor helps demonstrate that the intern’s primary goal is learning, not compensation, and that the university recognizes the program’s educational value.
The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
An internship structured to align with the academic calendar and respect the intern’s school schedule is more likely to be considered a training experience. Organizations must be flexible and avoid demanding work hours that conflict with the intern’s educational obligations.
The extent to which the internship’s duration is limited to the period in which the intern receives beneficial learning.
The length of the internship should be limited to the time necessary for the intern to gain the predetermined educational benefits. An open-ended or excessively long internship suggests that the organization is receiving sustained benefit from the intern’s labor, which points toward an employment relationship.
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.
This factor requires that the intern’s work not replace the tasks a regular, paid employee would otherwise perform. If the organization would have to hire additional staff or require existing employees to work overtime in the absence of the intern, the arrangement is likely an employment relationship. The intern’s activities must focus on learning, even if they sometimes assist in operations.
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.
A mutual understanding that the internship does not guarantee a job offer at its conclusion reinforces the educational nature of the experience. Implying future employment can be interpreted as an exchange of current unpaid labor for a future paid position, complicating the unpaid status.
Specific Exemptions for Unpaid Internships
While the Primary Beneficiary Test applies strictly to private, for-profit entities, other organizations have broader legal permission to host unpaid interns. The FLSA minimum wage and overtime requirements generally do not apply to individuals who volunteer their time for certain non-profit organizations or government agencies. This volunteer exception is recognized for religious, charitable, civic, or humanitarian purposes.
Unpaid internships in the public sector and for non-profit charitable organizations are permissible, provided the intern volunteers freely and without expectation of compensation. However, even in these settings, the organization must ensure the intern is truly volunteering and not performing work that displaces a regular employee.
Alternatives to Traditional Hourly Wages
Organizations seeking to compensate interns without committing to a full salary structure often utilize alternatives like stipends or expense reimbursement. A stipend is a fixed sum of money, often paid monthly or as a lump sum, intended to help the intern cover living expenses during the training period. While stipends may be lower than minimum wage, they can only be used when the internship legally qualifies as an unpaid, educational experience under the Primary Beneficiary Test.
For interns legally classified as employees, a stipend cannot substitute for meeting minimum wage and overtime obligations. Organizations can offer non-monetary benefits or expense reimbursements, such as for housing, travel, or meals, to ease the financial burden on the intern.
The Business Case for Offering Paid Internships
Shifting focus from legal compliance to talent strategy reveals a compelling business case for paying interns, even when not strictly required. Offering competitive pay significantly enhances an organization’s ability to attract top-tier talent, as paid internships often draw a larger and higher-quality pool of candidates. This approach is instrumental in promoting diversity and equity, as unpaid positions inherently restrict participation to students who can afford to work without an income.
Companies that pay their interns experience a higher rate of conversion, successfully transitioning a greater percentage of interns into full-time employees. Interns hired from a formal program tend to stay with the company longer than external hires, which reduces long-term recruitment and training costs.
Best Practices for Compliance and Risk Mitigation
To ensure legal compliance and minimize financial risk, organizations should establish robust, documented policies for their internship programs. A written internship agreement is foundational, clearly defining the educational goals, the limited duration, and the mutual understanding that the position is for training, not employment. Auditing the intern’s work periodically confirms that they are not performing productive work that displaces a paid employee.
Organizations must also be aware that state and local laws often impose stricter wage and hour requirements than federal regulations. Staying informed about these varying regulations and consulting with legal counsel ensures the program is compliant across all jurisdictions where interns are hosted.