by Benjamin J. Naylor and Alexandra E. Miller

Paid or Unpaid? Consult the ‘Primary Beneficiary’ Test

The Fair Labor Standards Act (FLSA) guarantees employees a minimum wage plus an overtime premium for hours over 40 in a workweek.

So, are interns considered “employees” under the Act, making them entitled to minimum wage and overtime? That question must be determined on a case-by-case basis using the “primary beneficiary test.”

The primary beneficiary test is flexible and involves seven nonexclusive factors aimed at determining which party (the employer or the intern) is the “primary beneficiary” of the arrangement. The seven factors to consider are the extent to which:

• Both the employer and the intern understand there’s no entitlement to compensation (if there is any promise of compensation, the intern is likely an employee);
• The internship provides training analogous to training given in an education environment (including clinical or hands-on training);
• The internship is tied to the intern’s education, including whether it entitles the intern to academic credit;
• The internship corresponds with the intern’s academic commitments and calendar (especially applicable to summer internships);
• The internship’s length is limited to the period in which it provides beneficial education to the intern;
• The intern’s work complements (instead of displacing) the work of paid employees, while providing significant education benefits to the intern; and
• Both the employer and intern understand the internship doesn’t entitle the intern to a paid job at the program’s conclusion.

If the employer is determined to be the primary beneficiary, then the intern is an “employee” entitled to the minimum wage and overtime payment under the FLSA, among other protections. On the other hand, if the intern is determined to be the primary beneficiary, the employer may be able to lawfully classify them as “unpaid,” though state and local law should be consulted before making a final determination.

If there’s any hesitation about who the primary beneficiary is, take a safe approach: Classify the intern as an employee, pay them the minimum wage, and track hours for overtime purposes.

Internship Programs for Nonprofit and Public Sector Organizations

The FLSA exempts certain workers from its definition of “employee” who freely volunteer to perform services for public service, religious, or humanitarian objectives without expectation of compensation. Thus, the volunteer may be paid expenses, reasonable benefits, or a nominal fee to perform services without triggering minimum wage and overtime protections under the FLSA.

Nonprofit and public sector employers who accept volunteer labor would be wise to clearly document the terms of each volunteer opportunity (including the expectation of no payment) in a letter to each volunteer. They should also be cautious if they are considering providing a stipend: A volunteer may inadvertently become an employee if the stipend is more than $500 per year or more than 20 percent of what a typical employee would be paid for the same service, or if the volunteer is offered the same benefits that paid employees receive because such payments are inconsistent with the nature of true volunteer work.

Risks of Misclassifying an Intern

The consequences of misclassifying an intern or volunteer can be costly. Most importantly, it may open you up to a lawsuit for FLSA and/or state law violations. If successful, the misclassified employee will be entitled to back pay and liquidated damages in the same amount (i.e., “double backpay”), plus attorneys’ fees. FLSA violations may carry a penalty of up to $1,000 per violation. In addition, the FLSA (as well as some state laws) allow corporate officers and directors to be held personally liable for minimum wage and overtime violations under certain circumstances.

Benjamin J. Naylor and Alexandra E. Miller are attorneys with BurnsBarton PLC in Phoenix. Ben is an experienced litigator and trusted advisor to his clients, which include employers of all shapes and sizes, from two-person startups to Fortune 100 companies. Alex counsels and defends employers in all employment law matters, including workplace discrimination, harassment, retaliation, disability accommodations, compliance, and contract drafting. You can reach them at ben@burnsbarton.com and alex@burnsbarton.com.