Many companies, including non-profit companies, provide opportunities to young student workers in the form of unpaid internships. Contrary to popular opinion, companies must comply with the Fair Labor Standards Act (FLSA), which, pursuant to case law, only allows unpaid internships under certain limited circumstances. Although the FLSA applies to both for-profit and non-profit companies, at the outset it requires an employment relationship between an employer and employee. Thus, the critical issue is whether an employment relationship exists.
In evaluating whether an employment relationship exists, courts look at the ‘economic realities’ of the individual case--worker’s economic dependence on the alleged employer-- in order to find the existence of an employment relationship. The Supreme Court has yet to address whether student interns are ‘employees’ for purposes of the FLSA. However, the Supreme Court has considered a case involving trainees in a company’s own training program and ruled that the FLSA does not define the employment relationship so broadly as to render all who provide any kind of service employees. See Walling v. Portland Terminal Co., 330 U.S. 148, 152 (1947). Since then, lower courts have applied the Portland Terminal holding in the student intern context.
In Portland Terminal, a railroad gave prospective brakemen a seven- or eight-day preliminary training course. There were no classrooms. Under a yard crew’s supervision, the trainees first observed the work and then performed it. Those who successfully completed the course formed a pool of workers available to the railroad as openings occurred. The trainees were not paid for the training period.The Supreme Court found that, because the trainees were not employees under FLSA precedent, they also were not entitled to compensation for their training. Although the trainees performed “work in the kind of activities covered by the [FLSA],” they still had to prove they were “employees.” In that regard, the court looked at the relative benefits of the training program to the trainees and the railroad. The Portland Terminal court found that the trainees’ “work does not expedite the company business, but may, and sometimes does, actually impede it.” Id. at 150. Clearly, there is no employment relationship if the business “receive[s] no ‘immediate advantage’ from any work done by the trainees,” or if the trainees are “work[ing] for their own advantage.” Id. at 152-53. That is because the FLSA “was not intended to penalize [companies] for providing, free of charge, the same kind of instruction [as a school] at a place and in a manner which would most greatly benefit the trainees.” Id. at 153. Otherwise, “all students would be employees of the school or college they attended,” and everyone who performed work for others (but for their own personal purposes) would be entitled to wages. Id. at 152. Hence, although the trainees performed hands-on work during the training period, and the railroad created a pool of trained brakemen from which it could hire as openings arose, the Supreme Court held the trainees were not “employees.”
Applying Portland Terminal, lower courts have found that no employment relationship exists for student intrens where: the work is an extension of studies and the intern received course credit and a grade for the work; the intern’s performance of actual work at the facility is the central purpose of the internship; no compensation was contemplated or paid; the facility received very little benefit from the intern’s work in that the intern did not displace a paid worker and did not lighten the workload for other workers; and the business had to supervise the intern’s work, provide feedback and training as needed; and answer the intern’s questions. Some courts, including appellate courts in the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee) and Second Circuit (Connecticut, New York, and Vermont), have said this analysis, and Portland Terminal, create a “primary benefit” test: Whether the primary benefit of the internship was to the student or the business.
The Department of Labor (DOL) has stated that no employment relationship should be found when a student receives credit toward graduation for the internship and the internship provides real life experiences unobtainable in the classroom setting .The DOL has created a series of factors to be used to determine employment, which have been used by some but not all courts. The factors used by the Department of Labor are: