Unpaid interns: are they really employees in disguise?

Companies need to tread carefully when it comes to unpaid internships and potential prosecutions by the Fair Work Ombudsman

Companies need to tread carefully when it comes to unpaid internships and potential prosecutions by the Fair Work Ombudsman, writes Gordon Williams

To date, unpaid interns haven’t played much of a role in the Australian labour market. This is in stark contrast to the US, where unpaid interns are commonplace in some of the world’s largest companies. However, if the number of queries I’ve fielded over the past 12 months is anything to go by, more and more of you are thinking of using unpaid interns in your business. While both parties can benefit from an unpaid internship, it’s important you’re aware of the potential legal risks.

The starting point is that your unpaid intern may actually be your employee. And it can be difficult to tell them apart, particularly where the nature of the relationship changes over time. Of course, recognising whether your unpaid interns are employees, and treating them accordingly, is essential. If you get it wrong, you could be liable for underpayment claims (based on the federal minimum wage or any applicable modern award or enterprise agreement), statutory leave entitlements, penalties (of up to $54,000 for the company and $10,800 for directors or other senior managers) and the adverse publicity that can go along with it.

As if to prove the point, 2015 saw two significant prosecutions by the Fair Work Ombudsman. The first was against a media company called Crocmedia. Although the company cooperated with the Ombudsman’s investigation and paid the two employees their full entitlements, the Ombudsman initiated legal proceedings because of the “strong public interest in deterring employers from significantly underpaying young workers’ entitlements through unpaid work arrangements”. Ultimately, the court handed down penalties against the company of $24,000.

“As with most things in employment law, how the arrangement works in practice is more important than how the parties describe it”

In the second, the Ombudsman was seeking penalties against another media company and one of its directors for failing to pay employee entitlements to former events co-ordinators working on its unpaid internship program.

So how can you tell whether your unpaid intern is, in reality, an employee in disguise? In one situation at least, the distinction is quite clear. If an unpaid intern is completing a “vocational placement” (as defined in the Fair Work Act 2009 (FW Act)), they are not considered to be an employee. This means they are not entitled to the minimum wage nor any other entitlements under the FW Act.

To be a vocational placement, the intern must undertake unpaid work as part of a placement that is:

  • a requirement of an education or training course
  • authorised under a Commonwealth, state or territory law or arrangement.

So what is the status of an unpaid intern in other circumstances? Well, unless you can say they are truly a volunteer, they will be your employee. The Fair Work Ombudsman provides the following guidance, saying that an employment relationship will generally exist where:

  • the parties intend to create a legally binding arrangement
  • there is a commitment to perform work for the benefit of the business or organisation
  • the person performing the work is to get something in return (which might be just experience or training)
  • the person is not performing the work as part of a business of their own.

“What may start off as a legitimate unpaid internship could easily morph into casual or part-time employment”

As with most things in employment law, how the arrangement works in practice is more important than how the parties describe it. Some of the key factors are:

  • the nature and purpose of the arrangement – is it to provide a learning experience (e.g. to assist with education or gain practical work experience) or to help the business?
  • the benefit the business gains from the arrangement – if the intern is doing work a paid employee would otherwise do, it strongly suggests an employment relationship; on the other hand, simply shadowing your employees suggests otherwise. Practically speaking, it is the intern who should benefit from the arrangement, not the company
  • the length of the arrangement – the shorter the better when it comes to avoiding an employment relationship (e.g. weeks versus months).

Despite form being less important than substance, careful drafting of the intern agreement is still important. To start with, avoid the common mistake of trying to use (and amend) your existing employment contract – the differences are too great. You really need to start from scratch. Of course, you should also include terms to protect the business – most importantly to deal with confidentiality, intellectual property and moral rights.

Also keep a close eye on how your interns progress. What may start off as a legitimate unpaid internship could easily morph into casual or part-time employment. This is particularly the case where an intern gains useful experience and starts to make a positive contribution to the company. When all is said and done, there’s still a place for the unpaid intern. And provided you consider each internship carefully on its facts and keep it under review, I’m confident you’ll stay on the right side of the law.

4 tips for drafting the intern agreement

  1. Use the correct terminology (such as unpaid intern or volunteer or work experience placement) and avoiding terms such as “duties”, which could imply the person is an employee.
  2. Describe the nature of the arrangement, focusing on what the intern will gain from it rather than the work they will do for the company.
  3. Include an acknowledgement by both parties that the arrangement does not create an employment relationship – although this won’t be determinative, it can help.
  4. state the purpose of the arrangement – for example, to gain experience related to career opportunities or education.

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