According to the Bureau of Labor Statistics, the unemployment rate is especially high among college students and recent graduates. For those unable to find paid work, an unpaid internship might seem like a useful way to gain valuable experience, recommendations and even future job placement. Likewise, for cash-strapped startups, the idea of getting labor without having to trade liquidity or valuable equity can be too appealing to ignore.
However, there are some very serious legal considerations every for-profit company -- including startups -- must be aware of before attempting to hire unpaid interns.
Under federal law, every employee in America is entitled to a minimum wage, additional compensation for overtime and certain other benefits. The employer must also consider worker’s compensation, discrimination laws, employee benefits, state labor laws and unemployment insurance coverage. In order for these requirements to not apply, the employment relationship must fall under applicable legal exemptions.
In the case of Walling v. Portland Terminal Co., the United States Supreme Court held that one such exemption to the federal requirements exists for people who work for their personal advantage rather than that of their employer. Such a person may be considered a trainee instead of an employee for purposes of federal law. In this seminal court case, the Supreme Court looked to six factors in deciding whether a work program was for the intern’s own educational benefit or the advantage of their employer.
Here are the six factors considered by the Court:
- 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.
- The internship experience is for the benefit of the intern.
- The intern does not displace regular employees, but works under close supervision of existing staff.
- 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.
- The intern is not necessarily entitled to a job at the conclusion of the internship.
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
The DOL has taken the position that for the exemption to apply, all of the factors listed above must be met. While some of the above requirements may be covered by an effective agreement, those that are subjective create a substantial burden on a company looking to hire interns to create a substantive program that meets these criteria.
The key takeaways for anyone looking to hire unpaid interns is that you need an appreciation for the nebulous area of the law you are entering, understand the difficulty of complying with the Department of Labor’s specifications, and finally, ensure you do all you can to be in compliance with the law.
Peter I. Minton is the founder and President of Minton Law Group, P.C. His practice focuses on the representation of startups and emerging businesses in business transactions, capital raising, corporate governance and general corporate matters. Prior to founding the Minton Law Group, P.C., Peter attended the University of Pennsylvania and Georgetown University Law Center. Upon graduation, he began his practice in the mergers & acquisitions department of a large New York City law firm where he represented private equity and hedge fund clients in a diverse range of transactions. He is a admitted to the New York bar.
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