Hiring interns is a great milestone for a young company and the use of interns is on the rise.  What is also on the rise, however, is the number of small businesses and startups getting audited for misclassifying interns as independent contractors or unpaid interns when they should have been classified as paid employees.

It doesn’t take a brain surgeon to figure out that businesses want to classify interns as independent contractors and unpaid employees because it is cheaper and easier than hiring full blown employees.  Hiring employees is expensive and time consuming.

The risk you run by improperly classify an intern as an independent contractor or unpaid intern, is that if you are audited then you will have to make up for all the unpaid wages, taxes, and insurance, and pay plus hefty fines.  This adds up to about double what you would have paid the intern had you hired them as a part-time employee.  Businesses can be randomly audited or turned in by a disgruntled intern (or parent of the intern).  Unfortunately, despite the numerous attorneys we talked to, no one could provide us with the probabilities of getting audited – only that audits are on the rise.

What are your options?

  1. Hiring Interns As An Independent Contractor

A number of companies hire interns as independent contractors because they can avoid the hassles that accompany employees (witholdings, employment taxes, etc.).  The major problem with this is that most intern relationships look nothing like an independent contracting relationship.

As we have explained before, in our Guide to Independent Contractors, the classic independent contractor is the HR or SEO consultant.  You can also see our Independent Contractor Check List. They are their own legal entity, provide their own tools (computer, transportation, etc.), set their own hours and have multiple clients.  They are independent contractors despite being on your company’s premises for an extended period of time.

Interns are not typically their own legal entity and are not working for multiple employers, yet are most likely working on your company’s premises.  Most interns would fail the independent contractor test.

Documents You Will Need:

  1. Hiring Unpaid Interns

Unpaid interns are legal, but they come with many strings attached to them. The relationship must be more akin to a training program vs. an employment situation.  An intern can be unpaid (or paid below minimum wage) under Federal law if:

  1. The training is similar to that which would be given in a vocational school;
  2. The training is for the benefit of the trainee;
  3. The trainee does not displace a regular employee and works under close observation;
  4. The training provider derives no immediate benefit from the trainee; in fact, its operations may be impeded;
  5. The trainee is not entitled to a job at the completion of the training; and
  6. The employer and the trainee understand that the trainee is not entitled to wages; however, a stipend may be permitted.

California adds their own additional requirements:

  1. The training should be part of an educational curriculum;
  2. The students should not be treated as employees for such purposes as receiving benefits;
  3. The training should be general in nature, so as to qualify the students for work for any employer, rather than designed specifically as preparation for work at the employer offering the program;
  4. The screening process for the program should not be the same as for employment; and
  5. Advertisements for the program should be couched in terms of education rather than employment.

Contrary to widely-held beliefs, high school or college credit is not a requirement for an unpaid internship, and it does not make an otherwise illegitimate unpaid internship legal.

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Taking California’s additional factors into account, it is safe to say that if an intern is working as part of an academic program and does not replace an existing employee or perform an employee’s work, and if the training is primarily for the intern’s benefit, you stand a better chance of the intern avoiding employee status.

3.   Hiring Intern As An Employee

Most attorneys we polled would recommend hiring an intern as a part-time employee (working less than 35 hours a week).

When hiring a part-time employee you must abide by many of the same requirements as hiring a full-time employee (workers comp, withholdings, etc.).  See Hiring Your First Employee or our complete Employee Guide (CA Specific). So you should setup your part-time employee interns on your company payroll.  The biggest pain of a part-time employee is ensuring that they do not exceed 35 hours a week or even 7hrs a day.

Even so, part-time employees generally have 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 optional whether to include a part-time employee on the company healthcare plan.  You should have it clearly written somewhere in the employee handbook and offer letter to the intern that they will not be receiving these type of benefits.

Thoughts On UnPaid Interns in General

How you can compensate an intern is really dependent on the state in which you operate. In CA, for example, there are several factors that agencies use to determine where an unpaid intern is valid. The bigger factors, and consequently the harder for most companies to comply with are:

  • The training is for the benefit of the intern.
  • The employer derives no immediate advantage from the intern’s activities, and, on occasion, the employer’s operations actually may be disadvantaged.

Bringing on interns can be a huge advantage for your company besides the man hours they can contribute. It helps to enstill a great helping culture in your company, injects new ideas into the organization, creates a hiring channel and helps to distribute your product name to active technology users.

That being said, you probably still want a little productivity out of your interns.

Here is the reality for MOST companies reading this. The biggest risk does not come from the Labor Agencies (Federal and State), unless you are running a slave labor camp. The biggest risk comes from disgruntled interns who might complain to the Agencies. Here are some best practices that I have seen from several companies:

  • Treat your interns like any other employee (hopefully this is good) and not as though they should be lucky to working for your startup
  • Make it apparent from the beginning that the program is about learning. Include this in the offer letter to the intern and in any documentation that you give them throughout the intern period.
  • Give them 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 group lunches a common thing where interns are encouraged to talk about their work and get advice.
  • In case it is not apparent from the above, TREAT YOUR INTERNS WELL!!

About the author

Matt Faustman

Matt Faustman

Matt is the co-founder and CEO at UpCounsel. Matt believes in the power of online platforms to change antiquated ways of life and founded UpCounsel to make legal services efficiently accessible. He is responsible for our overall vision and growth of the UpCounsel platform. Before founding UpCounsel, Matt practiced as a startup and business attorney.

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