The unpaid internship dates back to times when there were no minimum wage or overtime laws. Apprentices would work for a carpenter or silversmith, perhaps for free or maybe room and board. There were no vocational schools. All training was “on the job.”

Times have changed, and employers now must follow minimum wage, overtime, and other laws that are inconsistent with internships and apprentices. Even so, internships remain a vital way for new workers to gain experience, or at least an entryway into the job market. Additionally, individuals volunteer to assist public sector employers, non-profits, and charities.

The circumstances under which employers, particularly in the for-profit, private sector, may lawfully implement unpaid internship programs are limited. Particularly in times of high unemployment and recession, potential employees may be eager to “prove themselves” by working for free. Employers may be tempted to rely on interns as a source of low cost labor.

Possibly in recognition of this temptation, both the U.S. Department of Labor (DOL) and the California Division of Labor Standards Enforcement (DLSE) recently addressed this issue. Employers should be aware of the narrow circumstances under which it is lawful to avail themselves of free services.

Criteria for Private Sector Internships

Wage-hour laws typically apply only to “employees” or an employment relationship. Properly classified interns escape minimum wage and other requirements because they are not considered “employees.”

How does one tell an employee from an intern? The U.S. Department (“DOL”) of Labor and the California Division of Labor Standards Enforcement (“DLSE”) apply the same six criteria:

• The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
• The internship experience is for the benefit of the intern;
• The intern does not displace regular employees, but works under close supervision of existing staff;
• The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
• The intern is not necessarily entitled to a job at the conclusion of the internship; and
• The employer and the intern understand the intern is not entitled to wages for the time spent in the internship.

Both agencies warn that the determination of an employee-employer relationship under these criteria is fact-specific and based on the totality of the circumstances. Moreover, in “Fact-Sheet #71” (available on the Internet at https://www.dol.gov/whd/regs/compliance/whdfs71.htm, the DOL explained that all of the factors must be present to avoid employee classification.

Educational Experience

The “education” criterion is probably the most critical. To avoid characterization as an employment relationship, the internship ideally will be associated with an educational program, such as a university or vocational school. However, a school’s official involvement is not required. At minimum, the internship should be structured like an educational curriculum, such as permitting the intern to rotate between departments, or perform in accordance with milestones.

This criterion is not satisfied merely because the intern gains new skills. The skills should readily transfer to other employers. The intern’s work also should not involve the employer’s essential operations. For example, an intern in a restaurant cannot wait tables as his or her internship. Similarly, clerical work is not the type of job associated with an educational curriculum.

Displacement

The employer cannot substitute interns for regular workers. Therefore, interns performing the same duties as regular employees (other than as a “shadow” of a regular employee or try-out) likely will be due compensation. If the employer is saving labor costs by having an internship program, that is evidence of employee status.

Similarly, unpaid interns cannot be used to perform the “scut work” that no one wants to do. Management must not use interns as additional clerical or custodial help. If an intern is “building character” by learning the business from the ground up, pay her minimum wage. (She can “learn the value of a dollar”).

Supervision

An intern typically does not work independently. If regular employees work closely and supervise the intern, that is more akin to an educational experience. But if an intern receives the same level of supervision as regular employees, that is evidence of employee status.

Job Entitlement

Bona fide internships normally are for fixed periods of time. Open-ended arrangements do not emulate the structure of educational experiences. Additionally, an internship should not automatically result in a “regular” job at its conclusion. That is because employers wrongly may try to use the internship as a “try-out” program, where the employer gets a “free look” at a worker without having to commit to an employment relationship.

Agreement

The intern must understand that the internship is unpaid. The best evidence of that understanding is a written agreement. That agreement also can include the fixed term of the internship, the educational curriculum, and the employer’s disclaimer that the intern is not to perform routine work. Such a document may not be guarantee of no liability, but it will help the employer significantly if a misunderstanding occurs.

Volunteers

The law permits individuals to volunteer their time for humanitarian and charitable activities, such as for a religious organization or disaster relief. One typically may volunteer their time to serve public agencies as well.

The law will not, however, permit employees to “volunteer” their time to help a failing, for-profit business. It does not matter that well-intentioned employees initially propose working off the clock, or whether they agree to sign releases. If an employee is working, she must be paid.

Other Potential Pitfalls

Critics of internships focus on more than the wage-hour aspects. For example, there are charges that unpaid internships disfavor the poor. That is because interns lacking an independent source of income may not be able to afford working for free, particularly in high-cost cities. Employers who rely on internal referrals (e.g., hiring the boss’s nephew), may impair efforts to increase diversity.

Employers seeking to address these criticisms may change their recruiting methods to better promote diversity. Employers may wish to recruit interns from sources other than internal referrals, such as colleges or other organizations.

The lack of compensation is more tricky. Requiring an intern to survive on personal savings will screen out those unable to obtain financial support. More wealthy individuals are more likely to be able to afford going without pay. Employers unwilling to pay stipends for interns’ living expenses may wish to consider maintaining a list of potential philanthropic grants that may assist an underprivileged candidate.

Consequences of Misclassification

In this time of enhanced regulatory enforcement, particularly at the federal level, it pays to get it right when it comes to unpaid internships. The price of misclassifying workers as interns rather than employees is very high. In addition to minimum wage and overtime for all hours worked, a host of penalties may apply under California law. These include a special penalty equivalent to the wages for failure to pay minimum wage, as well as assorted penalties for improper recordkeeping, late payment, missed meal periods or rest breaks, etc. Then there are the claims for improper exclusion from benefit plans and other contractual employee benefits such as vacation.

Conclusion

Unpaid internships are still a good idea. They may help an employer identify a future star. The intern may gain valuable experience and training that the class room cannot provide. The responsibility for the proper administration of this exception to wage-hour law falls squarely on employers. Because the consequences of misclassification are potentially severe, not to mention the possibility of being tagged as a “sweat shop,” employers should carefully craft educational and appropriate trainee programs in accordance with the criteria discussed above.