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The Impact of Relaxed Department of Labor Rules for Hiring Interns

February 09, 2018
The term “intern” is one that has drawn a lot of discussion over the last several years. It is generally associated with someone in college who works during a specific period of time with a company as a way to gain experience. But, over time, companies have started offering “internships” to people just out of college. A few years ago, a court case decided that if someone was doing the work of a regular employee, they couldn’t be called an “intern,” and they had to be paid. Now, the Labor Department has relaxed those rules a bit and, therefore, has allowed the unpaid internship to return. To discuss this change, Knowledge@Wharton Business Radio’s Host Dan Loney interviewed Michael Schmidt, a labor and employment attorney with the firm of Cozen O’Connor, and Ioana Marinescu, an Assistant Professor of Economics, Faculty Affiliate of the Penn Wharton Public Policy Initiative and a Faculty Research Fellow at the National Bureau of Economic Research.

The full interview can be listened to on iTunes Podcast. An edited transcript of the interview follows.

Knowledge@Wharton: So Michael, what was your reaction to this decision? And, I guess if you can, give us a little bit of background of why the change was first brought to the forefront to begin with.

Schmidt: Sure. It’s really an important issue, particularly this time of year when companies are looking to start their summer internship programs. As we’ve all seen and read, when it comes to wage and hour issues – whether you need to be paying minimum wage, whether you need to be paying overtime – we’re seeing a lot of class actions, a lot of lawsuits filed over the past, really, decade. So, this is at the forefront of companies’ minds. And the issue in a nutshell was whether interns can be unpaid interns, or whether they have to be paid and be subject to the requirements of these wage and hour laws. In prior years, the Department of Labor, like on so many other employment law issues, has taken what I would call a “pro-employee” stance. They held that there was this six-factor test and that, by default, all interns were employees, unless the employer was able to prove the existence of all six factors in this test.

Fast-forwarding now to 2018, like so much of what we’re seeing with the Department of Labor and the Republican-led Washington, D.C., there’s a much more relaxed standard that this Trump Administration Department of Labor is giving us. It’s a more flexible standard for determining whether someone can be a paid intern or an unpaid intern.

Knowledge@Wharton: Ioana, give us your reaction to this.

Marinescu: This is very interesting, and I want to relate this back to economic research. Why do people do internships? There are a number of reasons, and the Department of Labor has focused on the learning for the student – and that’s an important component of it. But, there are two other reasons why people might do internships. One is that it’s a screening device that can allow people to prove that they are competent in order to get a job afterwards. The other reason is what we call “signaling,” meaning that having done the internship can look good on your CV and improve your opportunities afterwards. In fact, research shows that people who don’t get those opportunities early on – whose experience is unknown, whose quality is unknown – have more trouble finding work. So, in that sense, the internships can play an important role. But that’s where the regulation has to strike a balance between potential employer abuses and the positive role that it can play for students.

Schmidt: Ioana makes a great point there. Part of the problem, I think, is that while there’s no question that you want to rid society of wage and hour abuses in particular workplaces, the problem that we were starting to see when you had such a strict rule that the Department of Labor was enforcing, is that there was this disincentive. It became counterproductive because companies were less willing to offer these internships, and interns were not getting the benefits that Ioana just mentioned.

Knowledge@Wharton: But the learning part of it, I think, is the key component here, because when you’re talking about somebody who is taking an “internship” the idea they have is that they believe this is an industry or a company that they want to pursue as a career in once they graduate.

Marinescu: Right.

Knowledge@Wharton: What you end up having in some cases, is these people basically being the old-fashioned gopher, just doing any basic, menial tasks which would be a paid job, but that companies were throwing it into the realm of an internship and making it an unpaid position.

Marinescu: So this distinction is very important, and that’s why we have regulation, because in principle, the employers again could abuse the system. And again, back to economics, why would that happen? Well, it’s all supply and demand. When there are too many workers chasing too few job opportunities in certain particular sectors of the economy – fashion magazines, let’s say, would be an example. Then, of course, there’s a lot of incentives for companies to use those internships perhaps not as a learning opportunity, but almost like a regular job. It’s a balance to strike between the fact that internships provide valuable opportunities for students, and not having employers necessarily abuse the system. Though again, “abuse” is a relative term, because sometimes it’s driven by the economic situation, the fact that in some sectors there might be too many people chasing too few jobs.

Knowledge@Wharton: Michael?

Schmidt: And that’s what the Department of Labor has now recognized. So the bottom line, I think, is that instead of having this bright line, really strict rule that had a high threshold for employers to get out from under, we’re going to recognize the economic realities. We’re going to recognize that there may be differences sector to sector, even company to company within sectors, and have a much more flexible rule. As long as we can show that the individuals, the interns, were the “primary beneficiary” of this internship program, we’re going to allow some more flexibility. We’re going to recognize differences between companies and sectors and make it easier for companies to show that these individuals are interns, thereby increasing, perhaps, the number of internship opportunities that there will be out there.

