Can Interns Sue for Pay? Navigating Internship Labor Laws and Payroll

Each year, millions of college students head for interviews at big name companies in the quest for unpaid internships to complete their educational requirements. Many hope that their internships will pan out as full-time jobs, when the truth is these programs are clearly in the favor of the organizations themselves – a virtual goldmine of free labor that helps companies avoid full-time payroll and taxes. However, there are still many career paths and college programs that require an internship experience in order to get past certain industry barriers.

Unpaid Internship Labor Laws

In the book Intern Nation, author Ross Perlin reports that out of the one to two million people who participate in internship programs in the USA each year, nearly half of these gigs are unpaid or are paid at a rate that falls well below the federal minimum wage. Young people are literally working for nothing, with the dreams of a generation oftentimes going up in smoke because of a loophole in the current Department of Labor’s guidelines on wages and taxes for organizations that sponsor student interns following current unpaid internship labor laws.

Unpaid Intern or Employee? 6 Determining Criteria

According to current DOL standards, unpaid internships are “permissible” granted they meet certain criteria that deems them part of the non-profit standards of work performed on behalf of the organization. In other words, companies must be careful not to cross over into actual employment territory in order to avoid paying minimum wage and income payroll taxes for interns, and most importantly — to avoid unpaid internship lawsuits. These criteria include:

1. The internship must be an actual training program offered onsite in the work environment.
2. The internship experience should be for solely the benefit of the intern’s learning.
3. The intern cannot displace other regular employees, but rather works under close supervision of employees.
4. The employer cannot receive any immediate benefits (financial or otherwise) from the interns.
5. The intern(s) is not entitled to a job at the end of the internship arrangement.
6. The intern and organization must understand and agree to the non-payment terms.

How Unpaid Internships Can Cause Small Business Payroll Problems

The question remains then – If for-profit businesses use interns for the purposes of sliding under the radar of the DOL to avoid payment of wages and employee payroll taxes, then how does this negatively affect their small business payroll taxes and benefit policies?  

First, if an organization fails to meet the above criteria and uses interns to augment current paid staffers or to replace them, there is trouble brewing. Unpaid Interns can file a lawsuit for unpaid wages and taxes not collected if there is proof that an employee-employer relationship was established for failing to meet DOL criteria. Second, the implication that a job will be waiting for an intern can signal a case brought up with the DOL – meaning an audit can take place of the entire intern program; years of headache as the government sifts through all intern and employee records.

Final Thoughts on Intern Programs

The general rule of thumb for companies when creating an internship program is to go into this with the goal of providing a controlled educational program for students. Follow the DOL criteria very carefully to avoid illegal unpaid internships, limit the actual number of interns your organization can handle in any given year, and never promise actual jobs or a set rate of pay to any of the interns. Use scholarship programs, charitable donations to local colleges, and exclusive intern programs sparingly as incentives in lieu of looking at interns as a free labor source.

SourceOne Partners is comprised of an experienced team of payroll professionals that can help you find a PEO or payroll company that fits your specific needs. With offices in South Florida and New Jersey, we can help you find a solution to better manage your small business so that you can save time, money and avoid IRS penalties. Please call 561-674-0748 to speak with a payroll expert or click here to contact us online.