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Work Experience or Free Labor? Learn What Makes Unpaid Internships Legal

Siri Hedreen
Project Manager at Embedded Software
Business News Daily Contributing Writer
Updated Jun 29, 2022

Work Experience or Free Labor? Learn What Makes Unpaid Internships Legal

  • Unpaid internships are legal if the intern is the “primary beneficiary” of the arrangement as determined by the seven-point primary beneficiary test.
  • If an employer is the primary beneficiary, the intern is considered an employee under the Fair Labor Standards Act and entitled to at least minimum wage.
  • Some states enforce requirements for unpaid internships, such as affiliations with academic institutions.
  • This article is for business owners and hiring managers who are interested in hiring interns. 

Internships present students, young professionals and career-changing professionals with opportunities for skills development, networking and hands-on experience in their chosen industries. Likewise, interns offer companies fresh perspectives, varied skill sets and an extra set of hands for new projects. Ideally, the arrangement benefits both parties. However, businesses that choose not to compensate their interns financially and instead opt for unpaid internships face a unique set of legal and ethical challenges.

Under the Fair Labor Standards Act (FLSA) of 1938, any employee of a for-profit company must be paid for their work. However, interns are not considered employees under the FLSA. [Find out how an FLSA self-audit can help your business with FLSA compliance.]

Does that mean unpaid internships are legal? The short answer is, yes, as long as the intern, not the employer, is the “primary beneficiary” of the work arrangement. What makes this question so difficult is its subjectivity; interns and employers may have differing views on who benefits most from the arrangement. Couple this ambiguity with the different regulations in various states, and the costs for employers can often outweigh the benefits.

Primary beneficiary test

It may be tempting to assume that all unpaid internships are mutually beneficial; otherwise, why would anyone accept an unpaid internship? However, an intern’s willingness to work without a paycheck does not necessarily make that work legal or ethical. Businesses are responsible for ensuring their unpaid internships are genuinely beneficial to interns. Citing “mutual benefits” alone wouldn’t cut it in a court of law; what matters is who benefits more. That answer may depend on which party you ask.

The U.S. Department of Labor addresses this subjective question with a flexible seven-part primary beneficiary test, updated from a more rigid six-point test in 2018. Note that the test is for for-profit companies only; public sector and nonprofit organizations are held to separate standards, depending on whether their interns are categorized as volunteers or employees.  

According to the test, an intern is a primary beneficiary if they meet the following criteria: 

  1. The intern is aware they will be uncompensated.
  2. Training is comparable to training received at an educational institution.
  3. The internship is tied to the intern’s current educational program (e.g., the intern is getting academic credit).
  4. The internship accommodates the intern’s academic calendar.
  5. The internship is limited to the period during which the intern receives beneficial learning.
  6. The intern’s work complements (not replaces) existing employees’ work while still providing beneficial learning.
  7. It is understood that the internship does not provide entitlement to a job at its conclusion.

If an analysis of these seven points leads to the conclusion that the employer is the primary beneficiary, then the intern is an employee entitled to at least minimum wage. The tricky part is that no single factor is determinative, making the test more like a set of guidelines than a list of rules. Without any definitive rules to go by, it’s easy to see why many employers and interns are left scratching their heads.

Brandon Ruiz, whose Los Angeles law firm Hennig Kramer Ruiz & Singh represents employees in wage disputes, reminds employers that labels mean nothing. 

“If the intern performs work that benefits the employer and that would otherwise be performed by a regular employee, it is unlikely to be an internship,” Ruiz said. If the intern performs work that primarily benefits the intern and does not do work that would otherwise be performed by an employee, it is more likely to be an internship.”

In other words, simply changing an assistant’s title to “intern” does not waive their right to compensation. “Interns are not a way to get free labor,” Ruiz said.

This guideline extends to international students without authorization to work in the United States. While such students are only allowed to participate in unpaid internships, the internship still must pass the primary beneficiary test; the students’ legal inability to accept compensation does not provide companies with a legal loophole. What’s more, if the Department of Labor finds an international student’s internship to be in violation of the FLSA, that intern could be violating the terms of their immigration status. In such cases, the employer may not be the only one punished; the intern may be at risk of deportation.

State legislation on unpaid internships

Employers that are undeterred by the primary beneficiary test should also check with their state before hiring any interns. Although the federal government doesn’t have any strict requirements for unpaid internships, many state governments offer more specific standards. Some make the flexible guidelines of the seven-point test mandatory; many provide their own criteria.

