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Stipend pay: A cautionary tale

My first experience with stipend pay was in college. I was interning with a local non-profit, and I was paid a $600 stipend for a semester-long internship. I worked 15 hours/week for approximately 14 weeks. If you do the calculations, I was making $2.86 an hour. Little did I know, this was illegal. And here begins my cautionary tale.

If you are not familiar with the concept of stipend pay, let me break it down for you. A stipend is a “lump sum” payment, usually paid out weekly, monthly, or quarterly; often, stipends are paid on a semester basis for internships marketed to college students. A stipend is not technically considered wages, so you will not pay Social Security or Medicare taxes on it. However, a stipend is still considered taxable income, but your employer will not withhold income taxes from you like they would with hourly wages or a salary. Thus, your stipend will be taxed as 1099 income, meaning you will have to pay both state and federal income taxes on your stipend in one full payment come tax season. This is often a huge and unexpected burden for young people. Unfortunately, there is also a common misconception that stipend pay does not have to equate to a minimum wage. This is simply not true.  

Nothing denotes that stipend pay in and of itself can equate to less than minimum wage. Instead, this caveat depends on your worker classification. There is a lot of debate around what constitutes an intern vs. an employee. Just last year, the Department of Labor took steps to clarify this distinction. The “primary beneficiary test,” developed under the Fair Labor Standards Act (FLSA), is meant to function as a litmus test to determine whether or not a worker can be considered an intern. There are seven factors to the test, which can be found here. Ultimately, the primary beneficiary test seeks to determine who is the primary beneficiary in the intern-employer relationship. If the primary beneficiary of your work is the employer, then you are an employee, not an intern. And if that’s the case, then you are entitled to minimum wage and overtime, according to the FLSA. To be clear, an “unpaid intern” is by legal definition a volunteer, and FLSA guidelines do not apply to volunteer work.

Here is some additional information regarding Minnesota’s wage and hour laws.

This can be a confusing distinction, especially because most positions marketed as “internships” are, by definition, actually part-time jobs. Internships must provide training comparable to educational or vocational instruction (SHRM). I don’t know about you all, but many “internships” I’ve had, I was often left to my own devices and didn’t receive training beyond what was necessary for me to complete the work tasks assigned to me. When applying for an internship, be sure to inquire about the training you will receive, and what new skills you should expect to develop in your time as an intern. Further, your work should be complementary, not supplementary, to that of paid employees (SHRM). Meaning, without you, things should carry on as normal. Consider the seven points outlined in the primary beneficiary test. Always ask yourself: who is benefitting from this internship?

Minnesota Statutes §177.23, subd. 7 provides a clear definition of “employee” under Minnesota law.

If you are participating in what actually constitutes as an internship, FLSA Section 14(a) authorizes employers to pay 75 percent of the standard minimum wage- currently $7.25 an hour- after the employer has applied for an authorizing certificate from the U. S. Department of Labor. So this means stipend or hourly, you should be paid no less than $5.44 an hour.

This is a cautionary tale to both young professionals and employers alike. We must work as a sector to ensure everyone is being paid fair (and legal) wages, and that we are not party or victim to wage theft. I want young people to know their worth and their rights; and I want employers to understand their legal obligations. Stipend pay has often served as a loophole to extort cheap labor, especially from young people and college students seeking to gain experience. We cannot allow this to continue to happen because not only is it unfair, it is illegal.


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