What You Need to Know About Unpaid Internships

Source: Venture Fizz

Tuesday May 14, 2013 by Michael Gaiss – Founder, ThinkB1G & EIR, UMass-Boston Venture Development Center

ImageThe topic of unpaid internships comes up frequently in conversations that I have with companies looking to bring on young talent. It is an area where many people do not have a full grasp of the rules and regulations that exist (which can vary by state).

The team at WilmerHale has just brought a lot more clarity to the area through a recent webinar that they conducted (“Legal Issues for Startups: What You Need to Know About Unpaid Internships”). It is an EXCELLENT resource that clearly articulates the legal requirements and risks associated with unpaid internships and how to best structure a compliant program if this is a route your company wants to pursue.

According to WilmerHale, more often than not unpaid internships today are not structured in a legally compliant way. The penalties can be harsh if it is proven that your company is in noncompliance with the regulations. Therefore, know what you’re getting into before you proceed.

Everything starts with understanding the Fair Labor Standards Act (FLSA), a general law that determines the employee-employer relationship and what types of wages employees should receive. The FLSA has an exception for what they call “trainees” (i.e., unpaid interns). Here is the six factor test that companies must meet in order to qualify for this exception:

1.  Internship must be similar to training provided in an educational environment
2.  Internship must be for the benefit of the intern
3.  Intern does not displace regular employees and works under close supervision
4.  Employer derives no immediate advantage from the internship; operations may actually be impeded
5.  Intern is not necessarily entitled to a job at the end of the internship
6.  Intern must understand that he/she is not entitled to wages

In Massachusetts and California, employers just need to satisfy the FLSA six factor test. New York has an additional five criteria that companies must meet if operating in that state (which WilmerHale suggests is good advice to follow even if you are based elsewhere in order to really play it safe).

The above plus much more – best practices to follow, use of stipends, structuring paid internships as 1099’s, etc. – can be found at these links:

*  Webinar Recording
*  Presentation Materials

Everyone either currently using or contemplating unpaid interns should take 25 minutes and review this material if you are unfamiliar with the topic. The risks can be high if you don’t get it right and are found to be in noncompliance. For example, in Massachusetts, there are mandatory 3X damages if this is found to be the case.

Thanks to WilmerHale for pulling together such invaluable content as startups consider options for growing and scaling their teams.

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