The U.S. Department of Labor recently issued update Fact Sheet #71, clarifying that the key test for whether unpaid interns are owed overtime and minimum wage under the Federal Labor Standards Act is the “primary beneficiary” determination – i.e., whether the worker or the business benefits more. By its own terms, Fact Sheet #71 continues to apply only to for-profit businesses, albeit with a nod to nonprofit volunteers. In addition, it seems assumed that all internships are, or at least should be, carried out on a voluntary, non-compensated basis.
What should nonprofits do that pay modest stipends or other amounts to interns, well below employee wage requirements, in light of updated Fact Sheet #71? In a nutshell, nonprofits should keep operating internships despite these continued ambiguities, note the updated aspects of Fact Sheet #71 (assuming they could be applied to nonprofits), and modify policies and practices for optimal legal compliance and benefits to both nonprofits and interns.
Internships - Unpaid (aka “Volunteer”) and Paid (Below or at Minimum Wage)
Internships can provide highly beneficial, much sought after opportunities for individuals and organizations alike, especially budget-conscious nonprofits. Internships give organizations unique ways to observe promising new talent (potentially for future employment), to promote training, and to share resources within their community. Often interns come from nearby colleges or other schools, but not necessarily so. In turn, internships allow students and other individuals creative ways to grow in their intended fields, to learn valuable work skills, and to develop their resumes for future success. Internships are thus generally to be encouraged and used well.
If an intern is a volunteer, any legal inquiry regarding wage law compliance should end. This is a common scenario at a nonprofit with student interns, who may work for school credit or other non-remunerative purposes. In the business sector, however, per Fact Sheet #71, legal uncertainty thus remains.
Bearing in mind that the Fact Sheet #71 is the only available Department of Labor guidance, how might a nonprofit think about an arrangement involving a paid intern? Four potential scenarios may exist for paid interns:
- The intern fits within a categorical exemption, which would be unusual but possible – such as clergy covered by the ministerial exemption;[1]
- The intern is paid at least minimum wage and overtime (thereby meeting wage-related employment requirements), which is possible but somewhat uncommon;
- The internship fits within the Fact Sheet #71’s multi-factor test for exemption from otherwise applicable wage laws (aha, success!); or
- The internship fails the Fact Sheet #71 test, and therefore requires compliance with minimum wage and overtime law.
Mary the Intern Under the Updated Primary Beneficary Test
Consider a student named Mary who accepts an internship to perform social media work for 25 hours per week on a nonprofit’s educational outreach campaign. She is paid $100 per week for her internship, thankfully, to help cover her enormously high tuition bills. Mary is likely not exempt from wage and hour laws based on any available categorical exemption, and she is not getting paid at least minimum wage (actually $4 per hour!). How will she – and the nonprofit – meet the updated internship test?
According to the DOL’s updated internship test for paid interns, Mary must be the “primary beneficiary” of the internship. That is the new “north star” for the DOL internship test, consistent with federal court trends. The “primary beneficiary” approach involves application of seven factors, fairly similar to the prior six-factor test but with notable differences. This “primary beneficiary” emphasis is not really new, as it has consistently served as a short-hand litmus test for legally valid internships that are exempt from minimum wage and overtime requirements. In other words, the test has always essentially asked, “Does the intern get more than he or she gives?” The answer should always be yes – the intern should be gaining experience, skill development, training, in such a manner that they are the primary beneficiary of the internship.
One of the seven applicable factors is a stronger emphasis on academically-related arrangements. The DOL’s updated test thus casts internships as being mostly for students (although potentially broader job training and exploration arrangements may qualify as internships too). The school-oriented factors are as follows: (1) the extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit; (2) the extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar; and (3) the extent to which the internship’s duration is limited to the period in which the internship provide the intern with beneficial learning. These factors should be reflected in internship programs to the extent possible.
Two factors focusing on compensation remain as part of the internship test: (4) the extent to which the intern and employer clearly understand that there is no expectation of compensation; and (5) the extent to which the intern and employer understand the internship is conducted without entitlement to a paid job at the end of the internship. Paid internships thus will raise red flags; as noted above, these problems may be extremely serious for businesses, with the jury still out on specific applicability to nonprofits. The last two factors also remain from the prior version: (6) the extent to which the internship provides training that would be similar to that which would be given in an educational environment; and (7) the extent to which the intern’s work complements rather than displaces the work of paid employees, while providing significant education benefits to the intern.
Structuring the Internship: Best Practices
What should your organization do to promote compliance with these DOL factors? As before, both written communications and effective follow-through are critical.
As a best practice, for any internship, formal or informal, and paid or unpaid, create a simple “letter of engagement” or contract outlining the terms of the internship for the review and signature of both parties. Ideally this contract or letter should list specific skills or experiences the intern seeks to obtain for the internship. Be sure to state expressly the compensation arrangements (none, or some) and with no full-time employment expectation at the internship’s conclusion. Such descriptive information may be even more important if the internship does not correspond to the intern’s education in an obvious way. Using our Mary example, it should be relatively obvious that her internship will be educational if Mary is a communications major who manages the organization’s social media accounts, with minimal description needed. But if she is a pre-med major, then more development of the internship description may be important to reflect the legitimate educational aspects (e.g., “to help future doctors effectively use social media tools in their practices.”)
Before a school-related internship’s start date, consider requiring potential interns to complete a simple form which includes dates of final exams, indicates deadline for any major projects, highlights the start and end date of the academic semester, and perhaps even request the intern’s academic schedule. Then, adjust the internship schedule to reflect this and record the adjustments in writing. For example, update the terms of the internship so that it concludes before final exams, or includes a reduced hours or days off scheduled during exams.
For all internships, set forth written educational goals to be accomplished. As the internship progresses, provide feedback and periodic check-ins to the intern. For example, the intern’s supervisor could schedule at least two performance evaluations for the intern to discuss questions, lessons learned, and opportunities for additional improvement. Or just make sure to provide regular hands-on training and feedback throughout the internship. Either way, such measures will hopefully be quite helpful to the intern – and foster legal compliance too!
With respect to daily operations, avoid assigning repetitive tasks that can be learned easily (e.g., no “taking out the trash” internships allowed.) Mission-critical tasks assigned to the intern should be done with extensive supervision and significant employee involvement. All such practices will show that the intern is the primary beneficiary, not the organization.
Whether offered during summer months or year-round, internships are often quite valuable – and for good reason! With volunteer nonprofit internships, legal compliance should be assured relatively easy, and the protocols described above are essentially for practical benefit. For paid internships, these measures are of critical importance for meeting the DOL’s updated “internship” test – and with compensation admittedly a negative within the multi-factor test. In sum, nonprofits should focus on interns as the primary beneficiary of any internship, incorporate the other factors as much as possible, and continue (or start) these wonderful opportunities!
[1] For more information about categorical exemptions from overtime laws, please see our firm’s blog posts dated October 31, 2016 (white-collar exemption) and March 3, 2015 (ministerial exemption).