New York, for example, includes a stipulation that internships must provide transferable (rather than company-specific) training and cannot be of any “immediate advantage” to the employer, even when the intern is the primary beneficiary. In fact, as outlined by the New York State Department of Labor, “In most circumstances, interns will require employers to dedicate resources that may actually detract from the productivity of the worksite for some period,” making it virtually impossible for a company to profit from an unpaid internship.

California has one of the country’s strictest stances on unpaid internships, requiring all programs to be conducted through and supervised by an accredited school or vocational program. Employers must also submit an internship proposal to the Division of Labor Standards Enforcement before hiring interns. Any internship that does not meet these standards must pay at least minimum wage. 

Key TakeawayKey takeaway: If you’re thinking about building an internship program of any kind, paid or unpaid, consult both federal labor guidelines and your state’s labor guidelines. Pay close attention to employee definitions, wage requirements and academic credit requirements.

What are the benefits of unpaid internships? 

Why would someone willingly work as an intern without getting a paycheck? For some college students hoping to launch their careers, meaningful professional experience makes unpaid internships worthwhile. They may view internships as “buying” work experience rather than as offering their labor to a business for free. Robust, internship-filled resumes that stand out, after all, are incredibly valuable for young professionals.

“We’ve found interning marketing majors has become beneficial for both us and the interns,” said Keeon Yazdani, a marketing strategist who has dealt with interns at various companies, including CBD’R US, an online cannabis business. “We provide interns the opportunity to learn about how a small business operates while they provide their insight on social media and how to keep the younger demographic engaged with our content.” [Related article: How Social Media Is Changing Business]

Kristi Porter, a Georgia-based business owner who founded the copywriting consultancy Signify, also found her unpaid internship program to be an overall positive experience for her and the interns she has hired.

“I only require five hours per week, so that’s why it is unpaid,” Porter said. “All of them have been good with our arrangement and, I believe, have had a great time and learned a lot. As a one-woman business, it’s also great to sometimes get others’ opinions and insight.”

Neither Signify nor CBD’R US awarded academic or vocational credit through their internships. “Though I have offered class credit in the past, no one has taken me up on it,” Porter said. “They seem to want the experience more than anything else.”

Did you know?Did you know?: College students who complete internships are 15% more likely to find employment after graduation than their peers, according to Zippia.

What are the risks of hiring unpaid interns?

Unpaid interns can serve your business well while still being considered the primary beneficiaries of the internship, but there are also downsides and risks to hiring unpaid interns.

Legal hurdles

Businesses still keen on hiring unpaid interns should contact their nearest Department of Labor Wage and Hour Division agency to determine whether the FLSA applies to their proposed internship. However, they should expect the answer to be a resounding “yes.”

Even legal unpaid internships tread a fine line of compliance, where failure is costly. While some large companies can game the system by factoring legal fees into the cost of labor (paying an out-of-court settlement to one intern is still cheaper than paying 25 interns’ wages), small businesses do not have such luxuries.

“It is generally cheaper in the long run to ensure that any internship is legally compliant before hiring an intern,” Ruiz said.

Also, when some college students are eager to work for free, it can be easy for small businesses to overlook their legal due diligence. Many well-intentioned bosses may be surprised to learn that their off-the-books internships are breaking labor laws.

Thus, small business owners should err on the side of caution. Though these guidelines are not legally required in every state, the following suggestions may help prevent disputes between your business and an unpaid intern:

  • Put all understandings about compensation and commitment in writing.
  • Ensure that all terms of the internship are signed by both the intern and their supervisor.
  • Keep a log of hours and overtime.
  • Offer college credit when possible.
  • Stick to general, transferable training; do not assign grunt work. Some tried-and-true employee training tactics may be helpful.

Quality issues

Not every unpaid intern is simply ambitious for the cause. The professional experience they’re receiving may be valuable, but without compensation, they may not be motivated to deliver their best work. Unpaid interns may consider their internship less serious than a paid one and, therefore, be less committed.

Some employers find that the quality of talent in a paid intern outweighs the cost-effectiveness of an unpaid intern. The Hire Talent, a company that provides pre-employment assessments to recruiters, came to this conclusion when determining its own hiring process. As such, The Hire Talent opts to pay its interns on an hourly basis instead of offering no compensation.

