The Problem with Unpaid Interns
At face value, it sounds like a win-win situation when businesses hire college students–even recent college graduates–as unpaid interns. It gives college students or college graduates needed experience, and it provides the businesses economic value without paying wages.
And that’s precisely the problem with hiring interns without compensating them.
Under the Fair Labor Standards Act (FLSA) and the New Jersey Wage and Hour Laws, there is a presumption that all work must be paid. Thus, businesses who hire interns without compensating them may violate the law, and be liable for unpaid wages, taxes, and, where appropriate, attorney’s fees.
The year 2012 saw a number of high profile lawsuits regarding the issue of unpaid interns, including The Charlie Rose Show, the Hearst Corporation, Novartis, Oracle, Novo Nordisk, KPMG, and Fox Searchlight Pictures, Inc.
Employers and employees in New Jersey need to be familiar with the laws and regulations of the workplace — that includes understanding the circumstances when unpaid internships are permitted. In New Jersey, some small businesses and most large businesses need to be familar with the Fair Labor Standards Act. But all New Jersey employers, including not-for-profit organizations, need to be familar with the New Jersey Wage and Hour Laws.
Let’s address the FLSA and the New Jersey Wage and Hour laws separately.
The Fair Labor Standards Act
To inform employers of their obligations to pay employees at least minimum wage and overtime premium, the U.S. Department of Labor published Fact Sheet #71, which explains the circumstances under which a business can “hire” unpaid interns.
Whether an intern must be paid requires a close examination of the following six-part test:
1. The internship is similar to that which would be given in an educational environment or vocational school, even though it includes actual operation of the employer’s facilities;
2. The internship is for the intern’s benefit;
3. The interns do not displace regular employees, but work under close supervision of existing employees;
4. The employer who provides the internship derives no immediate advantage from the activities of the intern (occasionally, the internship may actually impede the operation of the business);
5. The interns are not necessarily entitled to a job at the conclusion of the internship; and
6. The employer and the interns understand that the interns are not entitled to wages for the time spent in the internship.
It’s important to keep in mind that despite this 6-part test, some courts do not require that all 6 parts be met in order for businesses to avoid liability. So, if an aggrieved employee sues a private lawsuit rather than file a complaint with the Department of Labor, the employer must be prepared for the possibility that not all six factors will be necessary in order for the employee to prevail.
As a matter, an employer who “employs” an unpaid intern as a substitute for an employee will most likely get the evil eye compared to a full time student who performs minimal work and is merely shadowing an employee for college credit.
According to Fact Sheet #71:
If an employer uses interns as substitutes for regular workers or to augment its existing workforce during specific time periods, these interns should be paid at least the minimum wage and overtime compensation for hours worked over forty in a workweek. If the employer would have hired additional employees or required existing staff to work additional hours had the interns not performed the work, then the interns will be viewed as employees and entitled compensation under the FLSA. Conversely, if the employer is providing job shadowing opportunities that allow an intern to learn certain functions under the close and constant supervision of regular employees, but the intern performs no or minimal work, the activity is more likely to be viewed as a bona fide education experience. On the other hand, if the intern receives the same level of supervision as the employer’s regular workforce, this would suggest an employment relationship, rather than training.
Employers who misclassify employees as “interns” can reasonably expect serious consequences. Such consequences may include liability for unpaid wages for all hours worked, liability for overtime premium for hours worked over forty in a workweek, liability for unpaid taxes, and where appropriate, fines and attorney’s fees.
New Jersey Wage and Hour Laws
New Jersey Wage and Hour Laws (NJWHL) and regulations make it more onerous on for-profit businesses as well as not-for-profit organizations to hire unpaid interns.
The NJWHL require that unpaid interns be part of a school-to-work program, regardless of whether the interns work for a for-profit organization or a not-for-profit organization.
In contrast to the six-part test set forth by the U.S. Department of Labor, the NJWHL establishes an eight-part test on entities who wish to employ unpaid interns:
1. The intern must be at least 16 years old;
2. The activity must be related to a formal school-to-work transition plan for the intern;
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 intern receives credit for time spent at the worksite and the intern is expected to achieve the learning objectives;
6. The intern 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 intern does not displace an employee.
Unpaid interns who are not receiving compensation may wish to seek an attorney or contact the Department of Labor to determine whether they are entitled to back wages and liquidated damages and, if appropriate, attorney’s fees.
Businesses that wish to provide unpaid interns an educational experience need to ensure that the internship program complies with federal and state laws. It is advisable to consult with an attorney for guidance.