Employer Bears All Risk for Unpaid Interns

An enthusiastic and energetic individual approaches you with a proposal to volunteer his time to gain valuable experience in your industry. “After all,” reasons the prospective volunteer, “how can I get my first job if I have no experience in the field of my choice?” Sounds like a win-win situation, doesn’t it?

Like many win-win situations proposed to employers by prospective workers, however, this one has a potential “catch.” The unpaid volunteer may cost your company more than you bargained for — in the form of the U.S. Department of Labor (DOL) finding that you violated wage and hour laws or when a lawsuit is later filed by the “volunteer.”

Learn more about wage laws and correctly classifying workers in the Wage and Hour Compliance Manual

Background
In the current economic downturn, there are more job seekers than there are opportunities for employment. The competition for a good job — or any job, for that matter — is keen. We’ve all heard the horror stories of scores of applicants for each entry-level job opening. Laid- off baby boomers are in competition for employment with teenagers looking for their first job. Ambitious job seekers may approach an employer asking for an unpaid “trainee” or “internship” position to gain a competitive advantage over other applicants seeking the same job. The applicant wins by gaining experience, skills, and contacts. Employers win by gaining a free worker, even if he’s not highly skilled.

However, employers are best protected if they remain wary of a “win-win” proposal made by a prospective worker, particularly if he’s a “volunteer” proposing an unpaid internship. Although he may be willing to do the work as a volunteer, the DOL might take a different view of the arrangement and, long after the relationship ends, may require you to reclassify him as an employee. Or the intern may later decide to claim that the work performed should have been compensated and make a belated claim for back wages.

It’s one thing to enter into a temporary relationship with an employee when you know what the costs are. However, it can be a rude awakening when you get hit with a claim for back wages, often years after the intern relationship has ended, perhaps accompanied by allegations of willful violations of federal or state law. Suddenly, the “unpaid internship” becomes much more expensive than previously imagined.

Federal law requires that every employee be paid at least the minimum wage for every hour worked and overtime for hours worked in excess of 40 per workweek unless a specific exclusion applies. The Fair Labor Standards Act (FLSA) defines “employment” as “to suffer or permit to work.” To “suffer” means to “require”; to “permit” means to “allow.” Those terms have been interpreted broadly to cover as many workers as possible. Thus, “to suffer or permit to work” has been construed expansively by the DOL to effectuate the broad remedial purposes of the FLSA. So if work is required or even allowed, the employer is obligated to pay for that work.

When it comes to classifying workers’ positions and claiming exemption from the minimum wage and overtime requirements of the FLSA, the employer bears the burden of proof. In the case of an unpaid volunteer, you must affirmatively establish that the worker is properly classified as a “trainee” (as opposed to an “employee,” who must receive minimum wage and overtime compensation for the time spent in the “volunteer” position). Simply stated, when it comes to accepting a proposal of an unpaid internship, the employer bears all the risk.

While an internship may initially appear to be mutually advantageous (some may describe getting a willing worker for free as a no-brainer), employers need to remember that the mere agreement by a volunteer to perform work as an unpaid intern doesn’t determine his proper legal classification. The DOL recently emphasized that the compensation requirements of the FLSA apply to employees who are “required or permitted” to work.

Mastering HR: Overtime

Volunteers may not waive the requirements of federal law
The U.S. Supreme Court has determined that employees subject to the FLSA may not choose to decline the Act’s protections by performing activities characterized as “volunteer” services. The Court was concerned that unless employees were barred on a general basis from “volunteering” to perform services for their employers, there would be potential for the coercion of uncompensated services to the detriment of the FLSA’s purposes.

The Court didn’t wish to allow the prohibition against employees waiving their protections under the FLSA to be circumvented by characterizing work as “volunteer” services. Accordingly, the general rule is that individuals who are “suffered or permitted” to work must be compensated under the law for the services they perform.

The DOL treats unpaid volunteers in the not-for-profit public sector more leniently than it treats interns performing work for private for- profit employers. Applying a more liberal “totality of the circumstances” standard, courts have allowed public employers to accept volunteer work without incurring back-wage liability. Municipal employers have been allowed to accept the services of volunteer emergency medical technicians, firefighters, paramedics, and individuals donating services to recognized charitable institutions.

However, even when an appellate court has ultimately resolved the question in the employer’s favor, the employer has had to endure a long and expensive legal proceeding ending only after judicial adjudication.

For the typical private employer struggling to make ends meet in this difficult economic environment, the use of volunteers might initially appear advantageous but may not withstand the rigorous analysis required by the DOL. In April 2010, to emphasize its enforcement position, the DOL published a six-point guide for use in determining whether a trainee is properly classified as unpaid. Accordingly, an employer in the private sector should enter into an unpaid internship arrangement knowing that the DOL will most likely view the relationship as employment unless the employer satisfies, by a preponderance of credible evidence, all of the criteria set forth in Fact Sheet #71.

Fact Sheet #71: the test for unpaid interns
According to the DOL, individuals who participate in “for-profit” private-sector internships or training programs may do so without compensation, but only under specified circumstances. Whether an internship or training program meets the exclusion depends on the facts and circumstances of each program. You should apply the following six criteria when making the determination:

1. the internship, even though it includes actual operation of the employer’s facilities, is similar to training provided in an educational environment;
2. the internship experience is for the benefit of the intern;
3. the intern doesn’t displace regular employees but works under the close supervision of existing staff;
4. the employer derives no immediate advantage from the activities of the intern, and on occasion, its operations may actually be impeded;
5. the intern isn’t necessarily entitled to a job at the conclusion of the internship; and
6. the employer and the intern understand that the intern isn’t entitled to wages for time spent in the internship.

If all six criteria are met, an employment relationship does not exist under the FLSA, and the federal minimum wage and overtime provisions do not apply to the intern.

In light of the requirements of the analysis and the applicable criteria, it appears that the benefit of allowing unpaid interns to work is substantially diminished from an employer’s standpoint. The relationship must be primarily educational and for the benefit of the individual. Under those circumstances, you may find yourself spending more time and money in the close supervision of the intern than you would if no intern were present at all.

HR Guide to Employment Law: A practical compliance reference manual covering 14 topics, including overtime and FLSA requirements

Precautionary measures
If, after all is considered, an unpaid internship is still offered to an individual, there are precautionary measures you may take to protect yourself from an allegation of misclassification (and a claim for back wages) later. Specifically, you should:

• create written policies or handbooks devoted exclusively to interns (avoid using the same policies and handbooks for both interns and employees);
• remove terminology from written intern policies that blurs the distinction between interns and employees (for example, intern policies shouldn’t state that the employer is “hiring” an intern or refer to an “apprentice,” a “trial period,” or a “working interview”);
• before the intern starts working, ask him to sign and date a statement acknowledging his understanding that there is no guarantee of a job at the end of the internship and no expectation of wages or any compensation that could be construed as wages;
• tie expense reimbursements, if any, to specific expenses with receipts to show there were bona fide expenses incurred by the intern that were, in fact, reimbursed; and
• keep good records of expense reimbursements because failure to do so will likely lead the DOL to conclude the “expense reimbursements” were merely disguised wages.

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Conclusion
Employers must tread carefully when considering a “win-win” proposal of an unpaid internship by a volunteer worker. Unless you can establish to the DOL’s satisfaction that all six of the criteria in Fact Sheet #71 support an unpaid internship, the agency will typically find that individuals working for “for-profit” employers are covered by the FLSA and must be paid at least minimum wage and overtime. Remember, an intern cannot be considered a free worker ? and you bear all the risk.