Does your internship Program pass the US Beneficiary test? Read to find more.

Internships can provide invaluable experience for students and young professionals, but they also present legal and ethical considerations for employers. Under the Fair Labor Standards Act (FLSA), the Primary Beneficiary Test helps determine whether an intern should be classified as an employee entitled to minimum wage and overtime protections, or if the internship can be unpaid. Understanding this test is crucial for businesses to ensure compliance with U.S. Department of Labor (DOL) regulations.

Why the Primary Beneficiary Test Matters

The Primary Beneficiary Test is a framework used by courts and the DOL to assess whether an intern benefits more from the arrangement than the employer. If the employer is the primary beneficiary, the intern is considered an employee and must be compensated. Conversely, if the intern is the primary beneficiary, the internship may be unpaid.

Noncompliance with FLSA regulations can result in significant legal risks, including lawsuits, back pay requirements, and penalties. Therefore, companies must carefully evaluate internship programs to ensure they align with federal and state labor laws.

3 individuals laughing at a table sitting in front of laptops doing work

Conditions for an Unpaid Internship

The DOL has outlined seven factors to determine whether an internship may legally be unpaid. No single factor is determinative; rather, the test is applied holistically:

1. Expectation of Compensation – The intern understands that the internship is unpaid.

2. Educational Environment – The internship provides training similar to what would be given in an educational environment.

3. Ties to Academic Program – The internship is tied to the intern’s formal education through coursework or academic credit.

4. Accommodation of Academic Commitments – The internship aligns with the intern’s academic calendar and commitments.

5. Limited Duration – The internship lasts only as long as is beneficial for the intern’s learning experience.

6. Job Displacement – The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits.

7. No Entitlement to Employment – The intern is not promised a job at the conclusion of the internship.

If an internship meets these criteria, it can be unpaid. However, if an intern is performing work that primarily benefits the employer, the company must pay at least the minimum wage and adhere to overtime rules.

Paid vs. Unpaid Internships: Pros and Cons for Employers

Companies must weigh the benefits and drawbacks of offering paid versus unpaid internships.

Pros of Paid Internships

• Attracts Top Talent – Compensation can make the position more appealing to highly qualified candidates.

• Improves Diversity & Inclusion – Paid opportunities ensure that students from all economic backgrounds can participate.

• Boosts Productivity – Paid interns may be more motivated and engaged in meaningful work.

• Reduces Legal Risk – Paying interns eliminates concerns about FLSA compliance.

Cons of Paid Internships

• Higher Costs – Paying interns adds to payroll expenses.

• Potential Administrative Burden – Employers must manage tax and benefits considerations for paid interns.

Pros of Unpaid Internships

• Lower Costs – Employers can allocate resources elsewhere without direct payroll expenses.

• Focus on Learning – Programs structured correctly ensure interns receive training rather than performing substantive work.

Cons of Unpaid Internships

• Legal and Compliance Risks – Misclassifying interns can result in legal action and financial penalties.

• Limited Talent Pool – Many students cannot afford to work without pay, potentially reducing the diversity of applicants.

• Lower Engagement – Unpaid interns may not be as motivated or committed to the company’s success.

Final Thoughts

For employers, offering a well-structured internship program is a great way to attract emerging talent, provide meaningful learning experiences, and potentially identify future full-time employees. However, compliance with FLSA regulations is essential. Employers should evaluate internship roles using the Primary Beneficiary Test to determine whether interns must be paid and consider the broader implications of offering paid versus unpaid internships.

By carefully structuring internship programs to align with legal requirements and best practices, companies can foster positive experiences for both interns and their organizations.

Can employers deduct short periods of time or force PTO for Exempt Employees?

Managing Paid Time Off (PTO) for exempt employees can be a nuanced issue for employers, particularly when accounting for short periods of time off. Exempt employees, as defined under the Fair Labor Standards Act (FLSA), must receive a fixed salary that is not subject to reduction based on variations in work quality or quantity. However, employers may require the use of PTO for partial-day absences, provided they do so in compliance with federal and state laws.

Federal Compliance: The FLSA and PTO Deductions

Under the Fair Labor Standards Act (FLSA), exempt employees must receive their full salary for any workweek in which they perform work, regardless of the number of hours worked. However, the U.S. Department of Labor (DOL) permits employers to deduct from an exempt employee’s accrued PTO balance for short periods of absence, such as partial-day absences. Key federal rules to follow include:

• No Salary Deductions: Employers may not reduce an exempt employee’s salary for partial-day absences, but they may require the employee to use accrued PTO.

• Full-Day Deductions: Employers may deduct from an exempt employee’s salary for full-day absences if the absence is for personal reasons other than sickness or disability.

• Sick Leave Deductions: Under 29 C.F.R. § 541.602(b)(2), salary deductions for full-day absences due to sickness are permitted only if the employer has a bona fide sick leave plan.

• Exhausted PTO: If an exempt employee has no remaining PTO, the employer must still pay their full salary for partial-day absences; failure to do so risks violating the salary basis requirement.

State-Specific Considerations

While the FLSA provides broad protections, several states impose additional restrictions on PTO deductions and employee classifications. Employers should be aware of the following state-specific regulations:

• California: Under California Labor Code § 221, PTO is considered earned wages, meaning employers cannot deduct from an exempt employee’s salary for short PTO shortages. Additionally, California’s Wage Orders prohibit salary deductions for partial-day absences.

• New York: Employers must follow the New York Department of Labor's wage and hour guidelines, which emphasize strict adherence to the salary basis test for exempt employees.

• Massachusetts: The Massachusetts Wage Act treats PTO as earned wages, and improper deductions could result in wage violations.

• Illinois: Illinois law requires employers to provide PTO payout upon termination, reinforcing its status as earned compensation.

Best Practices for PTO Compliance

To ensure compliance with federal and state laws, employers should implement the following best practices:

1. Develop a Clear PTO Policy: Clearly outline when and how PTO may be used, ensuring it aligns with FLSA regulations and applicable state laws.

2. Avoid Unlawful Salary Deductions: Never deduct from an exempt employee’s salary for short absences if PTO is exhausted.

3. Use Time-Tracking Systems: Implement an accurate system to monitor PTO use while maintaining compliance.

4. Train HR and Payroll Teams: Educate HR staff on legal requirements for PTO deductions to avoid misclassification and wage violations.

5. Review State Laws Regularly: Stay updated on state-specific PTO laws to ensure full compliance across jurisdictions.

Conclusion

Employers must balance maintaining operational efficiency with legal compliance when managing PTO for exempt employees. While requiring PTO use for short absences is permissible, reducing an exempt employee’s salary for such absences can lead to FLSA violations. By implementing clear policies and understanding both federal and state regulations, businesses can protect themselves from legal risks while ensuring fair treatment of their workforce.