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:
Expectation of Compensation – The intern understands that the internship is unpaid.
Educational Environment – The internship provides training similar to what would be given in an educational environment.
Ties to Academic Program – The internship is tied to the intern’s formal education through coursework or academic credit.
Accommodation of Academic Commitments – The internship aligns with the intern’s academic calendar and commitments.
Limited Duration – The internship lasts only as long as is beneficial for the intern’s learning experience.
Job Displacement – The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits.
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.
