To Pay or Not to Pay

Internships are a proverbial win-win for students and employers alike. Students gain valuable work experience, while employers get to “try out” potential future employees while gaining some positive on-campus PR. Yet the question of whether interns should be paid has been pondered for decades. While more than half of companies offer some sort of salary or stipend for their interns, some believe that the experience, coupled with earned college credits, should be pay enough. Others argue that fairly compensating an intern results in a more positive experience for the student, a definite plus if the employer decides to pursue them as a potential future employee.

In recent years, the debate over intern compensation has heated up, thanks in part to a scathing BBC expose and editorials in prominent business magazines across multiple continents. Specifically, there is growing concern that expecting students to not only work for free, but to pay for the resulting college credits is unfair, particularly for students from lower-income families who may not be able to afford to pay for the privilege of interning.

Some industry associations have issued guidelines on the “ethical use of paid and unpaid interns.” Most importantly, the Obama administration announced its intentions to crack down on companies that don’t comply with the rules regarding unpaid internships, as laid out by the U.S. Department of Labor’s Wage and Hour Division under the Fair Labor Standards Act (FLSA).

Under the Act, employers are required to compensate all employees. The key lies in determining whether an intern is truly an intern or actually an unpaid employee. In order to be considered an internship (and thus not required to be compensated), a program must meet six specific criteria:

#1 Intern Receives Training Equivalent to a Vocational School – In other words, the intern could pay to receive essentially the same training somewhere else.

#2 Intern Benefits from the Experience – The intern should be getting the practical benefit of being on-the-job in a workplace environment.

#3 Intern Must Not Displace a Regular Employee – If an intern is providing an essential service that others are normally paid to do, it’s a red flag that they are actually an employee and entitled to payment for all hours worked, even they have been labeled an intern.

#4 No Immediate Advantage from the Intern’s Activities – Not only may the employer not derive any significant benefit, but there may actually be a hindrance of operations because of the amount of time necessary to train and supervise an intern.

#5 No Guarantee of a Job – Internship programs are often used as recruiting techniques, but the employer must inform the intern that they are not guaranteed a job at the completion of the internship.

#6 Mutual Understanding of Unpaid Status – If you don’t intend to pay an intern, you must tell them so upfront. In fact, it is advisable for both parties to sign an agreement to that effect.

If all six of these criteria are met, an employment relationship does not exist under the FLSA and the Act’s minimum wage and overtime provisions do not apply to the intern. Employers must adhere carefully to these criteria, as failure to meet even one of them could result in significant fines and penalties.

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