• Always consult with legal counsel or an experienced HR professional if you want to create an unpaid internship.

“Intern” is a loosely used term, but for a worker to qualify for an unpaid internship, the criteria described below must be applied.

Primary Beneficiary Test

For years, a six-part test adopted by the U.S. Department of Labor (DOL) and followed by the California Division of Labor Standards Enforcement (DLSE) helped California employers determine whether an individual could be treated as an unpaid intern.

• Both federal courts and the DOL have abandoned the six-part test in favor of a “primary beneficiary” test.1

The primary beneficiary test looks at the “economic reality” of the intern-employer relationship to determine which party is the relationship’s primary beneficiary — the employer or the individual.

Seven factors point to the intern being the primary beneficiary, and thus properly classified as unpaid. You must examine the extent to which:

• The intern and the 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.
• The internship provides training similar to that given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
• The internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
• The internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
• The internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
• The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
• The intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

The primary beneficiary test is “a flexible test, and no single factor is determinative ... whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case.”2

In one case, students enrolled at a for-profit cosmetology school sued the school alleging that they were misclassified as unpaid interns and should have been paid as employees.3 The students claimed the school “exploited” them for the unpaid labor they provided in the school’s salons. They argued they were employees under federal, Nevada and California law, and were therefore entitled to wage and hour protections such as minimum wage, overtime, and meal and rest breaks.

The students in this case received classroom instruction necessary to obtain their cosmetology license. The school also provided students with clinical experience by having the students perform discounted cosmetology services for the public in the school’s salons. The Ninth Circuit used the primary beneficiary test to find that the students were not employees. In examining the seven factors, the court found that the students:

• Signed on to the program knowing they wouldn’t be paid and had no expectation of being paid;
• Received hands-on training and academic credit for the hours they worked;
• Performed clinical work that corresponded to their academic commitments;
• Were not required to participate in the program any longer than the students needed to obtain the required hours for state exams;
• Did not displace the work of paid employees; and
• Had no expectation of employment after graduating from the school.

Most, if not all, of the factors weighed in favor of the students being the primary beneficiaries of their work. As such, the court held that the students were not employees under either the FLSA or Nevada law (which follows the FLSA).

• The DLSE and the DOL do not treat internships lightly. Employers using or considering the use of unpaid interns should carefully evaluate the work interns will be performing. Employers should take into account the test outlined above to determine who will be the primary beneficiary of the intern-employer relationship. If the employer benefits most from the arrangement, the individual should be treated and paid as an employee.

Protection for Interns

California’s Fair Employment and Housing Act provides the following protections to unpaid interns and volunteers.4

The law:

• Provides protections against harassment to unpaid interns and volunteers.
• Provides protections against discrimination in an unpaid internship or in another limited duration program that provides unpaid work experience.
• Extends religious belief protections and religious accommodation requirements to anyone in an apprenticeship training program, an unpaid internship or any other program to provide unpaid experience in the workplace or industry.

1. U.S. Department of Labor Fact Sheet #71; Glatt v. Fox Searchlight Pictures. Inc. 791 F.3d 376 (2d Cir. 2015); Benjamin v. B&H Education, Inc., 877 F.3d 1139 (9th Cir. 2017)