Knowledge@Wharton: Well, Michael, I can throw a little firsthand experience on this. Going back a few years, before I was working in this part of radio, I worked in Minor League Baseball. And Minor League Baseball is something that so many college students who graduate with sports business degrees want to get into. They’re willing to move halfway across the country for an “internship,” where they may get paid $800 a month during the baseball season, but they understand that they’re working day to day in the industry, getting a better understanding of what the actual business behind baseball is. That’s a key distinction. I know there are a few teams, especially in New Jersey, who, when the changes were made a couple of years ago, basically got rid of these interns because they understood that they were going to be in a legal pinch.

Schmidt: That’s a great point. I think, like so many othe rissues about employment law, “if it looks like a duck, quacks like a duck, it tends to be a duck.” We’re far beyond the scope of this when you’re talking about independent contractors and other types of wage and hour issues. But regarding these issues, you can throw away the extreme sides, where you have the real, clear abuse on one side, and you have the obvious other extreme. Now, in the middle of this spectrum is this flexible test.

To your original question, why are we seeing this now? I think it’s, in part, because we’ve got this Republican-led Department of Labor, but it’s also this new, flexible primary beneficiary test that has been adapted in a lot of courts over the past couple of years in particular. What you’re seeing is an avoidance of having different standards from the agency standpoint and what parties are dealing with in the court system. The Department of Labor is trying to recognize what tests the courts have been using, and adopt something closer to a more uniform test.

Marinescu: Right. So I want to get back to this primary beneficiary test to help our listeners understand some of the economics behind that. As I mentioned earlier, one of the reasons to have internships is for interns to learn something. An important distinction, though, is are they learning something that is general and could apply potentially beyond this company, or are they learning something that essentially is only applicable at that company?

Knowledge@Wharton: Right.

Marinescu: So we make this distinction between general and specific human capital. And that’s important, because if what they’re doing doesn’t really extrapolate to any other company, then clearly, it’s more likely to just benefit the company and not the intern, because the company needs someone doing that, for example. That’s one interesting economic aspect to keep in mind.

Knowledge@Wharton: Let me ask you this, then. When you think about the college experience – when you’re somebody who is a sophomore or a junior in college – you have to go back and complete your degree. Obviously, you can do an internship and build a relationship with a company where they may basically say, “when you get done in two years, we want to bring you on as a full-time employee.” That probably doesn’t happen enough in the real world, correct?

Marinescu: So actually, that’s not so uncommon. I can tell you that for our students at the School of Social Policy and Practice here, this is fairly common, that they have to do an internship as part of their curriculum, and a pretty large number of them get jobs with those companies when they graduate.

In that case, the internship plays the role of screening, in the sense that it’s the employer – and to some degree, the employee – learning if this is a good fit or match. And that’s something that is very valuable, but I don’t think is explicitly recognized in the enforcement guidelines by the Department of Labor, which mostly focuses on the learning experience – as in you’re learning something about the industry or the job that might be more broadly applicable.

Knowledge@Wharton: Michael?

Schmidt: You know, the test does not say, and let’s be clear about this, that the employer cannot get anything out of this relationship. As Ioana just said, the company is also gaining from this, because the company is gaining some knowledge about the individual. Is this a person who we see as a future employee, as a future leader in this company? So there is something to be gained. I don’t want people out there to think that the company is not entitled to “gain something.” But, this does have to be a relationship where the individual is the primary beneficiary. There is this educational component. There is this aspect that students are learning something about the industry, about this company, about the skills they need, about future opportunities.

If you really want to break this down into a non-legal kind of nutshell, if this intern is just an individual who the company is trying to take advantage of who solely gets coffee, solely goes to the cleaners or makes copies so that it can pay fewer people to do those as regular employees, there’s going to be a problem. If we have something that does have an educational component tied to the individual’s course of study at school and future opportunities to become an employee in that particular business or entity, it’s going to be more likely that you’ll be able to show that that individual was the primary beneficiary of the relationship.

Marinescu: I want to add something here. Based on prior research, how can the individual be a beneficiary? One interesting way is, as I said, future opportunities. This plays into the feedback the company gives you after the internship. Basically, research has shown that just having a line on your resume might not be enough. What’s important is to be able to get positive feedback. One way employers can demonstrate that they are benefitting the intern–at least from an economic perspective–is to say, “we’ll provide a letter of recommendation”, a kind of feedback that then, clearly, can benefit the intern for future employment opportunities.