“This makes us more competitive for the best talent,” said Fletcher Wimbush, the company’s CEO. “For us, it’s a very inexpensive way to… test out new ideas.”

Divorce attorney Russell D. Knight found the same to be true when hiring interns for his Chicago-based family law firm.

“The quality of work is always higher if you’re paying someone even a nominal amount,” Knight said. “If the intern isn’t generating value greater than twice the minimum wage, do you really even want them there?”

Key TakeawayKey takeaway: Keep some practical risks in mind when considering unpaid internships, as both your company and your intern could face substantial legal consequences for any missteps. Furthermore, you might find that unpaid interns do not offer as much commitment as those receiving financial compensation for their work.

Before you start jumping through the legal hoops to employ an unpaid intern, it is worthwhile to consider the moral implications of unpaid internships. 

It might be difficult to see how an individual unpaid internship would be harmful, as the intern has agreed to the arrangement and can leave anytime they would like to. However, unpaid internships may be detrimental to social and economic mobility overall. Consider how unpaid internships affect students who cannot afford to work for free. For lower-income students, the price of an unpaid internship is not just time but the opportunity costs of the wages they could earn in another part-time or full-time role. Upon graduation, when these students have less industry experience than those with the financial security to accept unpaid work, their disadvantage becomes even more apparent.

Unpaid internships can create a vicious cycle: They reward students who are already economically advantaged while ramping up the competition for everyone else. It’s important to keep in mind that your intern’s well-being is not the only moral issue at stake.

What are tips for hiring unpaid interns?

If, after weighing the pros and cons, you decide to develop an unpaid internship program, you’ll need to know how to hire interns and make your program succeed.

Where to find unpaid interns

There are plenty of places to look for new intern hires. In general, internships appeal to young people who are still pursuing education and experience in their chosen field. This means colleges and trade schools are great places to start your search. Both may hold virtual or in-person job fairs. 

The future of recruiting is digital, so be sure to use online job boards, such as Indeed.com, to help with your search. You can also look for industry-specific job boards to improve your prospects. Try marketing your opportunity on LinkedIn, too.

Lastly, your personal and professional networks will be valuable resources for finding interns. Your contacts may be able to connect you with students who are seeking internships, their own prior interns or maybe even their own applicant pool. Direct references, such as connections from your college alumni network, can streamline the recruitment process.

How to develop an internship program

Developing an internship program can be a small or monumental effort, depending on your company’s needs and scale. Identify your specific goals for the internship program. Are you trying to get interns to fill needed roles or complete certain tasks in your organization? Do you want to foster talent for future hires? 

Once you’ve outlined your goals for the program, the next step is to design it. There are a few components that are vital to any successful internship program. First, there needs to be an orientation plan. Interns are not seasoned professionals; they need straightforward communication about expectations and objectives. You should be prepared to work with your interns and make sure they have clear metrics of success at your company. Furthermore, aspects of the internships should be tailored to their own professional goals and interests. They also need good mentors who can ensure they receive the attention they need to succeed not only in this role but in their later professional endeavors. 

TipTip: Developing concrete goals and success metrics for your company’s internships, as well as conducting formal exit interviews with your interns, will help you maintain a strong program that serves your business and your interns.

What tasks can unpaid interns perform?

Ideally, interns should do low-risk tasks that relate to their field of study. A writing intern, for example, could conduct research and prewriting for work that will be finalized by a professional. An engineering intern could conduct some fieldwork (with supervision). The work that interns perform for your company should be appropriate for the position and their own professional development. 

Conversely, interns should not be expected to perform grunt labor, run errands or simply pick up the slack in areas that existing employees aren’t interested in. Furthermore, remember that interns shouldn’t be doing the work of a paid employee for free; their contributions should complement the company’s existing work.

Can you profit from unpaid internships?

Legal unpaid internships are rarely profitable, and profitable unpaid internships are rarely legal. Meanwhile, the rare cases in the center of that Venn diagram still have ethical implications. While you may not have to pay wages, you will incur costs elsewhere. Just as there’s no such thing as a free lunch, there’s no such thing as a free intern to fetch you that lunch.

Cailin Potami contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article. 

Image Credit:

fizkes/Shutterstock

Siri Hedreen
Business News Daily Contributing Writer
Siri Hedreen is a graduate of King’s College London, where she wrote for Roar News, London Student and Edinburgh Festivals Magazine. Find her on Twitter @sirihedreen.