Summer is here, and school is out. For many companies and small businesses, that means unpaid summer internships. What’s not to like about these extremely common arrangements? Your business benefits from the burgeoning skills and work product of a young and eager intern for free. In exchange, you give your intern a glowing letter of recommendation, and they gain valuable work experience and an entry for their resume as they enter the work force later in their lives.
If unpaid interns are a fixture at your company or business, you must read this article. These unpaid internships can end up costing you way more money than they are worth in fines and back pay. In fact, most unpaid internships are actually illegal. And they have been for decades; it was just rarely enforced… until now. Since 2011, the Department of Labor has been cracking down on unpaid internships and auditing and seriously fining employers.
Unpaid internships at private companies, excluding nonprofit organizations and the federal government, violate the Fair Labor Standards Act (FLSA) standards, because the interns are actually acting as employees and not trainees. If the interns are classified as employees under the FLSA, then the FLSA’s minimum wage and overtime laws apply to them, as well as state wage laws (in California, for example, that includes meal and rest period rules).
If your intern does not meet all six factors below, you will be in violation of federal wage laws if you fail to pay the minimum wage. The factors are:
(1) The training, even though it includes actual operation of the facilities of the employer, is similar to what would be given in a vocational school or academic educational instruction;
(2) The training is for the benefit of the trainees;
(3) The trainees do not displace regular employees, but work under close observation;
(4) The employer that provides the training derives no economic advantage from the activities of the trainees, and on occasion the employer’s operations may actually be impeded;
(5) The trainees are not necessarily entitled to a job at the conclusion of the training period; and
(6) The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.
Upon examination, these factors show that the vast majority of interns must be paid. The fourth criterion is perhaps the most significant roadblock for a company or small business looking for a legal unpaid intern. Typically, a company or business desires to take on an unpaid intern, because they are going to benefit their business economically, or they are going to take on some of the duties of some of the other employees and lend a significant helping hand. However, if you are looking to free up your current employee’s time for other projects, or looking to utilize the work product of your intern for your economic advantage, then you will be in violation of the FLSA if you don’t compensate your intern.
The Consequences of Illegally Employing an Unpaid Intern
If you find yourself in the situation where you believe you have had an illegal intern, what potential ramifications could you face? In recent years, California and the Department of Labor have been fining employers for violating these laws and seeking wages on the unpaid intern’s behalf. Additionally, and significantly, the state and local taxing authorities (i.e. the IRS) are seeking back taxes for payrolls that should have – but were not – paid. As governments look for new sources of revenue, expect an increaseing payroll tax-related fines and audits to be meted out. Finally, if an intern brings a claim in labor court, you may have to pay them back pay, overtime pay, penalties, civil fines, interest and attorneys’ fees. In some rare instances, failure to pay employees can result in criminal sanctions. Obviously, these penalties can cost significantly more in time and money than the intern’s labor was initially worth.
Strategy Going Forward
If you do choose to take on a summer intern and not pay them from this point onward, you are doing so at your own risk. Due to the fact that the FLSA factors are not black and white, having an unpaid intern from now on, with these warning signs from the government that this law will no longer be ignored, is a risky endeavor. If you choose to take on unpaid interns, you must make sure you tailor their duties extremely carefully. If you want to err on the side of caution, pay your interns minimum wage this summer and overtime if it is deserved. Treat them as hourly employees, and do not abuse their eagerness to learn. A little prudence now may save you from heavy penalties later, as well as allow you to utilize your interns to their full potential.