Knowledge@Wharton: I would think, Michael, that when you talk about kind of the nature of business and who companies looking to hire these days, HR is really looking for the fit of a person. During an internship, as Ioana mentioned, the screening component up becoming a vital piece for the HR Department, and – whether it is implied, intended or not – it does end up becoming a cost savings for the company if you’ve made that connection with the intern in advance. Then there’s a benefit, obviously, down the road.

Schmidt: There’s no question, and that’s what I meant when I said that you can’t look at this as the company not being entitled to gain any benefit from the relationship.

But to your point, I think the screening aspect is certainly critical. But just as critical, if not even more so, is what happens after the screening. What happens when the intern is brought in? It shouldn’t just be a situation where you bring them in and say “congratulations, you’re here,” then HR or other people dedicated to the internship program just disappear.

Knowledge@Wharton: How often do you think, though, that you are still seeing cases today of the intern as a gopher? How frequently do you think that occurs, in this day and age? Especially with how companies are more worried about ensuring they have the right people working there, and want to keep those people working there for a longer period of time now that the recession is starting to be put away. Also, as more people are willing to think about jumping from company to company.

Schmidt: I think you’re still seeing a good amount of that, and it’s probably for two reasons. One is, a lack of knowledge and education. I’m not going to presume that every company out there is looking to take advantage of and abuse interns. I think part of it is that they just don’t necessarily know what the rules and requirements are. The other part of it may be that when you have smaller companies or companies where the particular subject matter, the particular work to be done, is extremely fast-paced, they don’t feel they have the time or resources to structure a program or dedicate people to the program. You’re still having problems out there, I think, for a combination of both of those reasons.

Knowledge@Wharton:  Ioana?

Marinescu: I want to get back to the issue of having a team there, or someone who is dedicated to the internship program. As I was saying before, the screening of an internship is not just for that company, but you can see it as a screening of the intern for the market. Being able to provide a recommendation will put the intern in a better position not just for that company, but for the market. So if a company does not have a system in place that, for example, will provide good quality recommendations, that’s less of a benefit for the intern.

Schmidt: That’s a great point. I agree completely.

Excerpt from the caller questions and answers:Knowledge@Wharton: For those of you out there with interns, some good insight and an opportunity to ask questions. Actually, there’s a comment from Twitter, as well. It says, “Don’t forget about having to pay for health care, too”–which is a factor in terms of somebody being an employee or being an intern.

Schmidt: There’s no question. It’s about the wages aspect of it, that if individuals are employees, you’ll have to comply with the rules, but also the other htings that go along with being an employee, like benefits.

Marinescu:That’s right. Of course that adds to the cost for the company, if they have to cover benefits. But I really liked the question before that, or the comment that was made about “give the interns to good managers,” because that creates an internal incentive in the company for the interns to be well placed. I suppose managers like to get some help, and so if you can get more help by being a good manager, that’s kind of good for everyone. The interns get supervised by good people, and then the managers have an incentive to keep being good so they can get more help.

Knowledge@Wharton: What about the role that the college or the university needs to play in this process? Obviously you have a student who wants to work for a particular company, but the college or university also wants to make sure that that is the right spot for that individual to be able to learn and benefit for it. Ioana?

Marinescu: Right. So that’s where the career counselors and the various services of the university step in. There is learning there, too, because universities can learn from the experience of prior interns with this company, if there have been any, and be able to advise on new generations of students about whether this might be a good fit for them or not. By the way, that’s why if a company consistently doesn’t provide a good experience for interns, presumably they’re going to get sent fewer interns by the university.

Schmidt: Yes, I totally agree. I think there’s got to be buy-in from the school’s side, as well, in terms of being able to help students understand what opportunities are out there, and perhaps tie in some specific curriculum through an internship-related course. Employees can then come back and show that what they’re applying and what they’re learning on these internships is something that can help their regular curriculum, and perhaps down the road.

Knowledge@Wharton: One of the things this administration has talked about was continuing to build the jobs numbers in this country. By doing this, are they in a round-about way, Michael, trying to spur job growth with some companies? Obviously opening the door for internships, as we’ve just kind of said, does potentially open the door for somebody to get a job with that company down the road.

Schmidt: No question about it. But you know, as our workforce is getting older, you can have senior interns, as well. The more that interns are building and developing skills of a unique nature for a company, for an industry, the more productive they become down the road for that company, or for some other company in the industry.

Knowledge@Wharton: Michael, thank you very much for joining us today.

Schmidt: Thank you for having me.

Knowledge@Wharton: :Ioana, great meeting you. Thank you for coming in.

Marinescu: Thanks.

Knowledge@Wharton: Michael Schmidt, from the firm of Cozen O’Connor, and Ioana Marinescu, who is with the University of Pennsylvania as an Assistant Professor of Economics, also a member of the Wharton Public Policy Initiative.


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