How is a California Unpaid Internship Defined?
Since 2010, California labor laws about unpaid internships have been hotly litigated (and previously summarized in this blog). To differentiate a true unpaid intern from a paid employee, and avoid expensive class action liability and expense due to unpaid overtime, California courts have employed the so-called "primary beneficiary test," which identifies factors both for and against an internship being unpaid. A 2010 opinion from the California Court of Appeal was the first court opinion to address the issue of whether an intern is an employee or not. See, ‘Fish on (with tips) and chips: Paid or unpaid intern and employee.’ The 2010 case, Benningfield v. Am. Commercial Sec. (Benningfield I), 681 F.Supp.2d 1156 (N.D. Cal. 2010), set out some of those factors. These cases explain that under California law, an individual is an employee if he or she is hired by an employer and performs work under the direction of the employer. In California, most individuals are presumed to be employees. A prerequisite of employment is that an employee be compensated for his or her work. However, a person who is not hired by an employer may not be treated as an employee. Cal. Labor Code ยง 3351 (defining employee as one in service of an employer). In addition to the statute , the California legislature has attempted to define an unpaid internship through drafting the now repealed Labor Code Section 1182.5, which stated as follows: "an individual shall not be considered an employee of an organization for purposes of this section or any other section of this code, if all of the following apply: (5) The individual displaces an employee of the organization for the same work. Further, the case law provided a definition and recitation of factors which must all be present in any instance of an unpaid internship. These include: 1. The internship, even though it includes actual operations of the facilities of the employer, is similar to training given in an educational environment. 2. The internship experience is for the benefit of the intern. 3. The intern does not displace regular employees, but works under close supervision of existing staff. 4. 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. 5. The intern is not necessarily entitled to a job at the conclusion of the internship. 6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Legal Criteria for Creating an Unpaid California Internship
California law, which establishes the lower bar for employer compliance, is largely in agreement with federal law regarding the requirements for an unpaid internship to be lawful. However, as is often the case, it is the state law where employers must be most vigilant in demonstrating compliance.
Educational environment
The FLSA and California law both require that, to be considered an internship rather than employment, a program must be offered by an educational institution:
"An internship or training program will be viewed as eliminating the application of the [FLSA’s] general rule of ’employment’ if the following factors are met:"
So, for example, a program offered by a community college, junior college, or other accredited institution of higher learning (including high schools) which meets the above requirements would not be considered employment under the laws.
Training environment
In addition, both federal and California law recognize that an employer may offer unpaid training or work experience monitor programs in coordination with an educational institution that also do not constitute employment. However, the parameters accepted for this training must be the same as discussed above, such as an internship available to the general public is a type of employment, irrespective of whether the educational institution profited financially from the arrangement (such as with a vocational school or training program that is also offered privately to the general public).
Voluntary
Finally, both the federal and California law recognize that an internship must be voluntary to be permissible.
Counseling and guidance
Like any area of employment law, the laws and guidance supporting the laws are vast and difficult to navigate. A written internship policy – and any practical consideration of how the internships will be conducted – may be the best guide for employers, along with consultation with advice of counsel, to ensure that any unpaid internship program does not present a legal liability or compliance issue under federal or California law.
Consequences of Misclassifying Interns
The law is clear that employment laws apply to interns and that, in particular, there are only very limited circumstances under which interns can be unpaid, and even under those circumstances, there are several restrictions. Companies who do not meet the criteria for employing unpaid interns in California expose themselves to significant penalties and lawsuits.
Some of the legal and financial implications of misclassifying interns or using interns when they do not qualify as such include:
misdemeanor fine of up to $10,000 per violation;
up to $25,000 in minimum wage penalties;
$4,000 for each violation of the IWC wage orders;
$4,000 in civil penalties for each violation of the Unfair Competition Law;
recovery of attorney’s fees and costs for minimum wage claims;
recovery of all wages owed for unpaid meal and rest periods;
liability for overtime wages;
liability for expense reimbursements;
liability for wait time penalties (up to 30 days’ pay for failure to timely pay wages due at termination);
tax liability (employer will be liable for the payment of state and federal taxes as well with respect to employee’s "wages");
assessment of penalties by the EDD;
forfeiture of the employer’s experience rating; and
loss of workers’ compensation insurance or fringe benefits (e.g., group insurance coverage or retirement or pension plan membership).
