Can Your Startup use Interns? Considerations for the For-Profit Sector

17 Jul Can Your Startup use Interns? Considerations for the For-Profit Sector

School’s out for summer! Wa-hoo! Now, what are all these talented kids going to do with all their free time? 😉 Welcome to the startup world, interns!

I struggle with naming one person I know who hasn’t been an intern at some point in their careers. Internships are a rite of passage, a launchpad to a successful career, or a meaningful way to earn course credit outside the classroom. However, startups that bring on interns must understand the legal framework that dictates if and how the company may utilize them. The legal landscape controlling the treatment of interns has been rapidly evolving and for-profit companies offering internships have come under increased scrutiny.

So, what precautions should a startup take when hemming and hawing over the prospect of having an intern? First, lets differentiate between an intern and an employee. Internships exist as means for a person to gain practical skills or education in a certain field. A good way to think about this is that federal law uses the term “learner or trainee” instead of the colloquial term “intern”. The focus of an intern’s experience must, therefore, be educational. An employee, on the other hand, is hired to serve the interests of their employer. Employment has no inherent educational value. Employees are, however, entitled to protections under the Fair Labor Standards Act (FLSA). This piece of federal legislation sets guidelines for minimum wage, employee benefits, workplace discrimination, and unemployment insurance. State laws must meet or exceed the standards in the federal framework. Under the legal system, big problems arise when a company starts to muddle the waters by treating an unpaid intern like an employee.

With that difference now sorted out, lets look at unpaid vs. paid internships in the for-profit sector.

Unpaid Interns:

A for-profit company may bring on unpaid interns only if certain criteria are met. The criteria are the same whether the unpaid internship is undertaken for credit as part of a formal education or for individuals looking to explore potential careers.

The over arching compliance scheme that all companies must adhere to is that the work performed by an unpaid intern must serve only the intern’s own interest. In other words, the company bringing on an intern must provide the education or instruction so that the intern develops skills and not so the company receives free labor. Specifically, U.S. Courts and the Department of Labor look at six criteria to determine if a company is treating an unpaid intern as an employee in violation of FLSA. All six of the following criteria must be met to exempt an unpaid intern from FLSA requirements.

1. The internship, even though it involves the company’s operations, must be similar to training given in an educational environment. Plain English: The training the intern receives should be centered solely on them learning new specific skills, as they would at school.
2. The internship experience is for the benefit of the intern. Plain English: You should help the intern drastically more than the intern helps you. 
3. The intern does not displace regular employees and must work under the close supervision of existing staff. Plain English: If a startup would have to hire additional employees or force current employees to work overtime if the intern wasn’t around, you don’t qualify to have an unpaid intern.
4. The employer providing the internship derives no immediate advantage from the activities of the intern; and on occasion may actually be impeded. Plain English: It will probably cost you money to have an unpaid intern since you should be taking time to teach them a skill and not depending upon them to generate revenue.
5. The intern is made fully aware that they are not entitled to a job at the conclusion of the internship. Plain English: An unpaid internship should not serve as a “tryout” for a future job as this is seen as “luring” potential workers to provide free labor.
6. The intern is made fully aware that they are not entitled to monetary compensation for the time spent in the internship. Plain English: Do not promise the intern that they will receive back-pay for the time spent as an unpaid intern if they are eventually hired.

Meeting each of the six criteria above is no small task, especially for a busy startup with few employees that can act in a supervisory role. It is also an evolving field of law with several recent cases attaining national prominence. Unpaid interns have sued for, and won, back-pay under the theory that they were treated as employees entitled to FLSA protections. They demonstrated that their treatment qualified as employment by showing they were assigned mostly clerical duties and spent significant time running errands for supervisors. Its clear that such practices sought only to benefit the employer and easily fail several of the above six criteria. In sum, if your company wants to bring on interns but can’t clearly meet all six criteria, you must comply with FLSA and all applicable state employment laws.

Now, of course, this does not preclude an intern from using the photocopier, but keep in mind that an unpaid internship must have a concrete educational value. Furthermore, startups must realize that the very nature of an unpaid internship can prove to be costly, as employees must divert their time away from revenue generation to provide an educational experience to the intern.

Paid Interns:

The term “paid intern” is somewhat of a misnomer. Under federal law, a person is either an employee falling under FLSA or otherwise qualifies as an unpaid trainee exempt from FLSA. Therefore, paid interns are really just at-will employees.

      The model of the paid internships has, however, taken on a few different faces. They can include short-term contract employment with money coming directly from an employer, or grant-funded programs such as Maine Accelerates Growth and UMaine Innovation Fellows. These programs promote entrepreneurialism by providing funding for qualified business to use, in part, for hiring paid interns. The businesses are then able to provide an educational experience for their interns without expending their own financial resources. Startups still need to take due care to comply with appropriate FLSA and Maine employment regulations and when partnering with any type of program that provides funding for your intern, make sure to have a conversation with the program to clearly define the responsibility of the company in relation to the administrative costs associated with having those interns as employees.

Wait, what “administrative costs” are you talking about? Most employers know all too well that they must pay worker’s compensation and unemployment insurance as part of an employee’s earnings.  However, many startups consist only of owners, and have never had an employee. Since a paid intern is really an employee, the administrative fees mentioned above can average out to 10-12% of their gross salary (ex: An employee salary of $1000 a week ends up costing the company between $1100-1120 a week). Additionally, if your company utilizes a payroll service, the service’s fees could increase if you need to add additional payees.

In Maine, it is possible to avoid paying worker’s compensation and unemployment insurance by hiring independent contractors (independent contractors are typically responsible for paying these fees as part of their taxes). It is, however, unlikely that a paid intern would qualify as an independent contractor due to their inherent lack of independence from your company’s operations. An intern is, by definition, working for your company to gain an education and not to provide a unique service, as would an independent contractor.

Additionally, if interns under the age of 18 are brought on, Maine’s child employment laws take effect and must be stringently followed. The implications of those laws should be well understood prior to having a high-school aged intern, whether they are paid or unpaid. Important to note is that Maine laws controlling the employment of minors change significantly depending on the type of industry and whether school is in session – just this week Maine law concerning the employment of 14- and 15-year-olds was amended to broaden work opportunities for teenagers in certain industries.. There are also specific rules for internships taken for credit as a part of post-secondary education.

The internship model is evolving . Government agencies and the courts are enacting laws that mandate formal educational environments and strict adherence to employment laws. And while guidelines are always surrounded by a layer of haze, following the six federally mandated criteria for having unpaid interns gives startups a great way to form a strategy for creating a successful program. Lastly, paid interns are technically employees, so you’ll need to treat them as such and understand the laws that go hand-in-hand with bring them on board.

[Updated from original post on March 28, 2014. ]