It's May. Your small business is ramping up. Phones are ringing. Work's piling up. Someone in the office suggests bringing on an intern or two for the summer. No salary. No benefits. Just "exposure" and maybe some school credit. They'll gain experience. Your business gets extra hands. Everybody wins, right?

Wrong.

Your intern is answering client calls. Managing vendor emails. Coordinating schedules. Doing the actual work that, if you hired a regular employee, you'd have to pay for.

Three months later, a former intern files a wage claim. The Department of Labor investigates. They ask one simple question: who benefited more from this arrangement, the intern or your business?

Welcome to the real world of internship liability, where good intentions aren't a legal shield.

The U.S. Department of Labor doesn't care if an intern says they volunteered. It doesn't care if they're getting school credit. What it cares about is whether the employer or the intern was the primary beneficiary of the relationship.

Under the Fair Labor Standards Act, an unpaid internship is only legal if it passes the DOL's "primary beneficiary" test. This isn't a single factor analysis. It's a multi-part inquiry where courts and investigators look at the totality of circumstances. But there are key elements that matter most.

First: Is the internship tied to academic credit or a structured learning program? A true intern should be in a formal educational relationship with an academic supervisor who monitors their progress. The internship should have defined learning objectives. It's not enough to say "they'll learn on the job." There has to be an actual school connection backing it up.

Second: Is the intern doing work that's substantially different from the work your regular employees do? If your paid staff members do the same tasks, your unpaid intern is displacing paid labor. That's a red flag the size of a building.

Third: How much is the intern shadowing versus executing? There's a meaningful difference between "intern observes and assists" and "intern does the whole project solo." The more independent work the intern does, the more productive value flows to the employer, and the more likely they should be paid.

Fourth: How long is the arrangement? Internships should have a defined, limited duration. If someone's working full-time for three months, they're an employee. If you keep the same interns rolling through every summer, rotating unpaid workers indefinitely, that's employment in disguise.

Fifth: Does the intern displace your regular staff, or do they add capacity without replacing anyone? This goes back to the displacement question. If an intern removes the need for you to hire a temp or contractor, they're saving you money. That's employer benefit, which shifts the scales.

Sixth: Are there costs to the employer? If you're training the intern, supervising them, and providing workspace and equipment, you're investing. But that investment doesn't override the core question: is the intern generating productive value for your business?

Seventh: Are you binding the intern to confidentiality agreements, non-competes, or other employment-style restrictions? If you're treating them like an employee legally, they're probably an employee for wage purposes too.

This is the framework. It's not an acronym. It's not a checklist where you need five out of seven. Courts call it the "primary beneficiary test" because the magic question is always: Who benefits more, the business or the educational experience of the intern?

Before you bring someone in as an unpaid intern, run through this checklist. These are the factors investigators will examine if you're ever challenged.

If you answered "yes" to questions 1, 2, 3, and 4, and "no" to questions 5 and 7, you're probably on solid ground. If you're hitting "yes" on questions 5 and 7, or you can't honestly answer question 1, that unpaid intern is likely an employee under the FLSA.

Now let's talk about temp workers. This is trickier because temp workers are technically employed by a staffing agency, not your business. So you're not paying them, the agency is. Problem solved, right? No.

The problem is joint employment. If a staffing agency places a temp worker with your company, but you control the work they do, set their hours, discipline them, and direct their performance, you can become a joint employer. And joint employers are on the hook for minimum wage, overtime, and all the usual wage and hour liabilities.

This happens more often than you'd think, especially in hospitality, healthcare, and administrative services. A staffing agency provides the "employee" relationship. But you control the actual work. The courts and the Department of Labor look right past the agency paperwork to the substance of the relationship.

The test for joint employment includes factors like: Does the business directly hire, fire, or supervise the worker? Does the business control the worker's schedule and hours? Does the business control the work methods and performance standards? Who sets the wage or rate? Who pays the worker? Are there agreed-upon limits on how long the worker can work for the business?

If you answer "yes" to the first four questions, there's a real risk you're a joint employer, which means you owe wages whether or not the staffing agency does.

The escape hatch isn't ironclad. Just because a staffing agency is technically the employer doesn't automatically shield you. You have to actually keep your hands off the operational details. If you micromanage a temp worker's day, treat them like your permanent staff, and control every aspect of their work, the agency relationship becomes fiction.

