June 10, 2011

Paying Summer Interns Less Than (or No) Minimum Wage

It’s summer intern season, and you may be tempted to hire a high school or college student who will work for less than the minimum wage or even for “free.” But, the Department of Labor (DOL) has very specific requirements for unpaid interns and volunteers, and allows only certain employees to be paid a subminimum wage.

2011 Compensation Trends Report
Are wages rising or falling in your industry, town or company size? Download a free, custom compensation trends report from The PayScale Index for Q1 2011 and get up-to-date on your market.

Does your organization hire unpaid interns? Or, do you rely on volunteer workers from time to time to get work done? If so, you better be sure that your workers meet the Fair Labor Standards Act (FLSA) very specific requirements for unpaid interns or volunteers. There generally are four circumstances when you do not owe nonexempt employees the minimum wage. If you do not meet the criteria, you could be facing corporate penalties for FLSA violations and even personal liability for your decisions.

Four Circumstances When Minimum Wage Not Owed

Under the FLSA, you generally must pay nonexempt employees the minimum wage and overtime for all hours worked over 40 in a single workweek. The current minimum wage is $7.25 an hour. However, under special circumstances, employers may pay certain employees less than the minimum wage. For example, the FLSA allows employers to pay subminimum wages to employees under the age of 20 (the “opportunity wage”) and to certain students and disabled employees. In addition, the FLSA does not require any wages paid to individuals who meet the criteria for “trainees” and bona fide “volunteers” since they are not considered your employee.

(Download a free Employee Classifications model policy including best HR practices and legal background.)

Learn More About Our Compensation Software

The Opportunity Wage

The FLSA permits employers to pay an “opportunity wage” of $4.25 per hour to employees who are less than 20 years old for a limited period of time. This opportunity wage may be paid during the first 90 calendar days after hire. The FLSA also protects current employees by prohibiting employers from taking action to displace employees, including reducing hours, wages, or employment benefits, for the purpose of hiring workers at the opportunity wage. See 29 U.S.C. §206(g); 29 C.F.R. §786.300.

Note that this opportunity wage of $4.25 was created in 1996 and was not raised with the last increases to the minimum wage. It is not indexed to the current minimum wage, and no changes have been proposed to increase the amount.

Students and Disabled Employees

The FLSA and its regulations also allow you to obtain a special certificate to hire certain other individuals at wages that are lower than the minimum wage. However, these certificates are available only in limited circumstances, and employers are restricted in the number of employees that may be hired under these provisions.

The following types of individuals may be hired for less than the minimum wage:

1. “Full-time students” (discussed below) employed in retail and service establishments and in agriculture may be hired for a wage that is at least 85% of the current minimum wage;
2. Students over the age of 16 who are enrolled in an accredited school, college, or university and who are employed in an approved vocational training program (referred to as “student-learners”), may be employed in an occupation requiring a substantial learning period at a wage that is at least 75% of the minimum wage; and
3. Individuals whose earning or productive capacity is impaired by age, physical or mental deficiency, or injury, also may be employed at a reduced wage that is related to the individual’s productivity. See 29 U.S.C. §214; 29 C.F.R. §§519, 520, and 525.1 et seq.

A “full-time student” is a student who receives primarily daytime instruction at the physical location of an educational institution and who is considered by the institution to be a full-time student. There is no maximum age restriction on qualification as a full-time or vocational training student. However, child labor laws require that full-time students must be at least 14 years old to be employed in retail and service establishments. Full-time students may be employed only on a part-time basis and not more than twenty hours in any workweek, except during vacation periods. Furthermore, they may be employed only after the employer has certified to the Secretary of Labor that the employment of students will not reduce the full-time employment opportunities of nonstudents. See 29 U.S.C. §214(b)(4); 29 C.F.R. §519.2.

An employer that wants to hire a full-time student, student-learner, or a disabled person for less than the current minimum wage must file an application for a special certificate with the Department of Labor (DOL). See 29 C.F.R. §§519.3, 520.501, and 525.7.

Trainees and Interns

According to the DOL, an individual may be considered a “trainee” or a student and not an employee entitled to minimum wage and overtime under the FLSA if all of the following six criteria are met:

1. The training/internship the person receives is similar to that which would be given in an educational environment;
2. The training is for the benefit of the trainees/interns;
3. The trainees/interns do not displace regular employees but work under their close supervision;
4. The employer that provides the training does not derive any immediate advantage from the activities of the trainees/interns, and on occasion its operations may be impeded;
5. The trainees/interns are not necessarily entitled to a job at the conclusion of the training period;
6. The employer and the trainees/interns understand that the trainees/interns are not entitled to wages for the time spent in training. See, e.g., Wage Hour Admin. Op. Ltr., FLSA 2004-5NA (5/17/04); Wage Hour Admin. Op. Ltr. (5/8/96), and WH Fact Sheet 71 (“Internship Programs Under the Fair Labor Standards Act,” http://www.dol.gov/whd/regs/compliance/whdfs71.htm).

