How to Create a Valuable (and Legal) Internship Program

When summer finally rolls around, the birds are singing. The days are longer. And your office feels a little lighter. You may find your office welcomes a bevy of young, energetic interns that bring a breath of fresh air with them.

Hosting an internship program is a great way to give back to students looking to gain experience. Also,  your team will appreciate having a few extra hands on deck. Internships are a valuable experience for students but can turn nightmarish—especially if the company they’re working for views interns as a source of low-wage or free labor.

How you manage your internship program is not entirely up to you. If your internship program isn’t satisfactory, your company could find itself in some hot water with the law. It’s important you understand the legal requirements for internship programs before you start one for your business. Not only will you be protecting your company from potential legal troubles, but you’ll be better prepared to give your interns a great experience and make the best use of their talents.

Know the Rules for Internship Programs

If you run a “for-profit” business, you need be especially careful about how you structure your internship program. You may have heard jokes about interns providing “free labor”—but don’t count on your interns being compensation-free.

According to the United States Department of Labor (DOL), the Fair Labor Standards Act (FLSA) requires “for-profit” employers to pay any employees for their work. Interns are not always considered employees under the FLSA. In those cases, you aren’t necessarily required to compensate them.

If you’re planning to offer an unpaid internship, first things first: figure out whether the intern will be an employee or not. How do you know? Luckily, there is a simple test your company can give itself to determine if an intern is, in fact, an employee.

The courts have set guidelines for a “primary beneficiary test” that determines this. What do they mean by “primary beneficiary”? While the idea of off-loading some of your work for free is tempting, under this definition, the employer cannot be the party benefiting the most from this relationship.

This test is flexible and not determined by just one of the following factors. The following test is sourced directly from the DOL:

1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

What happens if you fail the test? Well, if the intern was unpaid or not paid fairly, then you may have to compensate them for their time working at your company. If an analysis of this test reveals that an intern or student should qualify as an employee, then you may owe them minimum wage plus any overtime pay for which they qualify.

If you pass the test and they are not determined an employee, then they are not entitled to any pay. If it’s necessary to judge an internship by the FLSA standards formally, the verdict depends on the unique circumstances of the case.

Before hiring an intern, either paid or unpaid, think hard about what that intern would do, how their work would benefit your business, and how you as the employer would benefit that intern in return. If the training they’ll receive is valuable, if they’ll receive academic credit, and if you’re prepared to go the extra mile to educate them, you may have a good case for hiring an unpaid intern.

Cover Your Bases with a Contract

If you’re worried about any liability associated with hiring interns, then your best option is to pay them a wage and appropriate overtime. You should also have interns sign a clearly defined contract, whether you pay them or not. The contract should include the following information:

• Intern’s name and contact information.
• Supervisor’s name and contact information.
• Faculty coordinator’s name and contact information (if they are receiving school credit for the internship).
• The start and end date of the internship.
• If they are receiving wages, and if so, how much.
• An outline of their responsibilities.
• The intern’s work schedule (hours expected, days and times each week).
• If you require an intern to submit a final project demonstrating what they’ve learned.

Get the Most out of Your Interns

As mentioned, the intern has to be the primary beneficiary of this working relationship. As outlined in the DOL’s internship requirements, you know you can’t simply have interns replace the labor of a paid staff member.

While employers can gain some benefit from having an intern, be careful choosing their assignments. Make sure the tasks they are working on will help them learn about their desired role or industry. Research projects or a final assignment, like giving a presentation about what they learned, can help give an educational structure to the internship.

Make an effort to fully train and get to know your interns. Offer them constructive feedback on their performance. Before they leave, write them a letter of recommendation or help them make new contacts in the industry. With proper guidance, they’ll have a valuable internship experience, and you’ll have a new connection in the industry that you may want to hire one day.

The more valuable your program is to your interns, the less likely you are to find yourself with a disgruntled intern. Even more important, your internship program can become a valuable pipeline for finding outstanding candidates for full-time roles after their internships are done.

Disclaimer: Fundbox and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.