Summer: the season of sun, surf and student interns. This brings up an important question — are employers legally obligated to pay them? 

The old federal standard

The answer is simple but complex. Employers must pay interns if they qualify as employees. Employers need not add interns to their payrolls if they do not qualify as employees.

For years, the U.S. Department of Labor (DOL) followed a rigid six-factor test to determine whether interns qualified as employees entitled to payment of at least the minimum wage under the Fair Labor Standards Act (FLSA). Pursuant to the test, payment was not required if an internship was for the benefit of an intern and if the employer did not derive an immediate advantage from the intern's activities.

Understandably, this standard was subject to significant criticism. For instance, why would a company go to the trouble of having an internship program if it were to gain no benefit from it? Nevertheless, for years DOL stood by the test and internships that did not satisfy all six of its stated factors left employers susceptible to individual and class action wage claims brought on behalf of unpaid interns who could be characterized as employees entitled to compensation under federal law.

A more flexible approach

In 2015, the 2nd U.S. Circuit Court of Appeals adopted a much more flexible "primary beneficiary" test to distinguish employees from interns. This approach analyzes the "economic reality" of the intern-employer relationship to determine whether the internship primarily benefits the intern (by providing an educational advantage) or the employer (by providing it an economic boost).

Pursuant to the newer standard, interns who are the primary beneficiaries of their internships need not be paid under the FLSA. When employers are the primary beneficiaries, they must pay their interns at least the applicable minimum wage.

A wave of U.S. appeals courts followed suit and embraced the "primary beneficiary" test, which led to DOL's announcement earlier this year that it too would conform to it. Seven factors are considered for the primary beneficiary test:

1. The extent to which an intern and 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 similar to that which would be given in an educational environment.

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 during which the intern is provided 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 employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

This "primary beneficiary" analysis looks to the totality of the circumstances, including additional evidence beyond these seven factors that might support an intern's employee classification — a major departure from the prior "all or nothing" six-factor test.

In adopting the more flexible approach, the DOL has confirmed that whether an intern or student is an employee under the FLSA depends on the unique circumstances of each case. It's good news for employers because the individualized, fact-specific application of the "primary beneficiary" test to interns makes it difficult to maintain class actions.

A proper unpaid internship program

While the "primary beneficiary" standard is certainly more flexible than its predecessor, it is not license for companies to obtain free labor. To avoid misclassification issues, employers must take care to develop and maintain unpaid internship programs that clearly provide for the educational development, and benefit, of interns. 

Employers seeking not to pay their interns should provide something in writing to them (for instance, offer letters) explaining that internships with your company are unpaid and that future employment is not guaranteed. Seek applicants who will receive college credit or school approval for an internship (making sure to follow up with all educational institutions to receive written confirmation), and have interns work under the close supervision of one or more employees. Avoid having interns work independently for long periods.

Do not have interns — rather than paid employees — perform traditionally "paid" company work. Rotate interns through different departments and have them undertake varied tasks to provide a wide range of instruction and educational content.

Employers can also prepare specific written goals, focusing on training and experience for the benefit of interns, and prepare written feedback or evaluations that focus on interns' understanding, skill sets and progress. Formalizing the start and end dates of internships, and trying to match them to interns' academic schedules, is another tip.

State and local laws apply, too

Employers beware: intern and employee classification may differ under state or local laws. For instance, California state law follows the DOL's old (and more rigid) six-factor test.

The upshot is certain jurisdictions could find that an intern is not subject to the minimum wage requirements of federal law, but is entitled to such payment under applicable state or local law. As mentioned at the outset, it's confusing yet simple.

Of course, there is a straightforward way to sidestep any uncertainty — money. Always remember that there is no prohibition on employers electing to pay interns at least the applicable minimum wage, even if the law does not require it.