A new ruling by the U.S. Department of Labor may change how businesses small and large may classify interns.

For many years, the DOL maintained a six-part test to determine whether an individual working at a for-profit company could be classified as an unpaid, nonemployee intern. To bring on an unpaid intern, an employer had to meet all six qualifiers. In practice, however, the all-or-nothing requirements were detrimental to employers and to students, whose opportunities to gain practical experience were diminished.

The historical DOL test

Under the test, the employer had to meet these factors to properly classify an individual as an intern:

1. The internship must be similar to training given in an educational environment.
2. The internship is for the intern’s benefit, not the employer’s.
3. The intern does not displace regular employees but works under close supervision of existing staff.
4. The employer derives no immediate advantage from the intern’s activities.
5. The intern is not guaranteed a job when the internship ends.
6. The employer and the intern understand the internship is unpaid.

Most problematic was the requirement that the employer couldn’t gain an immediate advantage from the intern’s work. It’s a given that an employer gets some benefit from having an intern on the team, so how was a company to show otherwise? A single misstep meant the individual’s status could be called into question and, by extension, put the company’s entire internship program at risk.

The test’s inflexibility spurred litigation by individuals who were classified as unpaid interns but who believed they were, in fact, employees entitled to compensation. The four federal circuit courts that heard these cases, however, consistently rejected the DOL’s rigid approach and instead adopted a “primary beneficiary” test that focuses the analysis on whether the intern or the employer is the primary beneficiary of the relationship.

In early January 2018, the DOL followed suit, issuing a statement that it would no longer follow the six-factor test but would begin applying the more flexible primary beneficiary test to determine whether an individual should be classified as an employee or an intern. The new test evaluates the totality of the circumstances, and the failure to meet a single factor is not fatal to classification as an intern.

A new day for student internships

The DOL’s decision is welcome news for educational institutions that promote internship programs, and for students and companies, especially for smaller businesses that want to provide valuable internship opportunities but may not have the means to hire interns as employees.

The new test weighs seven factors:

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 the intern is an employee—and vice versa;
2. The extent to which the internship provides training that would be similar to that offered in an educational environment, including the clinical and other hands-on training provided at educational institutions;
3. The extent to which the internship is tied to the intern’s formal education program by integrating coursework or qualifying the intern for academic credit;
4. The extent to which the internship corresponds with the academic calendar to accommodate the intern’s academic commitments;
5. The extent to which the duration of the internship is limited to the period in which the intern receives beneficial learning;
6. The extent to which the work performed by the intern complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern; and
7. The extent to which the intern and the employer understand that the intern is not entitled to a paid job at the conclusion of the internship.

The change is particularly favorable to educational institutions because the test ties the internships to several education-related factors. There’s now a fair chance that connecting internships to academic programs will permit individuals to be considered nonemployee interns, even if not all factors are met, in those situations where the intern is the primary beneficiary of the relationship.

Employers still need to carefully assess their intern programs in light of the new test. They should put the internship agreement in writing and ask the intern to sign it, addressing as many of the seven factors as possible. And it never hurts to have your legal counsel to review the agreement. But, overall, the change is likely to open doors to new training opportunities for students and new mentoring opportunities for businesses.