By UpCounsel Attorney Josh Garber
More than 90 percent of employers had a formal internship program in January 2015, according to a National Association of Colleges and Employers survey. Nevertheless, the employer-intern relationship can be a tricky one.
For example, since a federal judge ruled in 2013 that Fox Searchlight Pictures violated labor laws by using unpaid interns in filming the movie “Black Swan,” an increasing number of interns have sued companies for back pay. This is despite the fact that an appellate court threw out the Fox Searchlight wage ruling and the class certification in 2015.
In addition, the Department of Labor has increased audits of companies in an effort to ensure that no workers are mistreated because of misclassification.
Also, if you’ve improperly classified an intern as an “unpaid intern” and you’re audited by the DOL, on top of hefty fines, you may have to provide unpaid wages plus interest and related taxes. Businesses with 50 or more full-time equivalent employees may also have to provide an interns with health benefits or face more penalties. This can mean paying double or more than the amount you would have paid the intern had they been classified as a part-time employee and been paid a minimum wage off the bat. If you’ve improperly classified an intern as an “unpaid intern,” you may be audited by the DOL.
If you’ve improperly classified an intern as an “unpaid intern,” you may be audited by the DOL.
Can I hire an intern as an independent contractor?
The main problem with classifying interns as independent contractors is that most working relationships with interns look nothing like IC relationships.
Independent contractors are typically their own legal entity, provide their own tools (e.g., computer, transportation, etc.), set their own hours, and have multiple clients and work premises. Interns, on the other hand, have rarely formed an LLC or corporation, generally are not working for multiple employers and are most likely working only on your company’s premises.
In other words, most interns would fail the IC test. (I’ve elaborated on when workers can be classified as independent contractors in the UpCounsel blog post “5 Employment Law Issues That Come up for Startups in the First Year.”)
Do I need to pay my interns?
Despite several recent court cases, it is still legal to hire an unpaid intern. But the internship must be more akin to a training program than employment. The DOL has developed a test to determine whether an intern can be unpaid (or paid less than minimum wage). Despite several recent court cases, it is still legal to hire an unpaid intern.
Despite several recent court cases, it is still legal to hire an unpaid intern.
If all of the following six criteria are met, the intern does not need to be compensated:
- The goal of the internship is to train the intern similar to how he or she would be trained in an educational environment.
- The primary beneficiary of the internship is the intern.
- No employee is replaced by the unpaid intern; he or she is closely supervised.
- The employer receives no immediate benefit from hiring the intern; in fact, their operations may sometimes be impeded by the intern.
- The intern is not entitled to a job at the completion of the internship.
- The intern is fully aware that he or she will not receive a salary.
It should be noted, however, that some states enforce more worker-friendly tests, so employers should check their state’s practices. And employers should be aware that the DOL criteria are being challenged in court. In Glatt v. Fox Searchlight Pictures, for example, an appellate court ruled in 2015 that the true test of whether an intern can be unpaid is whether the intern is the “primary beneficiary of the relationship.”
In the end, employers should consider whether the benefits outweigh the substantial legal risks.
Should I hire interns as employees?
UpCounsel recently conducted a poll of attorneys, and most recommended classifying interns as part-time employees (i.e., limiting interns to working less than 30 hours per week). Most attorneys recommended classifying interns as part-time employees.
Most attorneys recommended classifying interns as part-time employees.
Many of the benefit and salary requirements (e.g., workers comp, withholdings, etc.) for part-time employees are the same as for full-time employees. Among other things, this means that interns who are classified as part-time employees should be paid through company payroll.
Part-time employees generally are offered limited or no company benefits – such as health benefits, vacation and sick time, paid holidays and unemployment compensation – unless required by state labor laws and/or company policies. In California, for example, it is generally optional whether to include a part-time employee on the company healthcare plan when that employee works less than 30 hours per week. Your part-time employee policy should be written clearly in your employee handbook, and your intern offer letter should indicate what benefits part-time employees are and are not eligible for.
Importantly, employers should ensure that interns classified under this arrangement do not work more than 30 hours per week and, if you are planning on not offering health benefits, that the interns are not considered full-time equivalent employees.
General thoughts on unpaid interns
Two conditions that come with hiring an unpaid intern can be especially difficult to comply with. It is important to ensure that:
- the training your company is offering is for the benefit of your intern
- your company derives no immediate advantage from the intern’s activities and, on occasion, that the company’s operations actually may be disadvantaged
Bringing on interns can be a huge advantage for your company. In addition to the work they can contribute, interns help to instill a mentorship culture at your company, inject new ideas into the organization, create a hiring channel and distribute your product name to active technology users. Interns help to instill a mentorship culture at your company and inject new ideas into the organization.
Interns help to instill a mentorship culture at your company and inject new ideas into the organization.
Here are some best practices that apply when hiring and working with interns – tips that will help your company get productivity from them, too:
- Treat your interns respectfully, not as though they should be lucky to work at your startup.
- Make it apparent from the beginning that the program is about learning. Include this in the offer letter to interns and in any documentation that you give them throughout their internships.
- Give interns meaningful tasks, but have a learning or mentoring session associated with each task. Give them direct supervisors and have those supervisors meet with the interns at the end of a couple of days or each week.
- Make a common thing of group lunches where interns are encouraged to talk about their work and get advice.