Internship programs provide great benefits to businesses and interns alike, but employers must comply with both California and Federal laws in order to avoid potential lawsuits and fines.
To clarify, a person hired as an unpaid intern must (1) be a student enrolled in an accredited academic program and receive academic credit for the internship, or (2) be enrolled in a program that provides training and is approved by a public agency. If the intern is not part of an accredited program, the employer must pay the intern at least minimum wage for all hours worked.
Should the Worker Be Classified as an Intern or Employee?
The Federal Labor Standards Act (FLSA) requires that minimum wages and overtime be paid to covered employees. An intern who meets certain criteria may be considered “employee” who must be paid minimum wage and overtime if he or she provides services to a private-sector employer. Conversely, if an internship benefits only the intern and not the person who is providing training, the intern is generally not classified as an employee, and is not entitled to wages.
The more an internship focuses on providing the intern with an academic experience and skills that can be used in multiple employment settings, as opposed to an intern carrying out routine work of the business, the more likely it is to be viewed as an internship exempt from minimum wage and overtime requirements. For classification matters, direct and extensive supervision of interns becomes important and interns who are loosely supervised may fall into an employee category, which entitles them to pay. In addition, employers should not derive an immediate benefit from interns.
Utilizing unpaid workers who do not classify as interns can be considered unfair competition because the business is able to undercut its competitors due to the lower overhead, which results from not paying its workers wages or payroll taxes.
California and Federal Standards
According to California’s Division of Labor Standards Enforcement (DLSE), in order to be exempt from the wage and hour requirements of the IWC Orders, the intern’s training must meet all of the following four tests:
- The internship must be an essential part of an established course of an accredited school or of an institution approved by a public agency to provide training for licensure or to qualify for a skilled vocation or profession.
- The program may not be for the benefit of any one employer.
- A regular employee may not be displaced by the trainee.
- The training must be supervised by the school or a disinterested agency.
Only “employees” are entitled to the benefits and protections of federal and state wage and hour laws, including minimum wage and overtime. Trainees and interns are not considered employees according to the Federal Labor Standards Act (FLSA), if they meet six criteria:
- The training, even though it includes actual operations of the facilities of the employers, is similar to that which would be given in a vocational school.
- The training is for the benefit of the student.
- The student does not displace a regular employee, but works under the close observation of a regular employee or supervisor.
- The employer provides the training and derives no immediate advantage from the activities of the student; and on occasion, the operations may actually be impeded by the training.
- The student is not necessarily entitled to a job at the conclusion of the training period.
- The employer and the student understand that the student is not entitled to wages for the time spent training.
The California Department of Industrial Relations–and specifically the Division of Labor Standards Enforcement (DLSE) within that department–has taken the position that employers should follow several additional requirements that stretch beyond the DOL’s six criteria. The additional requirements are:
- The training should be part of an educational curriculum.
- The students should not be treated as employees for such purposes as receiving benefits.
- 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.
Consequences of Misclassification
Failure to properly classify a worker as an intern or employee can lead to lawsuits by the current or former worker for unpaid wages, wage statement violations, FLSA violations, meal and rest break violations, waiting time penalties, and unfair competition, among other causes of action.
Under the Labor Code, the misclassified workers have up to three years to bring a lawsuit for unpaid overtime, minimum wages, and meal and rest breaks owed. They would also be entitled to interest, attorney’s fees, penalties, and the costs of the lawsuit, which can be costly. Failure to pay workers wages can also be considered unfair competition under California Business and Professions Code § 17200.
Some of these violations may result in monetary penalties against the employer that are dictated by statute (law), and the defendant may have to pay not only its own attorney’s fees to defend the case, but may have to pay for the attorney’s fees and costs of the party bringing the action.
When in doubt, it is a “best practice” to pay the intern minimum wage. However, it is best to consult with a licensed California employment attorney to ensure compliance with California and Federal laws.
To schedule a complimentary 15-minute consultation with The Grady Firm’s employment attorneys, call (323) 450-9010, or fill out a Contact Request Form. The Grady Firm attorneys can evaluate a company’s internship program, update its company policies/Employee Handbook, create new policies, prepare employment forms, draft employment agreements, and explain the detailed nuances of new California laws.