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Companies Struggle on Rules for Paying Interns

By: Drew M. Smith

Volume 1: May 2015

Companies face challenges on keeping up with regulations on how to compensate their interns. At this time of year, many students are out for summer break and are looking for jobs to build up their experience and their skills. In many cases, these jobs are not paid part-time work, but rather unpaid internships. Though they are unpaid, these jobs help teach the students and young adults important life and job skills they could use in the future.

The issue is defining what defines an intern that can be unpaid and what defines an employee that must be paid and/or covered under the company’s benefit plans. These issues have, in recent years, come under fire with multiple bouts of litigation and settlements under the Fair Labor Standard Act, to allow the interns the rights of the company they work for.

In April 2010, a list was created, based on the 1947 Supreme Court case Walling v. Portland Terminal Company1, called Fact Sheet #71. If followed correctly, a company may classify an employee as an intern. The criteria are outlined in this fact sheet are as follows:

  • The internship is similar to training given in an educational environment.
  • The internship experience is for the benefit of the intern.
  • The intern does not displace or supplant regular employees, or perform duties traditionally rendered by regular employees.
  • The employer derives no immediate advantage from the intern’s activities (ideally, the intern impedes the employer’s operations).
  • The intern is not necessarily entitled to a job at the conclusion of the internship.
  • The employer and the intern understand, preferably in a signed writing, that the intern is not entitled to receive remuneration for his/her work.2

Under the current rulings, failure to meet any of these would mean they are classified as employees and must be paid and treated as such. Some states have other criteria in addition to these but for the most part, they follow similar rules.

The attitudes surrounding interns could be changing in the next few weeks, as the Court of Appeals of the Second Circuit in Manhattan is reviewing cases that could lead to a flood of new litigation and lawsuits. They are determining whether or not a company can engage a student as an intern or an employee.3 Also brought up is whether or not there should be a totality test of the six factors instead of the all-or-nothing test that is currently on the books.

In light of these litigations, companies should take the necessary steps to make sure they are classifying their and compensating their employees in accordance with state and federal guidelines. Laws regarding internships are designed to teach students life and working skills. Employers should take care in making sure such internships are truly learning experiences and not free labor.



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