You've probably heard the term "extern." It sounds like it might be a separate legal category. It's not.

An extern is typically a student working in a professional setting as part of an educational program (usually high school or college), often with academic credit involved. Many states recognize externs in their state labor laws with some reduced protections compared to regular employees.

But here's the catch: An extern is still covered by the FLSA if the work is in a for-profit business. The exemption for unpaid interns is narrow. An extern isn't a magic category that avoids minimum wage requirements. Some states allow reduced minimum wages for full-time high school students in specific industries, but that's different from working for free.

The common mistake is calling someone an "extern" and thinking that label solves the problem. It doesn't. An extern in a for-profit business still needs to pass the primary beneficiary test, still needs clear academic connection, and still probably needs to be paid if they're doing productive work.

If you want a legitimate extern program, make sure the educational component is real. Real academic supervision. Real learning objectives. Real limits on the work. And if there's any question, pay them. The minimum wage is there for a reason.

Let's say one of your unpaid interns or temp workers files a wage claim. The Department of Labor investigates and concludes they were actually employees. What happens next?

Back wages. That's the starting point. If the intern worked 40 hours a week for 12 weeks at the current federal minimum wage of $7.25 an hour (or your state minimum, which in New Jersey is $15.13 per hour), that's roughly $3,500 in back wages per intern, plus penalties.

But it gets worse. If you didn't properly track their hours, the investigator will estimate. If they worked overtime (over 40 hours a week), you owe time and a half. If you required them to work without breaks, there's additional liability. If you failed to provide required wage statements, that's a penalty per pay period.

The FLSA provides for liquidated damages, which means the employer has to pay double the unpaid wages in many cases. A three-month unpaid internship can become a $7,000 liability in a hurry. Multiply that by the number of interns or temp workers you've had, and the number climbs fast.

This is before you pay your attorney to defend yourself.

Some states, including New Jersey, have even stricter wage and hour laws. New Jersey requires employers to pay the minimum wage to everyone who works, with very limited exceptions. New Jersey also allows for additional damages for wage violations. An employer who violates New Jersey's wage laws can be ordered to pay restitution, civil penalties up to $5,000 per violation, and attorney's fees.

Here's a liability many employers overlook: workers' compensation.

If an unpaid intern gets injured on the job, who pays for their medical care? Workers' compensation insurance covers employees, typically not unpaid interns. But if the intern is actually an employee (which they often are), and they're injured, they can file a workers' comp claim. If you don't have them on your workers' comp insurance, the state might come after you. Or the injured intern might sue you directly instead of filing a workers' comp claim, opening you up to unlimited damages.

Even if the injury isn't serious, an unpaid intern with a legitimate employment claim and a work-related injury is a lawsuit waiting to happen.

Some employers think not paying the intern avoids workers' comp liability. It doesn't. It increases it. An uninsured worker injury combined with a wage dispute is a worst-case scenario.

Before we get to the case studies, let's talk about the defenses that employers inevitably raise and why they don't work.

"They got school credit." Great. But did they do productive work? School credit doesn't exempt you from paying someone minimum wage if they're working in your for-profit business. School credit might be part of a legitimate internship program, but it's not the whole story.

"They volunteered." In the for-profit context, this doesn't matter. Federal law presumes an economic relationship. If you benefited from someone's work, you owe them wages. Voluntary agreement to work for free is not a valid defense under the FLSA.

"The temp agency is responsible for their pay." Maybe. But if you controlled their work, you might be a joint employer. You can't hide behind the agency paperwork if you were directing the show.

"They're family." This is an emotional argument, not a legal one. Family members who work in the business are employees unless they fall under a specific exemption (which is rare). The family discount isn't a legal discount.

"Everyone else works for free, so why can't they?" This is actually an argument for why you owe everyone wages, not why you don't owe this person.

"The business can't afford to pay them." Budget constraints aren't a defense. If you can't afford to pay someone minimum wage, you can't afford to have them work. Hire someone part-time, or do the work yourself.

