Over the last few years, several federal courts rejected the Obama administration's mandatory six-prong test for determining whether an individual can properly be classified as an unpaid intern under the federal Fair Labor Standards Act (FLSA). On January 5, 2018, the Trump administration issued an overhauled Fact Sheet #71, which adopts a more flexible "primary beneficiary/economic reality" test. Below are key takeaways for employers that already have an internship program in place, or may be considering one in the future.

Six Required Criteria Versus Seven Considerations To Be Balanced

In April 2010, the U.S. Department of Labor (DOL) issued its Fact Sheet #71 requiring six factors to be met before an unpaid intern could safely be categorized as such and excluded from the pay requirements of the FLSA. The DOL emphasized that internships in the "for-profit" private sector "will most often be viewed as employment" unless the purported employer could prove the existence of all six of the following required criteria:

  1. "The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship."

Over the past few years, the Second, Sixth, Ninth, and Eleventh Circuit Courts of Appeals rejected this strict test.

The DOL's recent revised Fact Sheet #71 essentially complies with the courts' guidance on this issue. As a result, the following seven factors (and possibly others) should be considered and weighed:

  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."

However, every factor need not be present. The DOL makes clear "no single factor is determinative" and the ultimate answer depends on the "unique circumstances of each case." The "economic reality" of the intern-employer relationship now governs. If the intern or student is the "primary beneficiary" of the relationship, then he or she is not entitled to either minimum wage or overtime pay under the FLSA. Conversely, if the employer is receiving the better end of the bargain, it may have to treat the intern or student just as all of its other employees (i.e., minimum wage and overtime pay are required).

Key Takeaways for Employers With Internship Programs

The DOL's new test makes it easier to create unpaid internship programs that are lawful under federal law as long as the answers to the seven questions show that—on balance—the intern or student benefits more from the relationship than the employer does. In order to ace the test, employers should structure their programs such that all seven factors lean toward an internship—rather than an employer-employee relationship. Moreover, a passing grade absolutely requires implementation of clear policies, forms, and agreements for the internship program. The new year is a good time for every employer to make a resolution to review/audit its existing internship program, or to create a new one from scratch using the new guidelines. While there could be flexibility with a few of the factors (especially when the remaining factors so clearly weigh in favor of the existence of a lawful internship), if some of the factors are missing, the DOL or a court could still find that the relationship is truly an employment relationship. Employers should keep in mind that this development only affects the analysis under federal law. States (and even some cities and local jurisdictions) can impose stricter requirements on businesses—just like many of them do with regard to minimum wage, overtime compensation, and paid sick time and leave requirements. Employers should confirm that their internship programs comply with all applicable state and local requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.