Hiring Unpaid Interns Responsibly

Unpaid internships are authorized under both federal and state law. However, there are both federal and state requirements which have to be met in order to hire unpaid interns. The federal level is governed by the Department of Labor. The state level is governed by a series of requirements for employers in the New Jersey Administrative Code. The requirements are very strict and include tying the internship to specific learning objectives and the intern’s academic program.

Employers should be cautious when hiring unpaid interns because the penalties for failing to follow the state and/or federal requirements can be very costly.

Federal standards

First, federal law places requirements on employers who hire unpaid interns. Under the Fair Labor Standards Act (FLSA), the federal government places a variety of regulations on employers. However, in certain circumstances, unpaid interns do not fall under the protection of the FLSA.

Generally, interns at not-for-profit organizations are not considered “employees” under the FLSA. Therefore, the not-for-profit employers are not subject to the limitations of the FLSA and may hire unpaid interns. However, the same exception does not apply to for-profit employers. The Department of Labor has set forth a six-part test to judge whether an intern at a for-profit employer falls under the protection of the FLSA:

  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.”

If all six of the requirements are met, the intern is not considered an “employee” under the FLSA and may be kept on an unpaid basis.

The Department of Labor recommends that these standards are strictly enforced and failing on even one factor will make the intern an “employee” under FLSA. However, the courts have not been so eager to enforce the test presented by the Department of Labor.

Recently, courts have proposed alternative standards to those set forth by the Department of Labor. In Glatt v. Fox Searchlight Pictures, Inc., three unpaid interns claimed that they were owed the rights of “employees” under the FLSA. Initially, based largely on the factors presented by the Department of Labor, the district court granted the plaintiffs’ motion for partial summary judgement. However, the Second Circuit Court overturned the district court’s decision and found that following Department of Labor’s six-step test would have negative consequences.

Accordingly, the Second Circuit applied a “primary beneficiary” test to replace the Department of Labor’s six-part test. This “primary beneficiary” test would weigh seven factors against both the employer and intern. The seven factors to be considered by courts applying the “primary beneficiary” test are:

  1. “The extent to which the intern and the employer clearly understand that there is not 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.”

The test is meant to provide courts with more flexibility when deciding whether interns should be considered “employees” for the purposes of the FLSA. Glatt is representative of the unpredictable nature of court cases regarding the issue of unpaid interns. Ultimately, employers should proceed with caution when hiring unpaid interns and make sure to take all precautionary steps to abide by the FLSA standards.

Additionally, under the Fair Labor Standards Act, employers who violate the regulations and terms are subject to penalties. FLSA Section 216 sets forth the penalties for a violation of the Act. The penalties can be costly, consisting of both back pay and damages.

Federal standards do not apply to some small businesses

However, it should be noted, not all for-profit employers are subject to the rules set forth by the FLSA. The FLSA applies exclusively to three categories of employers: “1) employers whose annual gross volume of sales made or business done is not less than $500,000 (exclusive of excise taxes at the retail level that are separately stated); or 2) employers engaged in the operation of a hospital, an institution primarily engaged in the care of the sick, the aged or the mentally ill who reside on the premises; a school for mentally or physically disabled or gifted children; a preschool, an elementary or secondary school or an institution of higher education (whether operated for profit or not for profit); or 3) an employer who is engaged in an activity of a public agency.” Therefore, it is possible for some small businesses to hire unpaid interns under federal law.

New Jersey requirements

Unlike at the federal level, all not-for-profit organizations in New Jersey are treated in the same manner as for-profit organizations regarding unpaid interns. Also, New Jersey state law is stricter than federal law. Under N.J.A.C. Sec. 12:56-18.2, there are eight requirements for an employer to hire an unpaid intern under the school-to-work program:

  1. “The student shall be at least 16 years of age;
  2. The activity must be related to a formal written school-to-work transition plan for a student learner;
  3. There is collaboration and planning between worksite staff and school staff resulting in clearly identified learning objectives related to the non-paid activities;
  4. Any productive work is incidental to achieving learning objectives;
  5. The student learner receives school credit for time spent at the worksite and the student is expected to achieve the learning objectives;
  6. The student learning is supervised by a school official and a workplace mentor;
  7. The non-paid activity is of a limited duration, related to an educational purpose and there is no guarantee or expectation that the activity will result in employment; and
  8. The student learner does not replace an employee.”

If an employer is unable to prove that they satisfy all eight requirements, they will be barred from hiring unpaid interns and have to pay the interns for their services.

Interns are not volunteers

Furthermore, some may notice that N.J.A.C. Sec. 12:56 does not apply to volunteers. However, “volunteer” is limited to a “person who donates his or her service for the protection of the health and safety of the general public. Such a person would include, among others, a volunteer fireman, rescue worker, an aide in the care of the sick, aged, young, mentally ill, destitute and the like or assistant in religious, eleemosynary, educational, hospital, cultural and similar activities.” As a result, it is highly unlikely that many employers will be able to hire unpaid interns behind the veil of volunteerism.

More importantly, penalties for noncompliance with the New Jersey Statutes can be costly so employers should proceed with caution. A first offense for violating the statute can lead to a $1,000 fine and/or a 90-day imprisonment. Additionally, there could be administrative penalties up to $250 for a first offense and $500 for subsequent offenses.

In sum, there are not many options for those organizations looking to hire unpaid interns. With the rise in controversy and the progression of the law heading toward more rights for interns, it seems that the window for employers hiring unpaid interns is closing. As a business owner, when you make the decision to hire an intern, review these guidelines carefully to avoid a costly and embarrassing misstep.

Arthur “Scott” L. Porter Jr. Esq. is the senior and managing partner of Fischer Porter & Thomas, P.C. He represents many businesses in New Jersey and the New York metropolitan area, where he focuses his practice on civil litigation and transactional/corporate matters. In these capacities, Porter is recognized as a fierce advocate for his clients, and he maintains an active trial practice. Porter is admitted to practice in the state and federal courts in New York and New Jersey and has an active trial and appellate docket. More information is available at www.fpt-law.com.

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