The Internship Mistake Small Businesses Can No Longer Afford to Make

Interns have been a cost-effective way for businesses to get work done for years. But if your company runs an unpaid internship program, chances are, you're breaking the law.
Founder, mater mea
June 19, 2014

Unlike the death of print, Facebook and cable television, the end of unpaid internships may be closer than we think. And when historians go back into the annals of time to see when the practice fell out of favor, they'll encounter the same name over and over again, the backlash's patient zero of sorts: Eric Glatt.

In 2013, Glatt, along with fellow intern Alex Footman, won their case against Fox Searchlight for their time as unpaid interns on the set of the 2010 thriller Black Swan. Glatt, then in his late 30s, worked "hundreds of hours ... doing the essential work of drawing up purchase orders, making spreadsheets, [and] running errands," wrote Ross Perlin, the author of Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy, in an article for Time magazine. What countless college-aged students and corporations took as par for the course to building resumes and getting affordable labor respectively was called into question when Glatt worked with Outten & Golden in New York City to file for back pay from Fox.

The resulting victory for unpaid interns was like a warning shot fired to industries that relied on their labor, such as fashion and journalism. Many were shocked when Condé Nast decided to end its internship program after two former interns sued the company for being paid less than $1 a day. (The Condé Nast internship case recently settled, and an internal memo hinted at a new program for "developing meaningful"—and most likely paid—"new opportunities to support up-and-coming talent.") Hearst, Warner Music, Gawker Media, Lionsgate and NBCUniversal are all big-name and deep-pocketed companies that are now confronting lawyered-up former interns who want their rightful wages.

Glatt v. Fox Searchlight Pictures has made it incredibly clear that companies have been running afoul of the law when it comes to their unpaid internship programs. Succinctly put, "if you're a for-profit employer ... there aren't going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law," Nancy J. Leppink, the acting director of the Labor Department's wage and hour division, told The New York Times. It's true for small businesses as well. 

"A lot of times startups are trying to save money and cut corners," lawyer Tricia Meyer of  Meyer Law Ltd. explains to OPEN Forum. "But internships don't equal free labor. More often than not, interns actually do need to be paid."

Buzzy Shots

 Amy Baxter the founder of MMJ Labs, the company that created Buzzy, a painless way to administer shots for children and adults, agrees. Her company pays its interns $10 an hour and treats them to a lavish dinner at the end of the summer. "Truthfully, although we enjoy having extra people and energy, the value we have gotten from interns hasn't helped the bottom line," Baxter writes in an email to OPEN Forum. "It's something we enjoy, and it's a great way to expose entrepreneurs to the startup world. We're really doing the program to give back."

But Baxter and other like-minded business owners' largess seems to be the exception despite being the rule. According to ProPublica, every year an estimated half a million Americans work as unpaid interns, and while the Labor Department hasn't necessarily made good on its promise to crack down on employers who aren't paying their interns, it doesn't mean businesses have free rein either: Thanks to the 2013 ruling, that swan song is over. So what should small-business owners know before they take on another intern?

Passing the Test

It's understandable why the idea of unpaid interns is attractive to business owners. Who wouldn't be tempted by the concept of free, seemingly mutually beneficial labor? There's just one problem—the entire premise of unpaid internships has grown from a misreading of a 1947 Supreme Court decision.

In Walling v. Portland Terminal Company, the Supreme Court ruled in favor of the railroad company, which offered an unpaid seven- to eight-day training program from railroad brakemen, Vox reported. Ruling that the trainees did not have to be paid "created an exemption to the Fair Labor Standards Act." It also created a six-point test that the Department of Labor still uses today to determine whether or not an internship can be unpaid (nonprofits and government sectors are in the clear):

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment; 
  2. The internship experience is for the benefit of the intern; 
  3. The intern does not displace regular employees, but works under close supervision of existing staff; 
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded; 
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and 
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Before you can ask, there's no cherry picking allowed, either. According to the DOL, "if all of the factors listed above are met, an employment relationship does not exist under the FLSA, and the Act’s minimum wage and overtime provisions do not apply to the intern." And even if you work with a candidate who says they are willing to intern for free, the rules still apply to you, Meyer says. 

"If there's an agreement between two people and they decide to go down that path," she explains, "the employer is running the risk that that person comes back and says that they should've been paid." (Such was the case in the Glatt v. Fox Searchlight ruling, which states, "Glatt and Footman understood they would not be paid. But this factor adds little, because the FLSA does not allow employees to waive their entitlement to wages.") 

Making It Work

So if you have interns, they should be paid minimum wage (currently $7.25 an hour) and overtime if they work more than 40 hours a week.

