Not surprisingly, summer internships look a bit different this year. Some are cancelled outright, others cut short, and many are virtual. Amidst these changes, we know employers have more than a few questions . . .
Q. If my company is cancelling its planned summer internship, do we have to provide any cash compensation?
A. Not unless there is a contract in place to do so. Nonetheless, we’ve seen a number companies offer to pay a portion of the expected wages (and a few very generous employers have sought to pay the entire amount).
Q. And, if we want to pay our intern some amount for the lost opportunity, do we have to put them on the payroll?
A. Yes. The IRS takes the position that, from a tax perspective, paying any amount, in lieu of wages to a prospective employee who is never actually employed is nonetheless wage income subject to income tax withholding, social taxes, etc. Some employers are a little stumped by how they can set somebody up on the payroll just to make this one lonesome payment. But, it is doable. It requires some administrative tasks like getting the required federal and state withholding forms and setting the person up in the employer’s payroll system. For federal purposes, the required form is the Form W-4 that an employee fills out during onboarding for a new job, which form will require the employee to provide a social security number (or other taxpayer identification number) and other information needed for the payment to be properly reported on Form W-2 and withheld upon.
Q. Our budgets are really tight. If we determine to continue our internship program, do we have to pay our summer interns?
A. It depends. This question is coming up more frequently as some companies are pushing the envelope to cut costs given the current state of things. And, the good news is, that as of a couple of years ago, employers have more flexibility to structure unpaid internships lawfully than they did before.
In 2018, the DOL did away with its previous six factor test, which basically said if an intern is providing anything of value to the employer, the intern needs to be compensated. (Read more HERE.) The new test is the primary beneficiary test. It looks at whether the intern or the employer is benefiting the most, and if it is the intern, then they can be exempted from the FLSA. This means that the interns do not have to receive minimum wage and they do not have to receive overtime. The primary beneficiary test is more flexible and certainly more up to date with how internships are structured than the previous test.
The primary beneficiary test looks at the following factors:
- 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.
- 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.
- The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- 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.
- 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.
No single factor is outcome determinative; this is a holistic test that is fairly flexible. Thus, when determining whether an internship must be paid, it really is a case-by-case determination depending on the structures of the program. In light of these factors, companies do have some flexibility to structure their internships in a lawful way where interns are unpaid.
Q. If we cancel our internship program, do the would-be interns qualify for the pandemic unemployment insurance?
A. Likely yes. Under the new CARES Act, the available unemployment insurance — Pandemic Unemployment Assistance (PUA) — is different from than what we normally think of as unemployment insurance. Generally speaking, the Pandemic Unemployment Assistance provides an unemployment-type benefit to those individuals who are typically ineligible for regular unemployment benefits. For instance, gig workers, people who are self-employed, or people who do not have the work history that is typically required to collect unemployment insurance. The Pandemic Unemployment Assistance can provide up to 39 weeks of benefits.
Individuals could receive Pandemic Unemployment Assistance benefits because their job offer was either rescinded as a result of COVID-19, their start date was rescheduled, or they are not able to go to the job because of COVID-19. Thus, assuming the reason for the cancellation of the internship is related to COVID-19, it would fall squarely under one of the articulated reasons in the CARES Act. In that case, the would-be intern would likely be entitled to collect a payment under the Pandemic Unemployment Assistance Program.
For more on how to structure your internship program, contact your Baker McKenzie employment lawyer.
(With thanks to Anne Batter from our Tax Practice Group for co-authoring this post.)