Every spring, we start to get questions about hiring summer interns and what (or if) they should be paid. Thanks to Department of Labor (DOL) guidance, employers have flexibility when considering their pay options for interns.

Internships offer students opportunities to gain real-world experience and hands-on career development. The practical work experience derived from internships allows students to network, identify what they’d like to do career-wise, and gain an edge in an increasingly competitive job market.

As an employer, hiring interns gives you access to highly motivated and educated young workers and allows your junior managers to gain more experience training and supervising. Some students might even apply to work in your organization for the experience with no expectation of receiving a paycheck. This seems like a perfect solution for both intern and employer, right?

You can get some much-needed work done and provide students with real-life business experience. But there are potential pitfalls that many employers overlook; however, by identifying and managing them, you and your company can limit the potential for liability, employee relations issues, and administrative hassles.

Issues

Giving students meaningful work through an internship program is important for everyone concerned, but there’s another issue to consider: the pay. Career services professionals recommend that students should be paid at least minimum wage. After all, interns are working alongside regular employees, often doing some of the same tasks, and should be compensated for that work. However, there are several other issues surrounding internships to consider, one of which is the Fair Labor Standards Act (FLSA).

The FLSA doesn’t define “intern” or have an exemption from minimum wage or overtime for them, but this doesn’t necessarily mean that interns shouldn’t be paid. Most HR and legal practitioners consider interns as professionals in training, and employers using an intern’s services should generally adhere to FLSA minimum wage and overtime pay.

Of note, the FLSA does exempt certain people who perform services for a state or local government agency or who volunteer for humanitarian purposes at nonprofit food banks. The DOL’s Wage and Hour Division also recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation, for religious, charitable, civic, or humanitarian purposes to nonprofit organizations. Unpaid internships for public sector and nonprofit charitable organizations, where there is no expectation of compensation, are generally permissible.

DOL Test for Interns

According to the DOL, a “primary beneficiary test” determines whether an intern is an employee. The test examines who primarily benefits from the relationship: the employer or the intern. It’s a flexible test. No single factor is more important than another, and whether an intern is an employee under the FLSA depends on each unique situation. The test considers seven factors and how they apply to the intern-employer relationship. For example, any direct or implied promise of pay suggests that the intern is an employee, and vice versa. But that factor alone is not determinative, especially since some experts encourage at least minimum wage to be paid to interns.

The test includes examining the extent to which the:

1. Intern and employer clearly understand that there is no expectation of compensation.
2. Internship provides training that would be similar to the training received in an educational environment.
3. Internship is tied to the intern’s formal education program by integrated coursework or the earning academic credit.
4. Internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. Duration of the work provides the intern with beneficial learning.
6. Intern’s work complements, without displacing, paid employees’ work while providing the intern with significant educational benefits.
7. Intern and employer understand that there is no guarantee of a paid position when the internship ends.

The key consideration is determining who benefits more from the internship; the student or the employer. If the employer is profiting from the work, the company may have to treat the intern like an employee and pay them at least minimum wage and overtime according to federal rules. States, cities, and local jurisdictions may have additional, conditions that employers must satisfy.

It’s important to note that even though the terms of an internship may meet federal standards, stricter local rules may take precedence. in general, the cost of a paid internship will generally outweigh dealing with an audit, lawsuit, or negative publicity.

If there is ever doubt about whether an internship should be paid, the safe option is to make it paid. A student intern might not be considered an employee—entitled to pay—if the training program primarily provides them with professional experience that furthers their educational goals. But student interns should be paid if they’re performing work usually done by employees and aren’t receiving training and close mentoring.

What Should You Pay?

If you determine that your summer interns are really employees entitled to compensation, the next question is whether the intern is exempt or nonexempt according to the FLSA. Typically, interns will not be exempt, either because they do not meet the duties test for any of the white-collar exemptions, because they are paid less than the statutory minimum salary, or both.

