Hiring interns for your small business is a great milestone for a young company. Hiring startup interns are on the rise. However, the number of small businesses and startups getting audited for misclassifying interns is also on the rise. Businesses are misclassifying interns as independent contractors or unpaid interns when they should be classified as paid employees.
It doesn’t take a brain surgeon to figure out why businesses want to classify interns as independent contractors and unpaid employees. It is cheaper, easier, and less time-consuming than hiring full-blown employees
Improperly classifying an intern as an independent contractor or unpaid intern is risky. If you are audited, you will then have to make up for unpaid wages, taxes, insurance, and pay hefty fines. This adds up to double what you would have paid the intern if you hired them as a part-time employee instead.
Businesses can be randomly audited or turned in by a disgruntled intern (or parent of the intern). Unfortunately, despite speaking with numerous attorneys, no one could provide us with the chances of getting audited. They only informed us that audits are on the rise.
What are your options?
1. Hiring Interns As An Independent Contractor
Many companies are employing interns as independent contractors because it allows them to avoid employee hassles, such as withholdings and employment taxes. The major problem with this is that most intern relationships look nothing like an independent contractor relationship.
As we have explained before, in our Guide to Independent Contractors, the classic independent contractor is an HR or SEO consultant. They are a legal entity, with their own tools (computer, transportation, etc.), hours, and clients. They are independent contractors despite being on your company’s premises for an extended amount of time.
Interns are not typically legal entities, nor do they work for multiple employers. Yet, they will most likely work on your company’s premises. Most interns would fail the independent contractor test.
2. Hiring Unpaid Interns
Unpaid interns are legal, but they come with many strings attached. The relationship is 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 training’s completion; and
- The employer and the trainee understand that the trainee is not entitled to wages, however, a stipend may be permitted.
- California state laws add 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, to qualify students to work for any employer, rather than for 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 programs. It does not make an otherwise unethical unpaid internship legal.
Taking additional factors from California into account, an intern has a better chance of avoiding employee status if they are working as part of an academic program for their own benefit, and not performing an existing employee’s work.
3. Hiring Interns As Employees
Most attorneys we polled would recommend hiring interns as part-time employees (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, such as workers comp and withholdings. See Hiring Your First Employee. You should set up part-time employee interns on your company payroll. Also, ensure that they do not exceed working 35 hours a week or even 7 hours a day.
Even so, part-time employees generally have limited or no company benefits. They usually don’t have health benefits, vacation, sick time, paid holidays, or unemployment compensation, unless required by state labor laws and/or company policies. In California, for example, it is optional whether or not to include a part-time employee on the company healthcare plan. You should clearly state the intern’s benefits or lack thereof within the company handbook and the intern’s offer letter.
Hopefully, you are now better informed on how to find an intern for your business. The best choice is to hire an intern as a part-time employee. It’s also important to 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.