March 14, 2023

Paid vs Unpaid Internships: The Complete HR Overview

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Key takeaways:

  • Companies should pay interns for ethical reasons and some companies indeed must pay them in order to comply with the law.
  • Companies benefit from paying interns by achieving recruiting efficiency, better engagement, and more favorable employer branding.
  • Paid internships also support workplace equity and diversity initiatives.

Paid internships are key for attracting and retaining emerging talent. Unpaid internships might seem at first glance like a no-brainer for a company’s bottom line. However, not only are unpaid internships potentially illegal, not to mention exploitative, but they also cost the company more time, money, resources, and even its reputation in the long run.

Paid vs. unpaid internships

The differences between each type of internship go beyond the question of compensation.

Paid Internships Both Unpaid Internships
More structured No guarantee of employment at the end  Less structured
Focused goals and outcomes Career exploration, mentorship Open and exploratory
Supplementary, entry-level, value-added work, on-the-job skills Networking Observation, shadowing, menial tasks

After compensation, the biggest difference between paid and unpaid internships is the level of commitment involved for the company and the intern.

A paid internship is more structured, as interns are expected to show up according to a schedule and perform specific, on-the-job tasks. This will require employers to be more intentional upfront about the purpose and goals of providing a paid internship. Though it requires more effort from the hosting company, a paid internship maximizes the benefits that both the company and the intern reap.

Are unpaid internships legal?

Unpaid internships are legal in the U.S. under certain circumstances, making it tricky to classify employees and interns correctly.

For-profit companies are legally required to pay those classified as employees, but interns don’t necessarily fall into that category. The U.S. Department of Labor has compiled a list of factors to determine whether students and interns qualify as paid employees under the Fair Labor Standards Act (FLSA).

Of the DOL’s seven factors, the two that most clearly define an unpaid internship relate to academic credit and internship timing. That is, if the intern receives academic credit from their educational institution and it coincides with the academic calendar, they might not be legally entitled to compensation.

Conversely, if an intern is not receiving academic credit and the internship takes place from February to March to handle a company’s influx in demand, the intern might qualify as an employee—even if only temporarily—and therefore be entitled to minimum wage and overtime pay.

To ensure compliance, companies should develop a clear understanding of the purpose of their internship program and check with local, state, and federal labor laws regarding pay.

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Should interns be paid?

In short, yes, interns should be paid. Legality is one thing, but ethics is another. Given that about 60% of internships are paid, this suggests that paid internships are the norm. The average wage for an intern in the U.S. is $15.37 per hour, but this depends on industry and location. In addition, as with regular employees, companies need to beware of potential pay inequities among paid interns.

Certain circumstances might call for unpaid internships. For example, small businesses and non-profit organizations might not have room in their budgets to pay an intern.

So, unpaid internships that offer student interns academic credit might be the best course of action if the organization isn’t legally obligated to pay them. Some universities and colleges have programs that subsidize students for the duration of their unpaid internships.

Additionally, given that paid interns follow a structured program and schedule, an unpaid internship can offer a more exploratory approach, giving the intern freedom to tour various parts of the business and develop their professional interests.

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The business value of paid internships

There are plenty of ways paid internships add value to the organizations that offer them. They make recruiting easier, boost intern engagement, help maintain a favorable employer brand, and support a company’s commitment to diversity, equity, and inclusion (DEI).

Bolsters recruiting efforts

Paid internships are 32% more likely to result in a full-time job offer than an unpaid internship. This suggests that paying interns attracts top talent and thus supports a company’s recruiting strategies.

Paying interns is also a way to fill the recruiting pipeline with potential candidates for current and future roles at the company. The paid internship serves as a trial period during which the company develops a relationship with the intern. Paid internships can therefore be leveraged strategically to save recruiting teams time, money, and resources.

