Company was offering paid internships, but is now in a hiring freeze; do I suggest candidates consider unpaid?

Question

My company was offering two paid internships (hourly rate, no benefits) to students in Masters programs. We found an excellent candidate early on, who I will call C1. When their interview process was complete I told them that I wanted to hire them and would work with HR to draft the offer letter. However, when I followed up with HR to do so, HR told me that the company had just entered a hiring freeze due to COVID-19. The freeze had an end date, so I informed the candidate and said we would send an offer ASAP after it lifted. We reached the end date last week and HR informed me that the freeze is still essentially in effect as CEO approval is now required for all new hires.

I began interviewing a second qualified candidate (C2) after the freeze was in effect, so they were aware of it up front. Due to the freeze I made no promises about making an offer. In follow-up conversations, C2 stated they would be interested in doing the internship as an unpaid position. I had not thought about this option before they suggested it.

The company's reason for the freeze is to reserve as much cash as possible due to the economic uncertainties that COVID-19 created. Management already made it clear to me that they would not make exceptions for these positions, even though an intern is a much lower cost to the company than a typical full-time position. Due to this stance I believe the company would accept bringing on the interns as unpaid.

That leaves me at a quandary. Since C2 volunteered the idea, I don't see an issue with making them an unpaid offer. However, I don't know if it is ethical to suggest the idea to C1. From their perspective, the interview process began for a paid position and I was going to send them an offer for it. Now I would be coming back to them and suggesting they forego the pay. My intention is to make sure they don't miss out on work experience they seem very interested in, but making such a suggestion still feels a bit slimy. So, to make my questions plain:

1. Is it ethical to offer C2 an unpaid internship since they volunteered the idea?
2. Is it ethical to suggest that C1 consider doing the internship as unpaid, or should I simply say that the freeze leaves me unable to make an offer and hope that they also volunteer the idea?

Some additional info in case it's relevant:

• These internships are not guaranteed to translate into a full-time employment offer.
• If the freeze lifts I will try to retroactively make the positions paid again, but I assume my odds of success are low. I will not mention this to the candidates as I don't want it to influence their decision.

UPDATE: Thanks for the responses. I chose motosubatsu's answer because I was not aware of the FLSA considerations, although I hope my employer's HR team would be! I am glad that those protections are in place. For the record, I also am not a fan of unpaid internships; I only started to consider that approach because of the one candidate's suggestion. I also assumed that internships might be harder to find this summer due to COVID-19 and wanted to make sure that both candidates do not miss out on an opportunity. At this point I do not think we will move forward with the unpaid option, but I will offer both of them the option to touch base periodically over the coming months in case they want guidance on personal projects or skills to master. If/when a paid opportunity opens up again I will reach out to them if they are still interested.

Answer 1

Is it ethical to offer C2 an unpaid internship since they volunteered the idea?

You're going to have to tread very carefully - it's not as simple as having the candidate volunteer and have the same position unpaid. The Fair Labor Standards Act (FLSA) comes in to play here - if the company (assuming your organisation is for-profit) is deemed the "primary beneficiary" of the arrangement then the company could find itself owing the intern pay (and rightly so)!

There's seven factors you need to consider (taken from here):

1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

So I think you need to make sure that the internship is correctly structured, and really you probably want to get HR/legal to cover you before making any offers or suggestions.

Additionally if you're using the intern for work that would normally be done by an employee/contractor or if the company is getting so-called "immediate" benefit from work produced by the intern you could also run afoul of FLSA.

Is it ethical to suggest that C1 consider doing the internship as unpaid, or should I simply say that the freeze leaves me unable to make an offer and hope that they also volunteer the idea?

I think clarity and honesty are key here - assuming you get the all clear from the relevant parties at your company to offer alternative unpaid internships instead, and assuming you still want both candidates then contact both and explain that at this point in time paid internships are unavailable, as you've already said don't dangle any possibility of converting them retroactively or anything like that - make it clear what benefits you think the unpaid version of the program can offer, particularly anything you are adding to the program to compensate for the lack of pay.

There's a chance that C1 may view this as a bait-n-switch, but on balance I think it's better to offer them an upfront choice rather than trying to guess which way they will go.

NB: I'm consciously not addressing the wider ethics of unpaid internships as a whole here - while I'm not personally a fan of them, it's a complex issue and I don't think it's one that's addressable here.

Answer 2

I am not a lawyer so I do not know the legal implications of the advice I am about to suggest.

If C2 offered the idea of an unpaid internship and said he'd be OK with it, then I'd say there's nothing wrong with offering him the job unpaid. Explain to him clearly the situation (sounds like you already have) and that you would like to pay him but can't because management etc. But it sounds like this is already taken care of.

As for C1, you have to tread extremely lightly. If I applied to a company and they came back to me and said "you can work for us, but only unpaid", no matter what the excuse they gave, even if it is totally legitimate from their side, my reaction would be something like:

1) The company does not want me enough to pay me
2) The company devalues the work I'm going to do
3) The company is sleazy by posting a paid job offer and then blindsiding me into taking it unpaid

Something along those lines anyway. That said, if the company comes back to me and says "we really like you but can't hire you because MANAGEMENT", that sounds to me like an excuse for just saying they don't want me, it's exactly the same as a rejection letter for any other reason imo. So basically you're screwed in either case.

I think there exists a good way to explain the situation to C1 in such a way that he might accept the unpaid internship, or at least accept that the reason you have to suggest the internship is really a management reason and not you throwing out BS, and I think finding that is probably the optimal answer. I'll leave that answer as an exercise to the reader, but one thing I will say is it probably starts with getting on the phone rather than sending an email.