Q&A #108 – Can interns be paid as independent contractors?
Question: My nonprofit organization has had unpaid summer interns in the past, but next summer we would like to pay our interns a monthly stipend. Are we permitted to pay interns a monthly stipend as independent contractors, or must they be treated as employees?
Answer: While nonprofit organizations are usually afforded more latitude than for-profits to have unpaid volunteer interns, the decision to pay interns a stipend in lieu of employee wages raises difficult issues. Most paid interns would not fit the criteria for independent contractor treatment under the applicable laws. This means that paid interns must generally be treated as W-2 employees subject to minimum wage laws, payroll tax and withholding laws, and other requirements applicable to employees.
The legal framework for unpaid interns is relatively clear, as set forth by the Department of Labor (“DOL”) in Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act. This guidance describes a 7-factor “primary beneficiary” test to determine whether for-profit employers are permitted to have unpaid interns, which, in essence, seeks to ensure that the internship is focused on providing an educational environment for the intern rather than displacing the work of the employer’s paid employees. Recognizing the tradition and importance of volunteers in the nonprofit sector, the DOL notes that “[u]npaid internships for public sector and non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible.”
However, this guidance does not state that internships that otherwise satisfy the “primary beneficiary” test may include the payment of stipends that do not satisfy minimum wage laws. Indeed, the DOL states that “[a]ny promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.”
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Further, the determination of whether an intern can be treated as an “independent contractor” rather than an “employee” is governed by different rules. These rules, which vary somewhat depending on the legal requirement at issue and whether federal or state law applies, typically apply a multi-factor analysis that looks to the level of independence the worker has in carrying out the work. See, for example, DOL Fact Sheet 13 addressing the test in the context of the Fair Labor Standards Act, and this IRS guidance addressing the test for tax purposes.
Interns who receive a stipend generally do not comfortably fit the criteria for independent contractor treatment. Paid interns usually work in a highly supervised and regimented environment pursuant to a fixed schedule and detailed instruction, which tends to indicate an employee relationship. Further, the factors that tend to indicate an independent contractor relationship (workers who work on their own schedule, use their own tools, equipment, and resources, and provide their services to the other clients besides the organization) rarely apply to interns. Thus, there is usually high risk in treating an intern as an independent contractor and paying the intern a stipend that does not meet the minimum wage laws, payroll tax and withholding laws, and other requirements applicable to employees.
Planning Tip – All interns, whether paid or unpaid, should sign an internship agreement prior to commencing the internship. Among other provisions, this agreement should address expected standards of conduct and confidentiality requirements, and make clear that the organization reserves the right to terminate the internship relationship at any time and for any reason. In the case of an unpaid intern, this agreement should also clearly state the unpaid volunteer nature of the position, describe the training that will be provided, and document connections to the intern’s coursework at an educational institution, if applicable.
Many well-intentioned nonprofits wish to pay their interns a modest stipend on an independent contractor basis in order to make these positions more accessible to people who cannot afford to work for free for an extended period of time. This is an understandable motivation and there may be certain situations in which an argument could be made that this approach is permissible. However, nonprofits must be aware of the risks and avoid the common mistake of assuming that treating interns as independent contractors is an easy way around the requirements that come with employee status.
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Q&A #110 – Are small nonprofits required to provide paid interns with health insurance?
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