"I really can't believe there are companies that offer unpaid internships," Bob Bentz, the president of ATS Mobile, a Philadelphia-based digital marketing agency, writes in an email to OPEN Forum. "It just seems wrong to me. Our interns have real jobs and make a real contribution to the company; they aren't fetching lunch for the boss."

Brian Fino, CEO of Fino Consulting, a software development and consulting company based in New York City, says his company decided to continue its paid internship program. The team of interns goes through projects Fino has put on the back burner and pick one to take from conception to the real world during the course of their internship. "We wanted them to feel their work was valued because it is," he explains. "It's part of the society that we live in; you should be compensated for your contributions and that's how we wanted to do it."

Finio Management Company

Fino has an impressive internship program that this year attracted close to 40 interested candidates from some of the country's top schools, but its success comes at a cost.

"In software engineering and in consulting services, the only way we can really grow our organization is through the acquisition of talented people. I think that's true for every sector," Fino says. "The intern program for us represents an investment in the growth of our business." On top of flying candidates to their offices in New York and putting them up in a hotel, the 15 interns they selected receive $10,000 for their work done over the course of the summer.

"It develops a long-term pipeline of potential employees," Fino explains. "We've hired six to seven, maybe more, of the interns who have gone through our program. If you look at the [recruitment] agency cost to pay for selection of those candidates, it would've been $18,000 a kid."

Gary Lee of virtual office company Your City Office agrees. "There's such a high cost to recruitment, anywhere up to $10,000 for the most basic staff." When you hire interns you've trained yourself, you're doing it "knowing that you absolutely have somebody working for you that can do the job instead of hoping that you're hiring the right person."

Some business owners may balk at the cost, even when the savings and brand building opportunities are taken into consideration. But there are a number of ways to get the benefit of having an intern without paying more than you can afford. Local grants are available in some states for helping small businesses hire interns. InternNE is a program in Nebraska that awards eligible businesses up to 50 percent of the internship cost, or up to $5,000 per student, and 75 percent of the cost if the business hires a student who receives a Federal Pell Grant, along with an additional $2,500. The initiative was created to create jobs and ties to Nebraska for both students and businesses, and is one of many similar programs around the country. (For example, Michigan has the Small Company Internship Award granted to STEM businesses in the state that hire university students as interns.)

One previous workaround for offering unpaid internships was the promise of academic credit, with many universities and companies working together to ensure their programs went toward a student's coursework. However, "federal regulators say that receiving college credit does not necessarily free companies from paying interns, especially when the internship involves little training and mainly benefits the employer," according to The New York Times.

BORSAbag

But Diane Piper, the president and designer of BORSAbag, has seen firsthand the benefit of helping students with their educational goals. As the manager of Michigan State University's governmental affairs office in Washington, DC, for 15 years, Piper helped secure internships for students participating in the school's Washington Semester Program. Now that she owns her own business and would like to have an intern of her own, she's offering a $1,000 scholarship to a student participating in the program next year as payment.

"I am offering my scholarship to help promote this program and to stimulate interest from others," Piper says via email. Familiar with the DOL's six-point test, "I am involved in conversation with my attorney to make sure that I meet my requirements. I'm not sure how much help I will receive for my business by having an intern. The amount of time required to train, explain and mentor is high, [but] in order to have the intern gain from this internship experience, I need to be willing to give that time. Because I know the value, and because I love working with energetic students, this is a commitment that I am willing to take."

Another option is working with virtual assistants to handle any extra projects you need help completing. "They are amazing and can handle lots of tasks without the overheads of employment," says Gary Lee of Your City Office. But Lee still uses paid interns for his company, acknowledging that there can be risks associated with using a VA. "They're generally not in the office with you," he says. "You can pay for those services and when the job's not done well, the damage done could be a huge overhead."

While these options exist, it bears repeating that internships should not be treated as a means to get affordable talent. The Department of Labor's six-point test drives the point home—internships are truly about training the next generation of workers.

Stephanie Green, an Arizona-based chef, dietitian and owner of Nutrition Studio, Inc., has struck a balance between educator and recruiting employer with her interns. "My fellow dietitians who work at the local colleges send me nutrition students and dietetic interns to shadow me and learn about what I do," she explains. "It helps them understand the career choice they are making and rounds them out on their resume as they apply to dietetic internships. The ones I get along with really well and do good work I pay after they graduate or during the summer. 

"Best part of working with me," she continues. "The interns don't go home hungry."

Read more articles on internships. 

Photos: Finio Management Company, Buzzy Shots, BORSAbag

Founder, mater mea