For many companies and professional firms, hiring unpaid interns can be a tempting way to get good help on a limited basis at little or no cost. Before you take the plunge, however, it is important to understand that a true internship is intended to be an educational benefit for the intern and an educational responsibility for the company. Further, the company should not expect to derive a significant benefit from the intern’s presence or efforts.

More important, in the absence of six key compliance factors, the U.S. Department of Labor (DOL) may allege that your hiring of an unpaid intern is an illegal evasion of federal minimum wage and overtime payment requirements. Since any adversarial encounter with the DOL is something to be strenuously avoided, a prudent employer would be wise to understand and abide by the six hallmarks of an appropriate unpaid internship arrangement:

1. The training must be similar to that which would be given in an educational environment.

2. The internship is for the benefit (education) of the intern, not the employer.

3. The intern does not replace regular employees and is supervised closely by existing staff.

4. The employer receives no immediate benefit from the intern’s activities, and the intern’s presence may actually impede the employer’s operations.

5. The internship does not entitle the intern to a job when the internship is completed.

6. The intern and the employer understand that the intern is not entitled to wages.

These factors are somewhat subjective, and there is little certainty as to whether the employer is safe from wage claims arising from a DOL finding that the internship does not comply with one or more of the six factors. Let’s take a closer look:

Similarity to an educational environment; sole benefit of the intern. The DOL states that the more the internship is like a classroom or school, rather than involving the intern in the employer’s operations, the better. Many attorneys recommend that unpaid internship programs be sponsored by the school and result in academic credit, and that is exactly what DOL guidelines recommend. More specifically, the intern should not be performing work for the employer on a recurring or regular basis, and the business should not be dependent on the intern’s efforts. The DOL does not want to see unpaid interns performing filing, clerical work or assisting customers – even if they are also receiving educational benefits.

Substitution for regular employees; supervision issues. The DOL prefers to see an unpaid intern “shadow” a regular employee, i.e., to observe and learn. Performing unsupervised work that would otherwise be performed by a paid employee is not allowed.

No job entitlement. Using unpaid interns as a substitute for paid employees during probationary periods is strictly prohibited.

No entitlement to wages. We recommend that the intern program and the lack of any payment be memorialized in writing and signed by both the employer and the intern.

So what happens if you fail to comply with DOL requirements for unpaid internships? You could be liable for back wages and time-and-a-half for overtime according to the intern’s recollection of hours worked. In addition, you could be liable for unpaid employment taxes, penalties, and interest.

Also, don’t forget other employment risks. Just because you call someone an intern does not free you of prohibitions on child labor, non-discrimination, workers compensation for on-the-job injuries, and liability to third parties (such as customers) for statements made by interns on behalf of the employer as its representative or agent.

Alternative

So where is the advantage in hiring unpaid interns? For most small business, there may not be one. By the DOL’s definition, if there is an advantage to you (beyond the satisfaction of being a good corporate citizen), you may violate factor #4 mentioned above.

Instead, consider hiring your own children or children of your employees as paid interns, so they can generate earnings from which to start funding Roth IRA accounts for their retirement. The compound long-term growth and asset protection for Arizona residents can be especially valuable for younger workers.

If this is an option that interests you, contact your business attorney for guidance in properly setting up a paid internship arrangement.

Do you have questions about business or employment issues? Schedule a planning meeting with Phil Glasscock by calling 480-941-4359, or email jpg@jpglaw.com.