How to Properly Structure an Unpaid Internship Program in New York

A variation of this post appeared on my website a number of years ago following the initial wave of unpaid intern lawsuits that were filed in New York in 2011 and 2012. One of the questions that presented itself as a result of those lawsuits was: What’s the appropriate test for an unpaid internship? In other words: When is it okay not to pay an intern? Luckily, the lawsuits culminated in a resolution of the issue. With graduation season in full swing, it’s an appropriate time to revisit the requirements for an unpaid internship.

To avoid liability, businesses must comply with both federal and state laws. Separate tests exist for non-profits and for-profits. In this post, we focus on the requirements at for-profit businesses.

Federal Law Requirements for Unpaid Internships in the Second Circuit

In the Second Circuit, which encompasses Connecticut, New York, and Vermont, employers must comply with the “primary beneficiary test” when determining whether an intern can be paid or unpaid under the federal Fair Labor Standards Act. The test is nuanced and considers whether the intern or the employer is the primary beneficiary of the relationship.

Under this test, there are seven non-exhaustive factors to consider when assessing whether an intern is an employee entitled to compensation under the FLSA:

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.

Applying these considerations requires weighing and balancing all of the circumstances, and no one factor is dispositive. Although the test focuses on what the intern receives in exchange for his/her work, the test also incorporates the flexibility to examine the economic reality as it exists between the intern and the business. Therefore, every factor need not point in the same direction for in order to conclude that the intern is not an employee entitled to the minimum wage.

New York State Law Requirements for Unpaid Internships

Businesses must also comply with applicable state laws. New York’s Department of Labor considers the following eleven criteria at for-profits:

1. the training, even though it includes actual operation of the business’s facilities, is similar to training provided in an educational program;
2. the training is for the benefit of the intern;
3. the intern does not displace regular employees and works under close supervision;
4. the activities of the interns do not provide an immediate advantage to the business and, on occasion, business operations may actually be impeded;
5. the interns are not necessarily entitled to a job at the conclusion of the training period and are free to take jobs elsewhere in the same field;
6. the interns are notified, in writing, that they will not receive any wages and are not considered employees for minimum wage purposes;
7. any clinical training is performed under the supervision and direction of individuals knowledgeable and experienced in the activities being performed;
8. the interns do not receive employee benefits, such as insurance or discounted or free goods or services from the business;
9. the training provided to the intern is general and qualifies the intern to work in a similar business, rather than specifically for a job with the business offering the program;
10. the screening process for the internship program is not the same as for employment, and involves only criteria relevant for admission to an independent educational program; and
11. program advertisements are couched clearly in terms of education or training, rather than employment (although employers may indicate that qualified graduates of the program may be considered for employment).

All eleven of these criteria must be present for an intern to be unpaid.

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These are stringent tests and, in most cases, New York businesses that engage interns are likely engaging employees who are entitled to minimum wage and overtime compensation. For those businesses that truly do operate legitimate unpaid internship programs, those businesses should consider signing unpaid internship agreements to document the scope of their program. In the event of challenge, such agreements can be compelling evidence of how the internship program operated in practice.