In early 2018, the US Department of Labor announced significant changes to the Federal Labor Standards Act (FLSA).  Courts have used the "primary beneficiary" test to determine the relationship between intern or student and employer, and whether the intern is an employee under the FLSA.

Employers, too, can use this test of seven factors to assess whether their interns qualify as employees, requiring all the same legal rights and obligations under the FLSA.

The Seven Factors

According to the DoL, whether an internship is paid or unpaid depends on the extent to which:

1. The intern and employer clearly understand there is no expectation of compensation.
2. The internship provides training similar to that given in an educational environment.
3. The internship is tied to an education program by coursework or the receipt of credit.
4. The internship accommodates commitments by reflecting the academic calendar.
5. The internship’s duration lasts only as long as the intern is beneficially learning.
6. The intern’s work complements, rather than displaces, the work of paid employees.
7. The intern and employer understand there is no entitlement to a paid job at the end.

In summary, an internship can be unpaid as long as the intern, and not the employer, is the primary beneficiary. From the internship, an intern should gain an understanding of what the career path entails, skills and experience for their resume and, often, academic credit.

Volunteer, Employee or Contractor?

Based on the seven factors, an intern can be an employee, a volunteer or an independent contractor. For the employer, it's important to get the classification of an internship right. An intern who is an employee will have far more legal protections and tax implications than an intern who is a volunteer.

Volunteer

An unpaid intern is essentially a volunteer. Volunteers receive the fewest legal protections. You should classify your intern as a volunteer if, among other things, the intern works on educational or experimental activities and you’ve made it clear they won’t be receiving a wage.

Unpaid internships will often reflect the academic calendar to appeal to students. For example, an internship might begin in May and end in August to align with the spring semester for higher ed students.

Employee

A paid intern is typically an employee who is entitled to a minimum wage and significant legal protections. You should classify your intern as an employee if, among other things, their work is part of the regular course of business, the internship continues during the school year and you have stated, implicitly or explicitly, the intern will be paid.

Contractor

On occasion, an intern can be considered an independent contractor. This category doesn’t have the same legal protections and rights as an employee, but companies still have some tax obligations. Most internships don’t fit this model, but employers can make a case for interns who work on a per-project basis.

For example, a photographer who hires an intern to assist with a photo shoot might be able to make the case that their intern is a paid independent contractor.

What if You Misclassify an Intern?

Some businesses attempt to hire interns to do the work of a paid employee without the wage and protections given under the FLSA. Employers who misclassify their interns, even unintentionally, may face fines for noncompliance. They may also be hit with class action lawsuits by their former interns.

Former interns at Fox filed a class action lawsuit alleging they should have been classified as employees. The company agreed to pay nearly $500 to every intern who could prove they interned without pay for at least two weeks between 2005 and 2010. In addition to Fox, Dualstar Entertainment and Ralph Lauren have also been on the receiving end of class action lawsuits regarding unfair internship practices.

Avoid confusion and potential lawsuits by referring to the test above and stating the explicit expectations of the intern in the offer letter.