To Pay or Not To Pay: That is the (Internship) Question

May 11, 2017

Topic: Business
Time Investment: 20 minutes
Suggested Product: Independent Contractor & Employer Contracts


In the last few years, internships have been growing in popularity… and so have the number of unpaid-intern lawsuits.

Last month, fashion designers and actresses Mary-Kate and Ashley Olsen settled a lawsuit for over $180,000.

The problem?

The twins refused to pay interns at their fashion label, The Row. Former interns claimed that they had been forced to work 50 hours a week and do the same work as paid employees – without receiving a paycheck.

So, what does this mean for your business?

The choice of whether to have a paid or unpaid internship is up to you. You just need to know whether an internship is right for your business and, if it is, whether your internship should be paid or unpaid.

Let’s start at the very beginning – does your business need an intern?


Deciding Whether to Hire an Intern

Deciding whether to hire an intern for your business can be tricky. First, you need to make sure you have enough work to share with an intern and the proper resources to accommodate your intern. For example, you need to have time available to work with the intern and a place for the intern to work.

Next, decide what the job description for the internship looks like. What kind of intern do you need? What tasks and projects do you need done? How long should the internship be?

Now that you’ve decided that you need an intern and know what you want from them, you need to decide whether the internship should be paid or unpaid.


What Kind of Intern Should I be Hiring?

If you decide an internship would benefit your business, the next step is to decide whether to offer an unpaid or paid internship. It’s important to choose carefully to avoid creating future legal problems.

If you want to offer an unpaid internship, you need to make sure that the internship qualifies as an unpaid internship under state and federal law. Depending on your state, there are different rules follow to make sure the work an intern is doing is allowed.


There is a middle ground between an unpaid and paid internship:

  • You could offer an unpaid internship where the intern receives academic credit. Interns who receive school credit through their educational institution can be unpaid because receiving school credit qualifies as a benefit.
  • You can also offer an unpaid internship where the intern receives a stipend. Any stipend cannot be more than 20% of what a regular employee would be paid. If the stipend is more than $600/year, it needs to be reported to the IRS via a Form 1099.


For small businesses, it is often easiest to offer a paid internship. Keep in mind that small businesses generally receive more benefit by offering paid internships. While unpaid internships are common, many experts do not encourage unpaid internships because of their potential to cause problems. If you decide to offer a paid internship, make sure to follow all applicable local, state, and federal laws!


How Do I Know if an Internship Qualifies to be Unpaid?

A majority of states follow the test created by the U.S. Department of Labor: the economic realities test. This test established six standards that must be met for an unpaid internship.


These standards are:

  1. The internship is similar to training that would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees – instead, the intern works under close supervision of existing staff;
  4. The employer receives no immediate advantage from the intern’s activities;
  5. The intern does not have to be given a job at the end of the internship; and
  6. Both the employer and intern understand that the internship will not be paid.


A different test applies to businesses in New York, Connecticut, and Vermont: the primary beneficiary test.

For this test, courts consider a non-exhaustive set of considerations to see whether an internship can be unpaid, which are:

  1. Whether the employer and the intern understand that there will be no compensation;
  2. Whether the tasks and/or training activities are similar to those given in an educational environment;
  3. Whether and to what extent the internship is connected to an intern’s educational program;
  4. Whether an intern’s academic commitments are being accommodated;
  5. Whether the internship is limited to the period that provides the intern with beneficial learning;
  6. Whether the intern’s work complements the work of paid employees (rather than displaces their work) while the intern receives significant educational benefits;
  7. Whether it is clear that completing the internship does not entitle the intern to be offered a paid job once the internship ends.


What Can an Unpaid Intern Do?

Regardless of which test applies in your state, there are some basic guidelines that apply to all jurisdictions.


Unpaid interns can:

  • Job shadow;
  • Learn certain tasks under the constant, close supervision of a regular employee;
  • Perform tasks that do not benefit the business.


Unpaid interns cannot:

  • Perform routine work on a regular basis for an employer unless that work is paired with educational content (for example, after supervising an unpaid intern doing a certain task, have a sit-down conversation about that task);
  • Perform work that the employer depends on to operate the business;
  • Perform work with no educational or training value;
  • Expect to receive a paid position after the internship ends.

Basically, unpaid internships focus on skills that can be used in various employment settings while paid internships focus on particular skills that can be used in your business. For example, an unpaid intern could do a photo shoot that was specifically set up to be just for the intern’s practice. A paid intern could work on a photo shoot that was set up for a client or otherwise benefits the business.

Don’t forget – just because your intern is being benefited by what they learn does not mean they automatically can be unpaid. If the employer benefits from the intern’s work, that intern should be paid.


Helpful Tips for Setting Up an Unpaid Internship

The Do’s:

  • One good rule of thumb is to structure an unpaid internship around the idea of an academic experience rather than an experience structured around your business’s actual operations.
  • Another good idea is to establish a time period for the length of the internship before the internship period starts.
  • Do have the intern sign at minimum a general contract that defines internship responsibilities. Having the intern sign other paperwork, such as a confidentiality agreements, non-disclosure agreements, and licenses for the intern to use certain works created during the internship, can also be incredibly helpful.


The Do Not’s:

  • Do not let your intern do work that your business depends on. Remember: if you would pay someone to do a certain task, it’s most likely not a task for an unpaid intern.
  • Avoid using the internship as a trial period or audition to see if you want to hire the intern as an employee. Unpaid internships cannot exist when an employer leaves the intern with the impression or expectation that the internship is setting them up for permanent employment.


It’s Your Call

At the end of the day, only you can decide what’s best for your business and your potential new intern. Internships, in general, are a great way for employers to pass along their knowledge and for interns to learn new skills. You just need to make sure that any internships you offer are right for your business.


If you need more assistance or information, check out these sources:


If you are ready to hire an intern, check out these TheLawTog Resources that can be amended for internships based on the scope of their duties:



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