It’s that time of year – the time when many employers hire their summer interns. Interns can be great additions to an organization. They can bring in fresh perspectives, help support employees, and become potential candidates for full-time employment.

On the other hand, hiring an unpaid intern can create legal risk. You may be thinking, “but an intern is here for the experience, right?” However, the reality is not that simple. While it is possible to have an unpaid intern, there are legal requirements that should be considered before hiring.

The primary beneficiary test

Under the Fair Labor Standards Act (FLSA), the primary beneficiary test is used to determine whether an intern is also an “employee” who is entitled to both minimum wage and overtime. The Oregon Bureau of Labor and Industries follows this test as well. The primary beneficiary test is based on the idea that, in an unpaid intern-employer relationship, the intern should be the one primarily benefiting from the experience. An employer can obtain some benefits from an unpaid internship, but since it is unpaid, the priority should be the educational benefits to the intern.

While no one factor is determinative, the primary beneficiary test considers the “economic reality” of the relationship between the employer and the intern. As articulated by the Department of Labor, the following seven factors are relevant to this consideration:

The extent to which the intern and the employer clearly understand that there is no expectation of compensation.
The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

As you can see, simply labeling an individual as an “unpaid intern” has no bearing on whether the person is exempt from the requirements of the FLSA or other wage and hour laws. Rather, the realities of the job and the expectations of the parties are far more relevant.

What if an intern is misclassified?

Misclassifying an employee as an unpaid intern can be costly. Penalties can include back pay, back taxes, civil penalties, and damages. Even if you end up winning the lawsuit, defending a misclassification suit can be time-consuming and expensive.

Best practices for employing unpaid interns

If you plan to hire an unpaid intern, make expectations clear. Avoid making promises about future employment and avoid promising any form of compensation.

Further, businesses with unpaid interns should work around the intern’s school calendar and schedule. If an intern has school obligations, make it clear that those obligations are a priority to maintain that the purpose of the internship is educational in nature.

Finally, create training opportunities and make sure that the internship is an educational experience for the student and avoid using an unpaid intern to complete work that would otherwise be performed by a paid employee. An unpaid intern should complement the work of employees but should not replace employees.

Ultimately, if you decide you would like an intern who operates more like an employee and less like a student, it may be a good idea to go ahead and pay the person an hourly wage rather than risk a misclassification lawsuit. Each organization’s situation is different, and employers should discuss their specific circumstances with legal counsel to limit exposure when looking to hire unpaid interns.

Missy Oakley is an attorney with Barran Liebman. She represents employers in a variety of matters.

Hannah LaChance is a law clerk with Barran Liebman. She supports attorneys with content development for employment training, policy drafts, and legal research.