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?
- 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. 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.
- 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:
- The training is similar to that which would be given in a vocational school;
- The training is for the benefit of the trainee;
- The trainee does not displace a regular employee and works under close observation;
- The training provider derives no immediate benefit from the trainee; in fact, its operations may be impeded;
- The trainee is not entitled to a job at the completion of the training; and
- 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:
- 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;
- The screening process for the program should not be the same as for employment; and
- 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.
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. 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 company handbook and offer letter to the intern that they will not be receiving these type of benefits.
Hopefully you are a little better informed on this topic when making any cost-benefit analysis of how to hire an intern. The clear least risky position here is to hire an intern as a part-time employee and ensure they stay under the definition of a part-time employee. Above anything, treat your interns well. It will pay off beyond reducing the chances of getting audited or sued (although that is a pretty good perk).
Matt is the co-founder and CEO of UpCounsel (www.upcounsel.com), a legal services marketplace. UpCounsel makes it easy to find and hire a great attorney for anything. Matt started his career as a startup and venture capital attorney.