The Obama administration made it clear recently that it plans to crack down on for-profit companies using unpaid interns. Could your company be at risk?

Nancy J. Leppink, the acting director of the Wage and Hour Division of the U.S. Department of Labor, told The New York Times: “If you’re a for-profit employer or you want to pursue an internship with a for-profit employer, there aren’t going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law.”

In this economy, unpaid internships often make sense and provide enormous benefits to employers and interns alike. Although some critics argue that employers are taking advantage of young people for free labor, unpaid internships can actually be more beneficial to the intern, who may not otherwise be able to obtain the necessary skills and experience to procure a paying job.

According to the Wall Street Journal, unemployment for teenagers and workers age 20 to 24 — the primary demographic of those seeking unpaid internships — has risen approximately 26 percent and 16 percent, respectively, in the past year, which is far higher than the national average. Absent the opportunities afforded by internships to gain experience, contacts and résumé fodder, these numbers will likely continue to rise.

Mind the regulations

Not only do employers in New England need to be mindful of the increased federal enforcement efforts, but also of state regulators, a very active plaintiffs’ bar and employee-friendly state wage-and-hour laws.

This is particularly true in Massachusetts, where, in 2008, the Legislature passed a law mandating treble damages and attorneys’ fees for certain violations of wage-and-hour laws, even if the violations were inadvertent or resulted from good faith mistakes. Treble damages and attorneys’ fees create an incentive for plaintiffs’ attorneys, who typically work on a contingency-fee basis, to seek out unpaid interns and file lawsuits on their behalf.

This begs the question: Is your company’s unpaid internship program in compliance with federal and state law?

Both federal and state laws require the payment of minimum wage to all “employees.” Interns, when properly classified as such, are not considered employees and are exempted from the federal, and some state, minimum wage and overtime laws.
According to the Department of Labor, in order to qualify for this exemption, internship programs must constitute “educational or training programs that are designed to provide students with professional experience in furtherance of their education, and the training is academically oriented for the benefit of the students.”

Specifically, internship programs must meet the following six criteria:

1. The training provided must be similar to that which would be given in a vocational school or academic institution;
2. The training must be for the benefit of the interns;
3. The interns must not displace regular employees, but must work under their close observation;
4. The employer may derive no immediate advantage from the activities of the interns;
5. The interns are not necessarily entitled to a job at the conclusion of the internship; and
6. The employer and the interns must both understand that the interns are not entitled to wages.

Rules can vary by state

Massachusetts uses the same six criteria, but is even more restrictive because its exemption applies only to rehabilitation or training programs in charitable, educational or religious institutions.

While this additional requirement precludes many for-profit companies from hiring unpaid interns, the state has affirmed that companies with interns participating in Northeastern University’s cooperative education program are in compliance with Massachusetts law because of the level of oversight and evaluation provided, and because Northeastern is an educational institution.

Similar programs at other universities and educational institutions would likely also comply with the law. Other New England states have similar exemptions from the minimum wage and overtime laws, although the law in those states varies and is less developed.

Companies seeking to save money through internship programs should be careful to ensure that any unpaid internships comply with the standards described above. These criteria are most often satisfied where an intern is a student earning educational credit and receiving practical experience related to his or her studies.

To maximize the odds that your company’s unpaid internship program is in compliance with the applicable law, interns should not be used to fill in for an employee on leave; should not be tasked with making copies, answering telephones, delivering mail or other tasks that directly support or benefit the business; and should be overseen and evaluated by regular employees.

That said, the easiest way to ensure compliance with the law is simply to pay interns the minimum wage and any required overtime premium for hours worked above 40 per week. These are just a few suggestions of how to proceed.

It is unfortunate that state and federal regulators feel the need to take such a hard line on unpaid internships, particularly given that students and those new to the work force, who already have an increasingly difficult time finding jobs in this economy, will be harmed the most by this crack down. Nevertheless, every company must be cognizant of the law so as not to run afoul of it.

Erik Weibust and Beth Gobeille are attorneys in the Boston office of Seyfarth Shaw. They can be contacted at (617) 946-4800.