The Legalities of Unpaid Interns
Are you considering adding an intern to your company? The allure of free and eager workers is hard to deny when you’re busy and spread too thin. Interns can be a great asset to your business, but it’s important that you understand the restrictions and constraints imposed by the government on the hiring of interns.
The myth perpetuated for many years has been that interns can work for free if they choose to do so, especially if they are earning college credit for their internship. If they are eager enough to gain the experience, then why not let them make that choice? Well, the federal and state governments disagree.
The federal government has defined six strict criteria that for-profit employers must satisfy in order to offer an unpaid internship:
- The training given in the internship must be similar to what would be given in an educational setting or vocational school;
- The training is for the benefit of the trainee;
- The trainee does not displace regular employees, but works under their close observation;
- The employer that provides the training derives no immediate advantage from the activities of the trainee, and on occasion the employer’s operations may actually be impeded;
- The trainee is not necessarily entitled to a job at the conclusion of the training period; and
- Both the employer and the trainee understand that the trainee is not entitled to wages during the training period.
The gist is that it is very hard for a for-profit employer to meet the requirements necessary to engage unpaid interns. Requirement number four is particularly hard to satisfy, since the company cannot receive any direct benefit from the work done by the unpaid intern. If you decide that unpaid internships are right for your company, you need to be sure that you run your internship program like a training program in your specific industry or profession and do not have your interns doing "grunt" work (stuffing envelopes, running errands) or making coffee. There is no exception made for internships where college credit is given, but such a program may help you meet the above requirements because most for-credit internships have a structure specified by the school that resembles a training program.
It is particularly important that you use a written contract with any unpaid interns working for your company. A proper contract will clearly state the terms and conditions of the intern's engagement by your company and make it clear that the contractor is not an employee or independent contractor, which is an important part of defending yourself against allegations of misclassification and potential audits by the state or federal government. Unpaid internship contract templates are available now on Law for Creatives; just select your category/type of business from the home page, locate the Volunteer Intern Agreement and select the state in which your business is located.
Despite the stringent requirements, many businesses continue to improperly use unpaid interns because the opportunities for young, relatively inexperienced workers are scarce and many people are willing to work for free in order to improve their resumes, even if they are only performing menial tasks. These same workers are unlikely to report their employer for violating the law because they are either unaware of their rights or don't want to jeopardize their position with the company.
While the Labor Department says there has been an increased crackdown on the failure of businesses to pay interns properly, there is little specific statistical information available to the public. However, I've recently crossed paths with a number of event industry professionals whose businesses have been audited for employment-related issues, and they were each eager to spread a cautionary word to fellow event professionals about the severe stress and financial expense of an employment-related audit. Often audits do not arise because the intern reports the company; instead, it is because the intern lists the company as an "employer" on a subsequent application for unemployment insurance benefits. The state would then realize that they do not have your company listed as the worker's employer in their database since you never classified the worker as a W-2 employee, and this will trigger an initial investigation into your classification of the worker.
If you decide that your internship program cannot meet the requirements stated above for unpaid internships and decide to pay your interns, even if the position is short-term or seasonal, they must be classified as W-2 employees and not 1099 independent contractors. There is no separate classification for paid interns, so you must comply with the federal and state requirements related to W-2 employees such as tax withholdings, meeting state and federal minimum wage requirements, workers' compensation insurance and unemployment insurance benefits.
In the next post we will cover the regulations and requirements related to independent contractors.