Up until January 5, 2018, when employers needed to determine whether the internships they would offer qualify as paid or unpaid, they would turn to the long held 6-part test that was officially enacted by the Department of Labor (DOL) as of 2010. Amidst a number of high profile legal cases brought by unpaid interns against their employers (some of which initially favored the interns in their verdicts), several courts recently found the 6-part test was too rigid.
In response, the DOL published a new set of rules entitled, “Fact Sheet #71: Internship Programs Under the Fair Labor Standards Act”. “Fact Sheet 71” sets a new standard, based off the court’s “primary beneficiary” test, and uses 7-factors to be considered when determining the paid or unpaid nature of an internship.
As is the case with any major DOL policy change, especially those involving pay, the reviews are mixed thus far. Supporters of the change applaud the flexibility that the new rules provide to employers. Detractors are concerned that the subjective nature of the rules will allow for widespread abuse and a resurgence of unpaid internships.
While reality probably lies somewhere in between these two extreme viewpoints, if you are in the process of putting together your company’s internship hiring plan for this summer, you don’t have time to wait to find out what the trend will be. So, before you zero out your internship budget, here’s what you need to know NOW about the new rules for properly classifying paid vs. unpaid internships.
1. The DOL can only create federal policy.
This means that if your company is located in a state or municipality with more stringent set of rules surrounding internships, then those are the rules to follow. For the record, Ohio does not have anything on the books, so federal policy applies here in Northeast Ohio.
2. Regardless of the “test” being applied, some unpaid internships have always been, and remain, legal.
Non-profits, including the government sector, have always been exempt from the internship pay rules. The new test does not change that fact and only applies to for-profit entities.
3. The application of the new test is significantly more flexible than the old one.
Without even getting into the 7-factors included in the new test, the language used by the DOL describing how the test should be applied is quite different from the prior test.
Previously, an employer must have met ALL 6-factors for the internship to qualify as unpaid.
The new DOL policy is situated much more as a set of guidelines to be taken into consideration, either all together, or not. Furthermore, the new test is somewhat open ended, indicating that there may be other considerations specific to any one case that fall outside of the 7-factors that could enter into the equation as appropriate.
4. The “primary beneficiary” test is the new legal standard.
The court cases leading up to the official policy change set up the concept of the “primary beneficiary” test, but “Fact Sheet 71” provides official policy structure for implementing this as the new starting point for employers trying to decide if they are required, legally, to pay their interns.
To do this, employers should be weighing which party, the employer or the intern, derives the most benefit from the internship arrangement.
If it’s the employer (economically), then under the Fair Labor Standards Act (FLSA), this qualifies as an “employment relationship” and the intern must be compensated in full accordance with the FLSA. If the calculation favors the intern (educationally) they may not be entitled to compensation for their time and instead would be classified as a “trainee”.
5. Meeting a legal standard is just the beginning.
If your organization determines (with proper guidance from your legal counsel of course) that your internship program provides a greater benefit to the interns participating than to your organization, you are not legally obligated to offer payment in conjunction with your internship program. But, just as it is critical to consult your lawyer, it is also important to reflect on what your internship program is trying to achieve and how those goals fit into the cultural fabric of your organization on the whole.
ERC’s own research consistently demonstrates that employers consider “developing a talent pipeline” the top priority for their internship programs.
If this is the case at your organization, then your recruitment and hiring process needs to get the best and brightest in the door. While some proponents of the new standard predict that the financial savings of not having to pay interns will allow companies to provide more training & development opportunities within their internship programs and further enhancing the educational benefits provided to these interns.
But after nearly a decade of movement towards paid internships as the new norm, it seems unlikely that your company’s future “top talent” is even going to apply (much less have a chance to groom them through a robust training & development program) if your job posting indicates that the internship is unpaid.
Take the Intern & Recent Graduate Pay Rates & Practices Survey
Still wondering what impact the new rules might have on employers with interns and see trends in how other organizations are paying their interns (or not)? Take the Intern & Recent Grad Pay Rates & Practices Survey and we’ll send you the final report!