Not all courts agree that trainees/interns must meet all six factors. In Reich v. Parker Fire Protection Dist., 992 F.2d 1023 (10th Cir. 1993), the Tenth Circuit determined that even though an employer’s trainees expected to be hired at the end of the training, because they met the other five factors they were not employees subject to the FLSA. The court said that although the DOL’s six criteria are relevant to determining whether an individual is a trainee or an employee, not all of the criteria must be met.

In addition, trainees/interns may be paid a stipend and still not be considered employees as long as the stipend does not exceed “the reasonable approximation of the expenses incurred by the interns involved in the program.” See Wage Hour Admin. Op. Ltr. (5/8/96). However, the DOL’s opinion letter does not explain what expenses a stipend may cover and still be considered reasonable.

So, if the students are receiving training that benefits them, rather than the employer, and the training furthers their educational goals, the DOL typically will not consider them to be employees. Similarly, if the students receive academic credit for their work, they likely will not be considered employees. In addition, these students may be paid a stipend and still not be considered employees as long as the stipend does not exceed a reasonable estimate of the students’ expenses.

On the other hand, if the students are doing work normally performed by other employees and receive little supervision or training, and the employer gains an immediate benefit from the students’ work, they probably should be treated as employees under the FLSA.

Volunteers

Under the FLSA, employment of an individual is defined as “suffering” or permitting that person to perform work. Therefore, any person who performs work for your organization generally is considered an employee and, as a result, must be paid.

However, the DOL has recognized that individuals may volunteer their services in limited circumstances. Typically, these involve the performance of charitable activities for not-for-profit organizations such as for public service, religious, or humanitarian objectives. This restriction effectively eliminates most normal employment situations. For example, a 1998 Wage and Hour Administration Opinion Letter acknowledged that the DOL has “a long-standing policy of limiting volunteer status to those individuals performing charitable activities for not-for-profit organizations.”

Similarly, in a 1999 letter, the agency stated “Individuals who volunteer or donate their services, usually on a part-time basis, for public service, religious, or humanitarian objectives, not as employees, and without contemplation of pay, are not considered employees of the religious, charitable, and similar not-for-profit organizations which receive their services.” Note, however, that a paid employee of a not-for-profit organization generally may not volunteer to perform the same type of services that he performs as a part of his regular job.

To determine if a person is truly a volunteer and not an employee, the DOL ordinarily will consider the following factors:

1. How much the organization benefits from the services performed;
2. The time spent in the activity (the activity is less than a full-time occupation);
3. The individual’s services are of the kind typically associated with volunteer work; and
4. The individual does not expect pay for the services.

No one of these factors is determinative; rather the DOL will consider the totality of the circumstances. So, if your “volunteers” don’t meet the DOL tests and guidelines, they most likely will be considered as bona fide employees who must be paid. Also, be aware that any time spent in charitable activities “at the request of the employer,” under the employer’s direction or control, or while the employee is required to be on the employer’s premises is considered paid working time. See 29 C.F.R. §785.44.

(Download a free Employee Classifications model policy including best HR practices and legal background.)

FLSA Violations Could Mean Personal Liability

Because these requirements are complex, you should err on the side of treating summer interns as employees and paying them accordingly. The DOL started stepping up its enforcement efforts last summer to target unpaid interns, and likely will continue doing so this summer as well.

And, if you are wrong about your treatment of interns, your organization can be liable for back pay for any employee who is misclassified. Perhaps even more importantly, recent court decisions interpreting the FLSA have found that the individual decision-maker can be personally liable for any violations under the Act. In other words, you could be personally responsible for any back pay and other penalties. So, if you want to treat interns as nonemployees or pay them using the subminimum wage exceptions, you should consult with legal counsel to ensure you comply with the FLSA’s requirements.

Regards,

Robin Thomas, J.D.
Personnel Policy Service, Inc.

Related Posts:

Do you have any salary range topics you would like to see covered here on Compensation Today? Write us a comptoday@payscale.com.

Are you doing a salary review or compensation benchmarking project? PayScale provides up-to-date, external salary market data you can use right now. And, it is specific to the education, skills set and experience your employees. Give a PayScale demo a try.