Employers must comply with federal labor laws and the more restrictive state and local laws, so apply wage-hour requirements to the intern as you would for any other employee. Assuming your interns are nonexempt, they must be paid at least the minimum wage (federal, state, or local, whichever is higher), receive overtime when applicable, and be subject to your state’s meal and rest break rules.

If you are unsure how much to pay interns, consult with your local high school or college placement center. Their counselors may be able to give you some direction on what other employers in your area are paying. Pay levels for internships are typically determined by a student’s year in school and field of work. The National Association of Colleges and Employers (NACE) 2020 Internship & Co-op Survey Report found that companies expect to pay bachelor’s degree-level interns an average of $20.76 per hour. Pay for high school teens is typically minimum wage.

What About Offering Health Benefits?

Some employers choose to offer benefits coverage to interns; applicable large employers may be required to offer group health insurance benefits to avoid potential penalties under the employer shared responsibility provision of the Affordable Care Act (ACA). Under the ACA rules, interns are defined as seasonal employees when hired into positions for which the customary annual employment is six months or less. The ACA employer mandate may be triggered for seasonal employees (interns) depending upon a complex set of rules. Small employers are exempt.

Be sure to work with your broker and legal counsel to review the application of the rules based on the specifics of your benefit plans and employee work schedules. Offering benefits to interns enhances your employment brand and reputation in college placement offices and with the labor marketplace overall. The downside may be extra administrative work to communicate the benefits options, handle enrollment, and manage COBRA, although this is usually minimal. Often, interns are students or young adults who have coverage through their parents or other sources, and many choose not to enroll.

Finally, before extending health benefits to interns or temporary employees, review the eligibility provisions in your benefit plan documents. You may need to work with your carrier and broker to amend the plan to extend eligibility to interns.

Practical Tips for Hiring Interns

Before hiring an intern:

• Develop an intern policy and define the job carefully so that both parties are clear about job duties and expectations. This reduces misunderstandings that can lead to lawsuits. The policy should define the basic internship program, such as compensation structure (or spell out that interns will not be paid), benefits (if applicable), eligibility requirements, and the intern’s at-will status. Make sure the policy does not establish what could be viewed as a legally binding contract. Never infer the promise of employment for a specified period.
• Define supervisory roles and supervisor/intern evaluations. Reliable supervision is the key to preventing problems, including injuries, discriminatory actions, and performance failings. Make sure all supervisors know who is overseeing the work of each intern.
• If possible, obtain formal documentation from the intern’s college or high school explaining the educational relevance of the internship if it will earn the student credits.
• Ask whether the school provides liability insurance to cover damage caused by a student. Many schools carry the coverage. In addition, if your company has employment practices liability insurance, check whether it extends to interns.

Once your intern is hired:

• Onboard your intern by covering the company’s vision, mission, and values, orienting him or her to your company’s products and services and providing a roadmap of how to get things done within the company. Cover the important company policies that all employees, regardless of status, must follow.
• Confirm pay and benefits (if applicable) and explain pay dates.
• Make sure you comply with child labor laws that may affect the age groups of your interns.
• Limit teen interns’ hours. If your internship program uses high school students, the FLSA’s or state’s child labor provisions may curb students’ hours and duties as follows:
  • In most cases, children age 13 and under are off limits to employers, except for certain odd jobs, like newspaper delivery or babysitting.
  • Youths ages 14 and 15 can work outside of school hours in certain nonhazardous jobs, but their hours are limited to three on a school day, 18 in a school week, eight on a non-school day, and 40 in a non-school week. Further, they can work only between 7 a.m. and 7 p.m.; the nighttime limit extends to 9 p.m. in the summer.
  • The FLSA specifies 16- and 17-year-olds can work unlimited hours, but not in certain hazardous jobs.
  • Once workers reach age 18, they are free to work any job for unlimited hours.

For more details on child labor laws, visit the Department of Labor Youth Labor site. Check your state labor laws, which may require more strict child labor standards, and check for other requirements, such as whether your state requires work permits or proof-of-age certificates for minors.

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