^{[Note: This is a hypothetical scenario based on common compliance issues.]}

Prestige Events is a boutique event planning firm in Newark with 12 employees. They specialize in corporate conferences and private galas. In May, the owner decides to bring on four "summer interns" to handle administrative overflow during peak season.

The interns are college students home for the summer. They're not receiving academic credit from their universities (there's no formal internship program). They're not supervised by an academic advisor. They show up Monday through Friday, 9 to 5, for 12 weeks.

Here's what they actually do:

This is work that Prestige normally outsources to a part-time administrative contractor or spreads across existing staff. The interns are doing it for free.

Three of the interns finish the summer fine. The fourth, Maria, injures her wrist during a heavy event setup in August. She reports it to the owner and asks about filing a workers' compensation claim. The owner says, "You're an intern, you don't have workers' comp. You should probably go to urgent care and bill your own insurance."

Maria's wrist needs an MRI and PT. She racks up $8,000 in medical bills. She's angry. She talks to a lawyer.

The lawyer looks at Prestige's situation and sees an obvious wage violation. The interns were doing productive work with no academic program, no learning objectives, no academic supervision, indefinite hours, and no clear separation from regular employee work. They replaced contractor work Prestige would have otherwise paid for.

Under the primary beneficiary test, Prestige was the primary beneficiary, not the interns.

The lawyer sends a wage claim to the New Jersey Department of Labor.

Here's the financial exposure:

That's a serious blow for a 12-person firm. And that's just one summer and four interns. If they'd been running this program for years, the number would triple or quadruple.

But there's another damage that's hard to quantify: reputational harm. A wage violation lawsuit gets attention. Employees wonder if the business is cutting corners elsewhere. Client trust takes a hit. The owner spends months dealing with litigation instead of running the business.

^{[Note: This is a hypothetical scenario based on compliance best practices.]}

Westside Community Health Clinic in Jersey City has 45 employees across two clinic locations. They employ doctors, nurses, administrators, and support staff. Every summer, they run a formal externship program for high school and college students interested in healthcare careers.

The program is structured:

The program benefits students by providing real healthcare experience. It benefits the clinic by developing a pipeline of future employees and generating some assistance with administrative tasks. But the primary beneficiary is clearly the student: they're learning skills they can't get in a classroom, exploring a career path, earning money, and building a professional network.

When the Department of Labor investigates (if they ever do), it's clear these are legitimate externs, not hidden employees. The school connection is real. The learning is documented. The work is supervisory and educational, not independent and productive. The compensation is reasonable.

The clinic's liability is minimal. They're compliant with federal and state wage laws. The externs are covered under workers' compensation. The program is sustainable and defensible.

The cost to the clinic: about $3,000 per summer for four externs (at $15/hour for 20 hours per week for 10 weeks). That's a reasonable investment for compliance and a good community program.

Summer hiring season is here. The temptation to bring in unpaid labor is strong, especially for small businesses running lean. But the cost of getting it wrong far exceeds the savings of paying someone nothing.

The DOL's primary beneficiary test isn't ambiguous. It's designed to answer one question: does this arrangement exist to educate the student, or to benefit the business? If you can't credibly argue the former, you're gambling.

The interns and temp workers you bring in this summer could become liability claims three or four years from now. A former intern files a claim. The Department of Labor investigates. Back wages, penalties, and attorney fees pile up. It's a cascade of costs that could have been avoided by paying minimum wage from day one.

If you have questions about your intern or temp worker arrangement, consult with an employment attorney before the summer season starts. A simple audit of your program can save you thousands in liability.

For more on worker classification issues, see Classification Crisis and Who's the Boss.

Keep fighting the good fight.

LEGAL DISCLAIMER

^{This article is informational only and does not constitute legal advice. Employment law is complex and fact-specific. The examples, case studies, and analyses in this article are hypothetical and are not a substitute for advice from an attorney. Every employer's situation is different, and compliance with wage and hour laws requires careful review of your specific facts and applicable state law.}

^{This article contains advertising material. The information provided is intended for general informational purposes and is not a substitute for legal counsel.}

^{Copyright 2026 Jacobs & Associates LLC. All rights reserved.}

^{Jacobs & Associates LLC is a solo employment law practice in Jersey City, New Jersey, representing employees and employers in workplace disputes, compliance matters, and litigation.}