The Basics of Hiring Interns

Small businesses have long used unpaid internships as a way to lower costs. If you run a for-profit business and plan on offering unpaid internships, there are specific requirements you must comply with.  In such circumstances, the relationship must be for the primary benefit of the intern and not the employer. An employer who fails to pay interns who are otherwise entitled to pay may be liable for unpaid wages, taxes, interest and penalties.

The U.S. Department of Labor has adopted a seven-factor primary beneficiary test for analyzing whether an individual is an intern or an employee entitled to compensation.  Previously, the agency had promulgated a different six-factor test, which some circuits applied and others rejected.

Test for Unpaid Interns and Students

Courts have used the “primary beneficiary test” to determine whether an intern or student is, in fact, an employee under the FLSA.  In short, this test allows courts to examine the “economic reality” of the intern-employer relationship to determine which party is the “primary beneficiary” of the relationship. Courts have identified the following seven factors as part of the test:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.

  2. 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.

  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.

  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.

  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.

  6. 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.

  7. 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.

If analysis of these circumstances reveals that an intern or student is actually an employee, then he or she is entitled to both minimum wage and overtime pay under the FLSA. On the other hand, if the analysis confirms that the intern or student is not an employee, then he or she is not entitled to either minimum wage or overtime pay under the FLSA.

Also note that in addition to these federal requirements, individual states may have additional requirements that need to be satisfied. Check your state’s Department of Labor for more information.

There are some exceptions to the above rule. The FLSA exempts certain people who volunteer to perform services for a state or local government agency or who volunteer for humanitarian purposes for non-profit food banks. It also recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation, for religious, charitable, civic, or humanitarian purposes to non-profit organizations. Unpaid internships for public sector and non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible.

What to Know Before You Hire Help for Your Business

You’ve decided to hire some extra help for your business. Perhaps you’re now sending all of your graphic design needs to a local graphic designer or maybe you’ve hired a virtual assistant to help with administrative tasks. 

Although most business owners understand the value of having a contract in place to govern the relationship between them and a client regarding their services, , they frequently fail to have a contract in place to govern the relationship between the planner and a worker the planner hires to assist in the business.

What is an Independent Contractor?

In general terms, an independent contractor is a person or business - non-employees -who are in an independent trade, business, or profession in which they offer their services to the general public.  An independent contractor runs a separate business and is treated as such.   

One way to view whether a worker is an independent contractor is to ascertain the degree of control possessed by the worker.  Generally, an independent contractor has the right to control or direct the way they do the work contracted for, including when, where and how. 

For example, let’s say Premier Events Inc. wants to build a new website for their business. Because they don’t have the resources or skills to have this project completed in house, they decide to contract with Sally who is a website developer.  Sally works as a website developer and serves a variety of clients including Premier Events. Sally has her own tools, sets her own works schedule and decides how to go about working on this web development project. In this example, Sally is most likely an independent contractor.

Why a worker’s classification as an independent contractor or employee matters?

Hiring employees (as opposed to independent contractors) tends to impose a variety of administrative responsibilities on the employer and requires an employer to pay for a variety of taxes or benefits including, but not limited to, federal taxes, social security, Medicare, unemployment, and state taxes, as well as workers compensation insurance, and other employee benefits.  A business doesn’t incur these obligations when it hires an independent contractor, thus usually resulting in a financial savings and less administrative burdens.

Incorrectly classifying an independent contractor can be quite costly for a business owner. If a federal or state agency concludes that an employee has been misclassified as an independent contractor, the employer may be subject to paying back taxes and penalties, for example. 

A business owner’s decision whether someone is an independent contractor is subject to review by numerous federal and state agencies, including the IRS, the Labor Department, state tax departments, and unemployment and worker’s compensation agencies.  Moreover, the agencies each apply different factors to determine whether a worker has been properly classified as an independent contractor.  There is no one test that applies across the board.

Why you might need an Independent Contractor agreement?

  • May Support Your Independent Contractor Classification

If a government agency questions your independent contractor classification of a worker and audits your business, a written independent contractor agreement may help prove that you and the worker have entered into an independent contractor relationship. While having a carefully drafted contract with your independent contractor doesn’t necessarily qualify a worker as an independent contractor, it can help tip the balance in favor of an independent contractor classification when it’s a close call.

  • Sets the Parameters of Your Working Relationship

As with any working relationship, a contract can be useful in clarifying the working relationship between you as the business owner and a worker. It might include clauses regarding the services to be performed, the compensation and such. But it can also address other important issues such as who owns the intellectual property rights to work that is created by the independent contractor and how the business owner’s confidential information will be treated by the independent contractor.