Did you know that the Department of Labor recently changed the test used to determine if interns are employed under the Fair Labor Standards Act (FLSA)? Although mostly overlooked, this development can significantly affect the way employers provide internship opportunities. You can also encourage other employers to start their own internship programs.
In January 2018, the Department of Labor clarified that, in the future, a “primary beneficiary” test will be used to determine whether interns are employees of “for profit” employers under the FLSA. Why is this so important? The FLSA’s minimum wage and overtime requirements generally apply to employees, not interns.
Educators and employers alike agree that people can greatly benefit from properly designed unpaid internship programs. Unfortunately, since interns are not entitled to compensation under the FLSA, they can be exploited by employers who use their free work without providing them with an appreciable benefit in education or experience. The DOL began issuing informal guidance to prevent this type of abuse in the late 1960s.
In 2010, the DOL published a 6-factor test to distinguish between interns who don’t need to be paid under the FLSA and employees who do. One factor in particular turned out to be an almost insurmountable obstacle. “The employer providing the training does not derive any immediate benefit from the trainee’s activities; and sometimes your operations can be hampered. “
Since all six factors had to be applied, this test was believed by many to be too rigid, including some federal appellate courts. Instead, these courts chose to apply a “primary beneficiary” test that:
focuses on what interns receive in exchange for their work;
gives courts the flexibility to examine the economic reality of the intern-employer relationship; and
recognizes the uniqueness of internships in that interns agree to perform work in exchange for educational or vocational benefits.
In January 2018, the DOL essentially adopted this “primary beneficiary” test to eliminate unnecessary confusion and provide greater flexibility to comprehensively analyze internships on a case-by-case basis. This test includes seven factors to consider when determining whether an intern is actually an employee under the FLSA.
- Expectation of compensation. 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.
- Training. The extent to which the internship provides training similar to that which would be delivered in an educational setting, including clinical and practical training provided by educational institutions.
- Education. The extent to which the internship is linked to the intern’s formal education program through integrated courses or the receipt of academic credit.
- Academics. The extent to which the internship is tailored to the intern’s academic commitments by corresponding to the academic calendar.
- Duration. The extent to which the duration of the internship is limited to the period in which the internship provides the intern with beneficial learning.
- Displacement. 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.
- Promise of employment. The extent to which the intern and the employer understand that the internship is carried out without the right to paid work at the end of the internship.
Unlike the rigid six-factor test, the primary beneficiary test is meant to be flexible. No single factor is determinative and additional factors may also be considered on a case-by-case basis where appropriate.
The FLSA’s “internship exclusion” was quite limited based on the old six-factor test. It remains to be seen if this changes under the new primary beneficiary test. However, employers must proceed with caution when evaluating and determining whether someone can be treated as an intern under the FLSA, rather than as an employee.
The risk of employment-related claims increases every time laws and regulations change. Labor practices liability insurance, which may include limited coverage for wages and hours, can protect employers in the event of an inadvertent violation.