How to Navigate a Continued Professional Relationship Post-Graduation

The Fair Labor Standards Act (“FLSA”) defines employment very broadly.  To “employ” is to “suffer or permit” to work.  Generally speaking, individuals who are permitted to work must be compensated – i.e. they are “employees.”  This necessarily involves the employer paying employment taxes and/or providing other employment-related insurance and tax contributions.   The employee classification may be avoided only if the individual can be classified as a volunteer or intern/trainee.[1]

The United States Department of Labor (“DOL”) defines “volunteer” as “individuals who volunteer or donate their services, usually on a part-time basis, for public service, religious or humanitarian objectives…without contemplation of pay.”  DOL FLSA Advisor.  In considering whether an individual is a true volunteer, the DOL and the courts will look to the following six factors:

1. Is the entity that will benefit/receive services from the volunteer a nonprofit organization?
2. Is the activity less than a full-time occupation?
3. Are the services offered freely and without pressure or coercion?
4. Are the services of the kind typically associated with volunteer work?
5. Have regular employees been displaced to accommodate the volunteer?
6. Does the worker receive (or expect) any benefit from the entity to which he/she is providing services?

See Walling v. Portland Terminal Co., 330 U.S. 148 (1947); DOL W&H Fact Sheet No 71.[2]  If the answer to the first four questions above are “Yes,” and the answers to the last two questions are “No,” then the individual is likely to be regarded as a volunteer.  However, no single factor is determinative and a formulaic “Yes/No” test to the aforementioned factors is not a definitive indication of true volunteer status.

Volunteers may only be paid expenses, reasonable benefits and/or a nominal fee without losing volunteer status.  FLSA § 3(e)(4)(A)(i) and 29 C.F.R. § 553.106.  That latter, “nominal fee,” is often provided to volunteers in the context of a stipend. In assessing whether a fee is “nominal,” the DOL has stated, “whether a specific amount is ‘nominal’ depends on the economic realities of the situation and that no guidelines or specific amounts applicable to all (or even most) possible situations can be provided.”  DOL FLSA2006-28 (Aug. 7, 2006) (citing 52 Fed. Reg. 2012, at 2021 (Jan. 16, 1987).  Despite this, the regulations do provide factors to assist in determining whether a fee or stipend, is nominal and permissible.

These include:

1. The distance traveled and the time or effort required of a volunteer;
2. The availability – limited or unlimited – of a volunteer to provide services; and
3. The basis – as needed or throughout the year – on which a volunteer agrees to perform services.

See 29 C.F.R. § 553.106(e).  In short, the factors consider the “economic realities of the particular situation.”  Critically, to the extent the stipend is considered compensation and/or is tied to productivity, the stipend is highly unlikely to be considered nominal.  DOL FLSA2006-28 (Aug. 7, 2006).  Additionally, in the context of school volunteers  and volunteer firefighters (see FLSA2005-51 (Nov. 10, 2005) and DOL FLSA2006-28), and by extension non-profits, the DOL has adopted a so-called “Twenty (20) Percent Test” in assessing whether a stipend paid to a volunteer is nominal, and thus does not compromise their volunteer status.  Under this test, the DOL will presume the stipend paid is nominal so long as the fee does not exceed twenty (20) percent of what the entity would otherwise pay to hire a full-time employee to perform the same work and/or services that the volunteer performs.   DOL FLSA2006-28.  The DOL views a willingness to volunteer for twenty (20) percent of the prevailing wage for the job to be a likely indication of the spirit of volunteerism contemplated by the 1985 amendments to the FLSA.  Id.

In assessing whether the individual may qualify as trainee or intern,[3] the DOL, drawing on the United States Supreme Court precedent, utilizes the following six-part test:

• The internship/trainee experience, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
• The internship experience is for the benefit of the intern;
• The intern/trainee does not displace regular employees, but works under close supervision of existing staff;

• The employer that provides the training derives no immediate advantage from the activities of the intern, and on occasion, its operations may actually be impeded;
• The intern is not necessarily entitled to a job at the conclusion of the internship; and
• The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

DOL, Wage and Hour Div. Fact Sheet No. 71 (2010); Walling v. Portland Terminal Co., 330 U.S. 148 (1947).  Importantly, the DOL requires that all of the aforementioned factors be satisfied to avoid the existence of an employer-employee relationship.  Id.  Some federal courts have agreed with the DOL’s interpretation requiring that all six of the aforementioned requirements be met, see Glatt v. Fox Searchlight Pictures, Inc., No. 11 Civ. 6784 (WHP) (S.D.N.Y. June 11, 2013), while other courts have applied a totality-of-the-circumstances analysis, see Wang v. Hearst Corp., No. 12 Civ. 793 (HB) (S.D.N.Y. May 8, 2013).[4]

Generally speaking, payments made to volunteers and/or interns/trainees through a stipend or otherwise must be treated the same as wages paid to employees.  Thus income tax and FICA contributions must be withheld from a volunteer’s stipend.  See 26 U.S.C. § 3402.  Consequently, stipend payments for volunteers should be processed through payroll.

[1] It is also possible, given certain conditions, to avoid the employee classification through an independent contractor arrangement.  This potential classification is not applicable to the current situation.[2] The Walling case concerns “trainees,” while Fact Sheet No. 71 primarily covers “interns” in the “for-profit” private sector.  Despite this, federal courts have consistently looked to these sources as providing guidance in assessing a purported volunteer-entity relationship, regardless of whether that relationship exists in the for-profit or non-for-profit sector.

[3] The FLSA does not use the term “intern.”  Rather, the FLSA acknowledges “trainees”  Given the overlap between the two, as interpreted by the federal courts, both terms are used interchangeably throughout this memorandum.

[4] The Third Circuit – i.e. the federal judicial circuit encompassing Pennsylvania – has not yet ruled on the DOL’s interpretation of its six-part test.