How to Prepare Your Unpaid Internship Legally
Once it has been established that an internship may be unpaid, employers should be aware to comply with the summary of conditions above. In addition, regardless of what is discussed above, employers should consider a few practical tips.
First, all interns should have a clear understanding that the experience is educational in nature and that they will not be offered regular employment at the end of the internship. This may seem ridiculous at times, as companies spend thousands of dollars and resources training new employees.
Second, interns should sign an internship agreement confirming no legal rights are bestowed by the internship. If the intern will be using any proprietary information during the internship, an appropriate non-disclosure or confidentiality agreement should also be signed.
Third , employers should conduct periodic training for supervisors regarding paid and unpaid interns. Employers must train supervisors that interns cannot be directed to complete tasks like filing or making copies – that is unlawful and will negate the existence of the unpaid internship! Finally, employers should remember interns are more akin to students completing work experience to prepare for life after graduation, rather than employees.
Given these restrictions, unpaid internships are not for every company. However, companies with sufficient administrative support and supervision at reasonable expense often find that the investment pays off in the long run by developing relationships with prospective employees, marketing products and services, networking with contacts in the educational field, improving supervisor skills, and of course creating future sales/customer contacts.
Updates on Internship Laws and Recent Developments
Employers should remember that the Labor Code requires a "primary beneficiary" test to analyze an unpaid internship. This test was first recognized by the California Supreme Court in 2010 in the case of Benavides v. Bridge Private Wealth Management. The Court said there that an internship relationship is properly characterized as such under the Labor Code if the intern or student is the primary beneficiary of the relationship. Therefore, if the employer "derives some tangible benefit from [the] activity such as the exchange of services for minimum wage, the legislature clearly intended the intern to be considered an employee."
This test has been used by the DLSE in its opinion letters, as well as during audits of unpaid interns. If the primary beneficiary is the employer, the intern is likely an employee. If the primary beneficiary is the intern, he or she is likely not an employee. Many courts around the country have adopted this test, but the Ninth Circuit had not until the 2018 case of Benjamin v. B & H Education, Inc. There, a divided panel of the Ninth Circuit confirmed that the primary beneficiary test applies to both federal and state claims. The court highlighted the danger that employers might seek to "game the system" by sending their interns to a third-party provider to provide the training expected of an unpaid internship, then claiming the interns are not employees, but those attempting to obtain training to further their career. But the court noted that the regulations governing unpaid interns must have some teeth. The court said that, where the intern is relegated to routine, unchallenging tasks or performing mundane duties, particularly in comparison to other employees, the intern may be the "primary beneficiary." Similarly, where the intern is performing work that otherwise would be done by a paid employee, such that it displaces the work of paid employees, the intern is likely an employee.
The court also found that the interns in the B & H case were employees because, despite some argument to the contrary, they were working while contemporaneously taking classes for which they were paying, showing they were paying to provide the employer with free labor.
The DLSE has issued updated guidelines reflecting this case. This includes that, when evaluating whether an intern is an employee, the time spent doing productive work on the employer’s behalf counts as time worked. Further, if the intern is doing productive work under the employer’s control but assigned as part of an externship paid for by a third party, that counts as time worked. Thus, even if the purpose of the internship is to provide the intern with training and skills, so long as the employer is benefitting from the work, the intern may be an employee entitled to earn at least minimum wage.
Files on Recent Cases and Legal Precedents
A notable paid internship law case is Schwann v. FedEx (2018) which revolved around the misclassification of workers as interns. In this instance, delivery drivers for FedEx sued the company alleging it had wrongly labeled them as "independent contractors". After the Ninth Circuit Court of Appeals ruled in their favor, the case pushed FedEx to finally reclassify the workers as employees. However, the plaintiffs decided not go for overtime pay despite being successful in their lawsuit. Another case that delves into federal law regarding interns and trainees is US Department of Labor v. Blackman (2015). The DOL charged the Blackman home care business for failing to provide interns and trainees with minimum wage and overtime. The company was found liable and ordered to pay workers $1.5 million in back wages and liquidated damages. Interns can also be misclassified as apprentices , however, a case which saw interns lose their claim to compensation involved welders. The apprentices at the People of the State of California ex rel. Harris v. Long Beach Memorial Medical Center (2014) were taking part in an apprenticeship program. Yet, instead of being paid as apprentices should, the facility was paying them as regular employees. They sued the hospital for not paying them minimum wage but while the court found that the hospital had misclassified the interns as apprentices, the court determined that its actions did not violate California law.