Boosts motivation and engagement

While there’s no causal relationship between compensation and motivation, it’s safe to assume that compensation correlates with engagement. Paying interns will likely motivate them to stay engaged and do their best work, provided there’s ample mentorship and support in place.

Further, paid internships allow interns to be more fully present because they don’t have to work one or more side jobs to eke out a living during the internship. The stress of earning money elsewhere to financially support themselves only distracts interns from focusing on the goals of the internship.

Improves or maintains favorable company brand

An internship is the start of a business relationship with junior professionals that could last well after the end of the internship, whether the intern ends up at the company they interned at or not. Paying interns contributes to a positive experience and increases the chances of an intern becoming an employee someday or recommending the company to others.

Supports commitment to diversity, equity, and inclusion

Job candidates and employees are paying increasing attention to how a company treats its employees, including interns, and how a company acts on broader social issues.

An unpaid internship program contradicts a company’s commitments to DEI because it can exclude talent that can’t afford to work for free. By contrast, those who can are more likely to come from more privileged backgrounds. However, that’s not necessarily always the case, as other research from 2019 points to the overrepresentation of minority groups in unpaid internships and of white students in paid internships.

Paid internships mitigate the adverse economic and social impacts of unpaid internships and improve a company’s reputation in a competitive labor market.

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Challenges of offering paid internships

Businesses offering paid internships may run into challenges, including:

  • Increased complexity with correctly classifying interns for payroll and tax purposes.
  • Greater upfront planning and organization requirements.
  • Consistent monitoring of the intern’s workload.

It can be tricky to know how exactly to classify employees for payroll since interns don’t fit the definitions of freelancer or independent contractor. Plus, a company paying its interns will need to justify that expense to management.

To make sure the company gets value out of the intern’s work, there needs to be a plan in place with specific outcomes and value-added tasks assigned to paid interns. Then, as the internship is underway, the intern’s supervisor will need to monitor their workload to ensure they don’t get overburdened with work or fulfill menial tasks like fetching coffee orders.

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Maximize paid internships through micro-internships

Though there are numerous benefits of traditional paid internships that last a full semester, they may not be the most practical or strategic option for some businesses. Micro-internships are a flexible alternative that can be tailored to provide value for both employers and their interns — they’re shorter than the usual 3-month summer internships, aren’t tied to any academic calendar, and entail short-term projects that the intern assists with. 

As a result, micro-internships offer employers ultimate flexibility in how they manage paid internships. They’re also a great way to develop an ongoing work relationship with an intern during their studies that’s similar to a freelancer or independent contractor. 

Paid internships don’t need to be long. Given the brevity of micro-internships, they’re a low-cost way to get immediate help with business needs and move critical projects forward. They also serve as an all-around solution to potential legal obligations, ethical considerations, recruiting efficiency, positive company reputation, and the company’s bottom line.

HR software assists companies with matters of compliance, payroll, and engagement when it comes to managing paid internships. Check out our HR Software Guide to browse solutions.

1 Rippling

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Rippling is the first way for businesses to manage all of their HR, IT, and Finance — payroll, benefits, computers, apps, corporate cards, expenses, and more — in one unified workforce platform. By connecting every business system to one source of truth for employee data, businesses can automate all of the manual work they normally need to do to make employee changes.

Learn more about Rippling

2 BambooHR

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BambooHR is an award-winning HR platform that helps your growing organizations automate, centralize, and connect your people data all in one place. It gives you a one stop shop to manage data, hire talent, run payroll, and help employees grow.

Learn more about BambooHR

3 GoCo

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Elevate your HR with a modern, easy-to-use HRIS designed for small businesses. GoCo is a secure, compliant hub for sending, digitally signing, and organizing your sensitive HR documents and data. Manage records, performance, time off, onboarding, benefits, and more – all in one place. With the best support in the industry, every GoCo customer is assigned a dedicated Customer Success Team that is readily available to provide guidance and ensure a smooth and reliable HRIS experience.

Learn more about GoCo

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