Employment and Labor Law

By: Lauri E. Cleary and Priya Dadlani

You just hired a bright, local high school or college student to intern at your company this summer. You need not be concerned with wage and hour, child labor or other laws because they only apply to employees, and your new addition is an intern—something entirely different. Right? Not necessarily. And if you are mistaken—if this student is more appropriately classified as an “employee” in the eyes of federal and state regulators— you may find yourself in violation of applicable tax, wage and hour, wage payment, immigration, worker’s compensation, ERISA, and a host of other state and federal laws. But it gets worse: you may be subjected to intrusive audits and investigations, drawn into burdensome and expensive litigation, or face substantial civil fines and penalties, to name just a few perils you never may have considered.

Internships are an increasingly popular way for students to “try out” a particular career and for employers to identify new employees to hire upon graduation. More and more colleges and universities are requiring such training for graduation. According to the National Association of Colleges & Employers, in 1992 only about nine percent of college graduates had completed internships. By 2008, this number had risen to 83 percent, most of whom were not paid. But in 2011, polls showed that more than half of all college interns were being paid, and that trend continues today. Also, more than half of those who serve as interns later are hired by the businesses for which they intern. While later hiring ordinarily is not guaranteed (and should not be, as noted below), most of those new employees are paid more than new hires who did not serve as interns.

As the lines between education and employment continue to blur, anyone managing a workplace should be familiar with relevant child labor issues and laws. U.S. employers must comply with the federal Fair Labor Standards Act (FLSA) and corresponding regulations, as well as the numerous similar laws enacted by state and local governments. The FLSA and state and local laws all restrict work hours, and the particular tasks and occupations in which minors may engage.

How Do I Determine Whether My “Intern” is Really an “Employee?”

The FLSA offers no practical definition of “employee,” and the Supreme Court has not spoken. Recent court cases demonstrate that there are no bright lines or rules, despite a six-factor “test” used by the U.S. Department of Labor (DOL) for years before appearing in a clarification issued in 2010. The DOL’s six criteria for a legal unpaid internship may be found in DOL Fact Sheet #71 (see, http://www.dol.gov/whd/regs/compliance/whdfs71.pdf). They are:

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.

Although the courts have not yet announced an FLSA definition of “employee” in this context, recent court cases have distilled a few basic principles with which the DOL criteria above are consistent. The key factors tending to support a court’s finding that an intern or other “trainee” is not an employee require a look at whether:

• The trainee works for his or her own benefit to learn a profession or vocation with adequate supervision and instruction from the company;
•  The company does not derive the primary benefit of the work performed by the intern; and
• The trainee does not displace paid employees.

If any of the three factors above is missing, the intern is likely to be classified as an “employee.” In that case, the FLSA will require the wages to be paid and will impose various restrictions on the employment. The best practice we recommend is to put your internship program to the test—to both tests, that is. See whether your program would have trouble meeting any of six factors in the DOL’s test and, if so, see whether the more general three-factor test distilled from the court cases would be met. Then, rethink whether the particular attribute(s) making it difficult to meet all six DOL criteria and all three court criteria can be revised or discarded entirely to reduce risk.

In addition to the FLSA, there may be even more stringent laws in the state or locality with which the employment also must comply. A prudent employer will observe the most restrictive of the potentially applicable laws. The State of Maryland is working to assist those employers to comply with the many laws limiting and governing the employment of minors. It posts and updates helpful information on its Department of Labor, Licensing and Regulation’s Division of Labor and Industry website, including fact sheets and frequently asked questions, which can be found at http://www.dllr.state.md.us.

Whether in connection with internship and training programs, the utilization of independent contractors rather than employees, and even with respect to nonprofit organizations’ acceptance of volunteer services, the problem of “employee misclassification” has generated far more federal and state enforcement activity in recent years than ever before. The risks to an employer increase greatly when a misclassified employee is a minor. It is crucial that every employer be aware of and comply with federal, state and local laws each time a new worker (regardless of the label) is added, and employers should conduct periodic internal audits to ensure that their programs are not misclassifying volunteers, trainees, interns, or others not regarded as employees.