To Pay or Not to Pay – New Rules On Interns

Over the years many businesses have taken on interns to fill positions and have not paid wages or have paid something less than minimum wage.  Recently I have run into a couple of college grads that have been in “Intern Relationships” that have not been paid and those meetings prompted me to help clear up the rules on interns.  The rules around these relationships have recently stiffened and I thought it would be worth reviewing the new rules.   In 2010 President Obama signed Executive Order 13562.  Prior to this order, the rules regarding the relationship of an intern to the employer were pretty loose.  This meant that a lot of employers were getting “free labor” from a lot of college kids looking for experience.   These interns did in fact provide valuable labor and were not being compensated for the work.  The no-pay-for-work relationship also affected their ability to receive work comp and unemployment; so compared to a normal entry level employee they were not receiving standard employment protections.   So as much as I hate to say it – this Obama Executive Order was probably both fair and needed.

As a result of the Executive Order there was a DOL Fact Sheet #71 published that defines the new rules.  I will cover the high points, but the complete fact sheet is worth reading if you are using “Fee Interns”.   Getting this right can be very important considering an audit that finds your business not to have paid folks you should have paid can result in a requirement to re-pay ALL of the interns affected for several years in arrears, all of the associated employment taxes – FICA, SUI & FUI and of course the wonderful penalties associated with the infraction.  This really adds up and could be catastrophic for a businesses.

Here is an overview of the rules:

•          “Employ” is defined as “suffer or permit to work” and by law those who are employed must be compensated for the services performed for the employer.

•          You may have an inter work on an unpaid basis for the purpose of the “Education” of the intern in question.  If the work is seen as being done for the benefit of the employer, the work must be paid according to the standard rules of employment – i.e. minimum wage, overtime etc.  This means that if you bring on an intern (as free labor) who is an accounting major because you have an abundance of filing that needs to be done and the job consists of cleaning up and alphabetizing your paperwork – this does not qualify.  It does not substantially add to their education.  If however the intern works an “educational environment” and works under close supervision for the purpose of education they might qualify to work on an unpaid basis.

In order to qualify for “unpaid” status as an intern ALL of the following six criteria must be met.  These are directly from DOL Fact Sheet # 71.

1 – The internship, even though it includes actual operation of the facilities of the employer, is similar to training which 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 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.

Remember that all six factors must be fully met.  The activities should be for the benefit of the intern – this means that it should be primarily of an educational nature.  When the work activates overseen by the educational institution they are more likely to qualify as non-paid.  If the intern is performing productive work that benefits the employer such as filing, general clerical, assisting clients this will most likely not qualify for non- paid status.  This is because it is the kind of work that a regular paid staff member might do and is not primarily “educational”.  The fact that they are developing “good work habits” will not meet the criteria.

If you “un-employ” someone and replace a regularly paid job with an unpaid intern you are asking for trouble.  In addition some employers have traditionally taken on unpaid interns as a trial period prior to paid employment – this does not meet the standard either.

If your company uses interns or plans to do so please look up the new DOL rules and make very sure that you qualify or give us a call and we will supply you with the DOL Fact Sheet.  One thing is for sure, the penalties are not worth getting this wrong.