Nonprofit employers should be aware that on January 5, 2018, the Department of Labor (DOL) discarded the stringent test previously used to determine whether an intern is an "employee" under the Fair Labor Standards Act (FLSA) in favor of the more flexible "primary beneficiary" intern test utilized by numerous federal courts. This new guidance provides nonprofits with the opportunity to stop paying interns or to hire unpaid interns, provided certain conditions are met.
Under the former test, for an intern not to be considered an "employee" who is subject to the FLSA's minimum wage and overtime requirements, a nonprofit employer had to satisfy six factors.1 The most restrictive required factor was that the organization "derive no immediate advantage" from the intern's activities. Because most internship programs involve some element in which the intern performs job tasks from which the nonprofit benefits, most nonprofit employers were required to pay their interns, even where the interns' job tasks were designed primarily to allow the interns to learn or hone job skills.
The primary beneficiary test is more flexible. It shifts the focus from whether the nonprofit employer benefits at all from the intern relationship to whether the nonprofit or the intern is the "primary beneficiary" of the relationship. The test also allows for a weighing and consideration of the factors, rather than requiring that all factors be met. The primary beneficiary test factors include (1) whether both the employer and the intern understand that the intern will not be compensated; (2) whether the internship provides training similar to training that would be provided in an educational environment; (3) whether the internship results in academic credit or is otherwise part of the intern's coursework; (4) whether the internship corresponds with the intern's academic calendar; (5) whether the internship ends after the intern has gained the educational benefits of the internship program; (6) whether the work complements, rather than displaces, the work of employees and provides significant education benefits to the intern; and (7) whether the employer and intern understand that the intern is not entitled to a paid job at the end of the internship.
Although the test newly adopted by DOL is less rigid than its predecessor, both tests contain some of the same or similar factors. For example, both require that the intern does not displace regular employees and that the employer provide training similar to that which would be provided in an educational environment. Thus, nonprofits should exercise caution in reclassifying interns from an FLSA-covered status to a non-covered status (i.e., from paid to unpaid status) and should not assume that simply because an intern receives credit from his or her educational institution the internship automatically may be unpaid. For example, where an intern is hired to supplement the nonprofit's workforce and the internship runs beyond the academic year, it is likely that, even under the more flexible primary beneficiary test, the nonprofit would be considered the primary beneficiary and thus would have to compensate the intern as an employee, even if the intern receives educational credit for the internship.
Recommendations
Nonprofit employers with interns, whether paid or unpaid, should re-examine their interns' FLSA coverage. If a nonprofit wants to reclassify paid interns, or hire unpaid interns, it should design an internship program that includes, at a minimum, the following elements:
- Requires the intern to execute appropriate documentation that expressly states the internship is unpaid and that the intern is not entitled to a paid job at the conclusion of the internship;
- Requires, as eligibility factor, credit from the intern's educational institution;
- Educational training sessions;
- Involves job tasks that are primarily not administrative in nature to avoid the perception that the intern is performing the work of (i.e., displacing) other employees; and
- Run with the intern's academic calendar (e.g., begins and ends with a semester).
Nonprofit employers should seek the guidance of counsel for assistance in designing the specific details of unpaid internship programs.
[1] The six requirements included the following: (1) the internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment; (2) the internship experience is for the benefit of the intern; (3) the intern does not displace regular employees, but works under the close supervision of existing staff; (4) the employer that provides the training derives no immediate advantage from the activities of the intern, and on occasion its operations may actually be impeded; (5) the intern is not necessarily entitled to a job at the conclusion of the internship; and (6) the employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.