Highlights
- The “primary beneficiary” test is crucial for determining if an internship must be paid. If the intern is the primary beneficiary of the internship, an unpaid internship may be permissible. However, if the employer is the primary beneficiary, the intern must be paid.
- State laws often have stricter regulations regarding internships than federal law, so it’s key to understand both federal and state laws regarding intern compensation.
- At EmPower HR, we help small businesses stay compliant, so you can focus on growing your business. Contact us to learn more about our services.
It’s a win-win. In an internship program, interns gain hands-on work experience, while businesses gain young professionals who are eager to work and bring fresh ideas to the table. But there’s one looming question: the expectation of compensation. As an employer, do you have to pay for internships?
If you are a business owner or a hiring manager looking to hire interns, we’ve got your back. This article explains the legalities of unpaid internships, clarifies when intern compensation is required, and discusses the benefits and drawbacks of paid internships.
Do You Have to Pay for an Internship?
The question of intern pay isn’t always straightforward. While roughly 60% of internships are paid, employers have the flexibility to offer unpaid internships if certain conditions are met. The key is the Department of Labor’s (DOL) “primary beneficiary” test.
This test determines who benefits most from the internship. If the intern is the primary beneficiary—meaning they gain the most from the experience in terms of learning and skill development—an unpaid internship may be permissible. However, if the employer is the primary beneficiary, the intern must be classified as an employee and paid according to Fair Labor Standards Act (FLSA) guidelines, including minimum wage and overtime.
Whether an internship is paid or unpaid, employers should always keep documentation of internship duties, to ensure compliance with the DOL’s primary beneficiary test.
Even when legally permissible, most career services professionals advise paying interns, as they contribute meaningful work to organizations. They should be compensated for their time and effort. Always ensure your internship program complies with minimum wage and overtime laws.
How Much to Pay an Intern?
The current federal minimum wage is a starting point, but many states and localities have higher minimum wage rates. You must comply with the higher of the federal, state, or local minimum wage.
A study from the National Association of Colleges and Employers (NACE) found that companies can expect to pay an average of $20.76 per hour for bachelor’s degree-level interns. Younger interns with less experience, such as high school students, may receive minimum wage.
State Laws and Unpaid Internships
While the FLSA doesn’t mandate compensation for interns who meet the “primary beneficiary” test, state laws often impose stricter requirements. Learning about state regulations for internships is crucial to stay compliant.
Some states, such as California, require that workers must be paid at least minimum wage except in very limited circumstances. California has a stipulation that student workers must be paid at least 85% of the California minimum wage ($13.60 per hour.) When meeting terms of federal standards, local rules may be stricter and can take precedence.
Unpaid Internships for Nonprofits
It’s important to note that unpaid internships for nonprofit organizations are generally permissible. The FLSA does exempt certain people who perform services for a state or local government agency or who volunteer for humanitarian purposes at nonprofit food banks.
The DOL’s Wage and Hour Division also recognizes an exception for individuals who volunteer their time.
Paid Internship vs. Unpaid: Which is Right for Your Business?
Hard work should always be rewarded. If your interns are contributing good work for your company, they deserve to be compensated.
These are some of the benefits of offering paid internships:
- Attracting top talent. Offering competitive pay significantly increases your chances of attracting high-quality candidates. Students and recent graduates are more likely to apply for paid positions, giving you access to a larger and more skilled pool of applicants.
- Increased motivation. When interns feel valued and compensated for their work, they are more likely to be motivated, engaged, and invested in your company’s projects.
- Enhanced company reputation. Offering paid internships can boost your company’s reputation as an employer that values its interns and invests in their development.
- Greater legal certainty. Paid internships generally fall squarely under traditional employment regulations, reducing potential legal ambiguities and risks associated with unpaid internships.
- Reduced turnover: If you hope to hire your interns after graduation, offering a paid internship can serve as a trial period and increase the likelihood of them accepting a full-time position.
The Cons of Offering Paid Internships
Let’s be real, no one prefers to not get paid. But as a small business owner, it may not be in your budget to offer a paid internship. If you’re unable to compensate your interns, that’s okay – but interns must receive academic credit instead and ideally, an impactful experience as well.
If your business has the means to pay your interns, it’s highly recommended that you should. If you think you’re saving money or time by avoiding paperwork, it’s not worth it in the long run and can damage your reputation and even company morale.
Unpaid Internships: When Does It Makes Sense?
For students, unpaid internships can be a valuable starting point, especially if they provide:
- Real-world experience
- Mentorship and guidance from experienced professionals.
- Opportunity to develop skills
- Networking opportunities
For employers, an unpaid internship only makes sense when it truly benefits the intern’s education and skill development, and only when it complies with the “primary beneficiary” test. Even though internships might be a way to evaluate talent and complete specific projects, employers should approach them with caution, prioritizing compliance and ethical considerations.
Preparing To Hire an Intern? Here’s How EmPower HR Can Help
Planning ahead is crucial to the success of your internship program. If you don’t know where to start, EmPower HR can help you navigate intern compensation and ensure you’re meeting all legal requirements.
Here’s what we can do to keep your business compliant:
- Develop a policy. An internship policy will set the tone prior to an intern starting so they’re aware of what to expect and any company rules, values, etc.
- Define job duties. Clarifying the job role informs the intern of their responsibilities and helps establish whether the internship meets the “primary beneficiary” test. We can help you define roles in a way that supports compliance.
- Stay updated on changing laws: Employment law is constantly evolving. We’ll keep you informed of any changes to federal or state regulations regarding internships, so you can adapt your program and remain compliant.
Lean on HR professionals to create an impactful internship program for your organization. Need a team of experts by your side? Get started today.
FAQs about Internships
Do Interns Have to Sign a Contract?
While not always legally required, it’s highly recommended that interns sign a written agreement or contract. This document should clearly outline the terms of the internship, including:
- Duration
- Compensation
- Duties and responsibilities
- Learning objectives
- Supervision
- Work schedule
- Confidentiality and intellectual property
- Termination clause
A written agreement helps prevent misunderstandings and protects both the employer and the intern.
Do Interns Get Benefits?
Whether interns receive benefits is at the employer’s discretion. There is no legal requirement to provide employee benefits to unpaid interns. However, some employers may offer benefits to paid interns, such as health insurance and PTO.
Do Interns Get Holiday Pay?
There is no legal requirement to provide holiday pay to interns, whether paid or unpaid. However, some employers may choose to offer holiday pay to paid interns as a matter of company policy. This should be clearly stated in the internship agreement.
Do Unpaid Interns Need to Complete an I-9?
Generally, unpaid interns who are not considered employees under the FLSA and applicable state laws do not need to complete an I-9 form. However, if the intern is classified as an employee due to failing the primary beneficiary test or other state regulations, then an I-9 form is required.
Are Interns Exempt or Non-exempt?
The exempt or non-exempt status of an intern depends on their classification as an employee and the type of work they perform. If an intern is considered an employee under the FLSA and state laws, they will generally be non-exempt and entitled to overtime pay unless they meet the criteria for one of the FLSA’s exemptions (which rarely apply to interns).
Unpaid interns who are truly not employees under the primary beneficiary test and state law do not have an exempt/non-exempt status because they are not subject to wage and hour laws.