The Department of Labor Has Updated its Rules for Unpaid Internships

By HunterMaclean Attorneys, as published in Business in Savannah

This past January, the U.S. Department of Labor (DOL) updated its rules for determining when it is permissible for private-sector businesses to utilize unpaid interns. The update is helpful for employers because the new test is more flexible and holistic than the former, more rigid criteria. The update also conforms the DOL test to the one used by both the Eleventh Circuit Court of Appeals, whose jurisdiction includes Georgia, and the Fourth Circuit Court of Appeals, the federal appellate court governing South Carolina. While these developments make it easier for employers to use unpaid interns and make the DOL’s test consistent with the one used by federal courts, it remains worthwhile for businesses to familiarize themselves with the applicable rules and evaluate their unpaid internship programs accordingly.

As a result of this recent shift in policy, the DOL has adopted the “primary beneficiary” test. This test is designed to determine whether or not the intern is the primary beneficiary of the internship by assessing the “economic reality” of the relationship. Generally speaking, the more closely tied the internship is to an academic program or course of study, the more likely it is that the intern, not the employer, is the primary beneficiary and therefore may be unpaid according to the DOL.

The previous DOL test contained six requirements, each of which had to be satisfied in order for an unpaid internship to pass muster. The primary beneficiary test includes seven factors to be analyzed in evaluating the economic reality of the internship. It is more flexible because each situation is to be assessed on a case-by-case basis, and no single factor is determinative. To decide whether the intern or the employer is the primary beneficiary of the internship, the DOL will now consider the following seven factors, as set forth in its updated Fact Sheet #71, which is available online:

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.

On the whole, the DOL will look at the degree to which the internship complements and advances a course of academic study or training. If the employer cannot demonstrate the career benefits to the intern, then the intern is more likely to be protected by the Fair Labor Standards Act (FLSA) and therefore entitled to minimum wage and overtime pay. As a result, businesses who use unpaid interns should ensure that their internship programs are supported by a strong justification based on the seven-factor “primary beneficiary” test. Taking these steps can help employers avoid potentially costly audits, litigation, and liability.