By: Anna Kolontyrsky and Jeffrey Landes

As summer internship season approaches, financial service employers should confirm that their internship programs comply with all relevant laws, including the requirements of the Fair Labor Standards Act (“FLSA”) and applicable state laws.  Ascribing the term “intern” to a college or postgraduate student working for an employer for a short duration during the summer months does not automatically exempt the employer from federal and state minimum wage and overtime requirements. Unless the position meets certain statutory and regulatory criteria, these individuals will be subject to all of the same requirements as employees.

The following tips can help employers implement the proper policies and procedures with regards to their internship programs.

Must Summer Interns Be Paid?

Under the FLSA, the definition of “employ” includes to “suffer or permit to work.” Covered and nonexempt individuals who are “suffered or permitted” to work must be compensated for their services. Thus, summer associates at a financial firm who qualify as employees, rather than interns or trainees, typically must be paid at least the minimum wage and overtime compensation for all hours worked over 40 in a workweek.

In order to be considered a bona fide intern, and exempt from the minimum wage and overtime requirements of the FLSA, the following six factors, set forth in the U.S. Department of Labor’s (DOL) FLSA Fact Sheet #71, must be met:

1. The individual receives training similar to what would be given in an educational environment;
2. The training is for the benefit of the intern;
3. The interns do not displace regular employees, but work under close observation;
4. The employer that provides the training derives no immediate advantage from the activities of the individuals and on occasion the employer’s operations may actually be impeded;
5. The interns are not necessarily entitled to a job at the conclusion of the training period; and
6. The employer and the individual understand that no wages are paid for the time spent in the internship.

In order to utilize unpaid interns, the program must meet all of the above factors as well as any applicable state factors.  New York’s unpaid internship test, for example, includes several additional factors such as i) the training the intern receives must be designed for specific work in the industry and not tailored to the particular employer; and ii) any advertising or postings for the intern position must emphasize education and training.  In this regard, in order to have an unpaid intern, the intern should be performing no work that benefits the employer.  Time should be spent attending training sessions and “shadowing” other employees.  It is also very helpful if the intern is receiving academic credit.

In light of the above, many summer interns at financial institutions will not satisfy the unpaid intern test.  For instance, if a summer worker is hired to perform the same tasks as a junior associate, this may be viewed as work that displaces regular employees.  If the summer worker is “crunching” numbers, this will probably benefit the employer.  Employers should carefully review any unpaid internship programs to determine whether the six-factor test, and any additional applicable state test, is met, especially given the current environment of increased government enforcement and high profile litigation in this area.

When Summer Interns Are Paid, What Considerations Should Employers Keep In Mind?

For many summer workers at financial institutions, a paid summer internship is a highly lucrative experience.  If interns are paid, however, the vast majority will be non-exempt and, therefore, subject to overtime requirements.  Indeed, most undergraduate summer interns at a financial firm will not exercise sufficient independent discretion and judgment to meet the administrative exemption of the FLSA.  These individuals are also subject to record-keeping requirements, company policies and eligibility for workers’ compensation.

• Recordkeeping

The FLSA mandates that employers keep certain records for all employees, including hours worked.  For summer staff, this record keeping process may prove complicated. For instance, many interns at banks receive blackberries or other PDA devices, on which they may work at all hours. Some interns are given remote access and, as a result, perform work from home that the employer may fail to track.  Interns also often attend networking and other work functions outside of the office, which typically may be considered “work hours” under the FLSA.  Employers should make sure that proper policies are in place to record all of an intern’s work-time.

• Company Policies and Benefits

Further, if interns are considered employees, company policies will apply to them just as they would to any other employee. Specifically, company policies regarding e-mail or internet usage and anti-harassment should be distributed to the interns on their first day of employment. Employers should be particularly careful regarding any complaints of discrimination or harassment brought by interns.  As employees, interns are protected by anti-discrimination laws.

Other policies, like sick day or vacation policies, may apply only to “full-time” employees. Employers should review their employee manuals to see whether interns are defined as “part-time” or “temporary” employees, and, as such, are excluded from such policies. Interns may also be eligible for benefits, depending on the wording of the benefit plans.

• Workers’ Compensation

Workers’ compensation laws have been enacted in all states to provide recoveries for injuries arising out of, or in the course of, employment. The underlying principle of workers’ compensation is common to all states, but the amounts and methods of payment, types of injury covered, and options open to employers vary considerably under the laws of the states. If an intern receives workers’ compensation benefits, he or she is barred from suing the employer for negligence with unlimited damages. It, then, behooves the employer to provide such coverage for interns.

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Finally, summer interns, whether paid or unpaid, at financial institutions will likely participate in work-related social activities and networking events.  Accordingly, employers need to be mindful of underage drinking laws.