Business risks with paid and unpaid internships

Insureon staff
If your company is planning on bringing summer interns on board, make sure you know the federal guidelines for unpaid interns.
Group of interns working.

Internships are a rite of passage for college students and business professionals who want to gain experience and make valuable business connections. If interns are paid, the internship typically functions like an entry-level position with an expiration date. However, it can get a little trickier for companies that hire unpaid interns, since different rules apply.

Are unpaid internships legal?

In order to be classified as an unpaid internship, federal law requires that a position must involve strictly educational tasks that benefit the intern more than the company. This means an unpaid internship is legal – as long as the business hiring the intern follows this rule. Where companies tend to run afoul of the law is when they assign tasks to interns that are normally handled by paid employees.

Fox Searchlight Pictures wound up in court for its use of unpaid interns during the filming of the movie "Black Swan." In the case of Glatt v. Fox Searchlight Pictures, a New York federal judge ruled that two production interns should have been paid as Fox employees for their work on the Oscar-winning film. The ruling stated that the interns' work (which involved getting lunch, filing paperwork, running errands, delivering paychecks, etc.) included tasks that displaced a paid employee. This marked the first time a "modern" internship was deemed illegal in court.

Fox Searchlight Pictures appealed to a higher court, which overturned the ruling. However, the court did agree in part with the initial decision, which stipulated that unpaid internships needed to primarily benefit the intern, not the company.

Federal guidelines for unpaid internships

The U.S. Department of Labor has guidelines that businesses must follow in order to legally offer unpaid internships. Here's a checklist business owners can follow to ensure that their internship program is legal:

  • The internship is structured like a class or other educational training program, and it corresponds with the academic school year.
  • The intern is entitled to academic credit upon completing the internship.
  • The internship provides significant educational benefits.
  • The intern's work complements, not displaces, that of a paid employee.
  • There is no promise of a job at the end of the internship.
  • Both parties are in agreement that the internship will be unpaid.

Businesses that hire interns should evaluate their current policies to make sure they are meeting these guidelines. This can help avoid unpleasant and potentially costly liability lawsuits down the road. If a business is sued over a wage dispute involving an unpaid internship, employment practices liability insurance can pay for legal costs.

Three steps for a successful unpaid internship

Here are some tips to ensure unpaid internship programs benefit both the business and the intern, and also protect the business from potential legal risks:

Create a curriculum for interns

Before hiring interns, business owners should outline skills that are central to the type of work the intern will be learning. These skills can be integrated into a day-to-day progression of lessons – creating an educational program based upon what the business does. By creating assignments for interns that differ from the company’s normal operations, businesses lessen the risk of designating tasks to an intern that a paid employee would normally perform.

Talk with an attorney

While knowing the criteria for unpaid internships is a start, it's never a bad idea for business owners to talk with an attorney to verify that all of the rules are being followed. An attorney could also help write up an employment agreement that sets clear expectations regarding the internship, and how it will benefit the intern.

Designate a mentor

Giving an intern a one-on-one relationship with someone at the business can provide a useful learning opportunity, especially if the mentor is already well-established in a career. This also adds a touch of personal accountability to help ensure the intern has an educational experience.

Business owners who take the time to create a clearly defined curriculum that focuses on the educational benefit to the intern are less likely to land in court over a wage dispute.

Does paying interns less pay off?

Although unpaid internships might seem like a good deal for a business owner, it poses less of a risk to simply pay interns, especially for small business owners. In fact, paying interns will not only make the experience more beneficial for both parties, it could also help a business's bottom line.

By offering a paid internship, small businesses can attract a more competitive pool of applicants and ensure that no one is excluded from consideration because they can't afford to work for free. And since paid interns are less likely to take on a side job to pay their bills, they should be able to fully commit to the company’s goals, raising the business's productivity level and minimizing the risk of a lawsuit.

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Christine Aebischer, Contributing Writer

Christine is a contributing writer who's experienced in a wide range of topics from personal finance and insurance to luxury lifestyles and wellness. She is an accomplished writer, editor, and content marketer with a specialization in service-driven content.

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