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

image for fizkes/Shutterstock
fizkes/Shutterstock
  • Unpaid internships are legal if the intern is the "primary beneficiary" of the arrangement. This is 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 minimum wage.
  • Some states have requirements of unpaid internships, such as affiliation with academic institutions.

Under the Marxian view of capitalism, labor is a commodity that is bought and sold on the market. In exchange for the burden of that labor, workers get a salary, or wage. No need to cite Das Kapital – anyone who has ever had a job could tell you as much. So how could an unpaid internship possibly exist in a capitalist system?

For college students willing to pay any cost to launch their careers, it's a no-brainer. For them, interning is not selling their labor for zero wages; it's buying work experience for the price of their labor. Despite the Fair Labor Standards Act, this can be legal. Such is the value of a well-padded resume.

One of the companies taking advantage of this demand is CBD'R US, an online cannabinoid product retailer based out of Anaheim, California, which began hiring unpaid interns two years ago.  

"We've found interning marketing majors has become beneficial for both us and the interns," said Keeon Yazdani, chief marketing officer at CBD'R US. "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."

Kristi Porter, the Georgia-based solopreneur behind the copywriting consultancy Signify, also found her unpaid internship program to be an overall positive experience.

"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 awards 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."

With college students lining up to work for free, it can be easy for small businesses to forget to do their legal due diligence. Many well-intentioned bosses may be surprised to learn that their off-the-books internship is breaking labor laws.

Under the Fair Labor Standards Act of 1938, any employee of a for-profit company must be paid for their work. However, interns are not considered employees under the FLSA.

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 the question so difficult is its subjectivity – interns and employers may have differing views on who benefits most from the arrangement. Couple this with the fact that many states have their own regulations, and the costs for employers can often outweigh the benefits.

It's a safe assumption that all unpaid internships are mutually beneficial to some extent – or the transaction would never have occurred in the first place. However, an intern's willingness to work unpaid does not alone make it legal. Citing "mutual benefits" wouldn't cut it in a court of law either – what matters is who benefits more. The answer may depend on which party you ask.

The Department of Labor addresses this subjective question with the flexible seven-part Primary Beneficiary Test, updated from the more rigid six-point test in 2018. Note that the test is for for-profit organizations only. For public sector and nonprofit organizations, the rules do not apply – indeed, both Congress and the White House have been known to employ unpaid interns.

According to the test, an intern is a primary beneficiary by the extent to which …

  1. The intern is aware that 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., with academic credit).
  4. The internship accommodates that 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 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 clear lines drawn in the sand, one could see why many employers and interns are left scratching their heads.

Brandon Ruiz, whose Los Angeles law firm Hennig, 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. 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," said Ruiz.

This extends to international students without authorization to work in the United States. While such students are only allowed unpaid internships, they must still pass the Primary Beneficiary Test – an inability to accept compensation does not provide a legal loophole. What's more, if the Department of Labor finds the internship to be in violation of the FLSA, that intern would be violating their immigration status. In such cases, the employer is not the only one punished; the intern may be at risk of deportation.

Employers undeterred by the Primary Beneficiary Test will also have to check with their state before hiring any interns. Where the federal government fails to set any strict requirements, many state governments pick up the slack. Some make the flexible guidelines of the seven-point test mandatory, with many providing criteria of their own.

New York, for example, includes 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.

In the case of CBD'R US, the lack of academic affiliation in its internships could be problematic. The state of California has one of the 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. Any internship that does not meet these standards must pay minimum wage.  

Those still keen on hiring interns should contact their nearest Department of Labor Wage and Hour Division agency to determine whether the FLSA applies. However, be prepared for the answer to almost always be yes.

Even legal unpaid internships tread a fine line of compliance, where failure is costly. While some large companies can game the system, 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.

Small business owners should also err on the side of caution. While not required in every state, the following suggestions may be helpful in preventing disputes:

  • Put all understandings about compensation and commitment in writing. Everything should be 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 employers find the quality of talent in a paid intern outweigh the cost-effectiveness of an unpaid intern. This was the case for The Hire Talent, a company that provides pre-employment assessment to recruiters, when analyzing its own recruiting methods. The Hire Talent currently pays interns $15 an hour.

"This makes us more competitive for the best talent," said CEO Fletcher Wimbush. "For us, it's a very inexpensive way to get tasks our higher-paid people would prefer not to do or test out new ideas."

Divorce attorney Russell D. Knight found the same to be true when hiring interns for his Chicago 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?"

Before you start jumping through the legal hoops of employing an unpaid intern, it may be worthwhile to consider the moral issue as well.

It's hard to see any harm done in an unpaid internship – they're free to leave, after all. According to the Economic Policy Institute, however, unpaid internships can be of great detriment to social mobility. Its report shows how the unpaid intern is not the only stakeholder; students who cannot afford to work for free are also affected. For such students, the price of an unpaid internship is not just time, but the opportunity cost of the wages they could be earning in another part-time or full-time role. Upon graduation, when these students are outcompeted by those who had the support for an unpaid internship, their disadvantage becomes even greater.

In short, unpaid internships create a vicious circle: They reward students who are already economically advantaged while ramping up the competition for everyone else.

That's not to say that your small business's internship program is single-handedly responsible for the U.S.'s rise in income inequality. Still, it's important to keep in mind that your intern's wellbeing is not the only moral issue at stake.

Legal unpaid internships are rarely profitable, and profitable unpaid internships are rarely legal. Meanwhile, the rare cases in the center of the Venn diagram may still provoke moral quandaries: While you may not have to pay wages, costs will be incurred 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.

Siri Hedreen

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.