Internships: Do I Have to Pay Interns? How to Apply FairSetup?

Intern FairSetup works very well for groups of interns.  Put together a team, set up goals, allocate bonus pools linked to outcomes, run the team using FairSetup, and, once outcome thresholds are reached, release payment according to everyone’s impact.  But one question that we get from companies is: can interns work for free?

The answer is yes, but with some conditions.  Hiring interns is governed by US Department of Labor Fair Labor Standards Act (FLSA).  The impact of FLSA in internships is discussed here.  And the key points are as follows:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. 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;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Roughly put: you can’t abuse your interns.

Given all the coffee-running that interns are often made to do, protections are reasonable.  That said, bright young minds, properly incentivized, can do some crazy awesome things.

We would recommend the following.  Put together small teams that have at least two experienced members and two interns per function.  Then run them using the FairSetup model (weekly meetings, track expectations, calculate impact).  Make sure that you get buy-in from the team on what a reasonable goal is and what would constitute a home-run (i.e. awesome outcome).  Set up a bonus pool so that it is:

  • zero if a basic milestone is not reached
  • set value 1 if threshold A is reached
  • set value 2 if threshold B is reached
  • 25% of KPI if the outcome is better than threshold B

And let interns participate in the pool AFTER their departure.  This way, you could get someone who will work on your company the way that they would work on theirs for the three months that they are with you.

To prevent abuse of the system, we recommend that a “cliff” is set up that would preclude an intern from getting any bonus in case they leave (or are fired) prematurely.  For example, if they drop out of the program within 4 weeks.

To make this feel more like equity, desaturation time can be set to be contingent on performance threshold reached.  For example, if threshold A is reached, it is assumed that impact is short-lasting, so desaturation happens over the next 6 months.  If threshold B is reached, then 1 year.  If performance is better than threshold B by 20%, then desaturation is set to 3 years.  This way, you create an incentive for a student to really seek long-term impact on your company.

Update: the article was updated slightly from its original version on 9/10/2013.

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