NY Startup Law

A businesslaw blog for New York entrepreneurs by Marc Law Associates PLLC

11 THINGS YOU MAY WANT TO REVIEW BEFORE USING UNPAID INTERNS IN NEW YORK

There may come a moment in your business cycle where you feel that there is growth potential, but realize you can’t afford to take advantage of it because you are in the initial stages of your growth cycle. Some start ups may go with part time employees, but many will try to use interns. With the job market being what it is, or isn’t, depending on who you ask, you may think that hiring a few volunteers or interns is a cost effective idea. NOT SO FAST… The misclassification of your employees could cost you a lot more in fines from lawsuits than you were trying to save in the first place. There are a few basic requirements to using interns. The most widely known is the fact that the internship must be for school credit. The Federal government (“The Feds”) and New York both impose additional requirements on a company’s use of unpaid interns

THE FEDERAL VIEW

Like most employment issues, the federal government has its own rules, and so do most states. The main thing The Feds and the state have in common is that your liability will be tied to their perception of whether your intern is an employee or an intern, a fine line indeed. If The Feds come knocking on your door it will be someone from the U.S. Department of Labor’s Wage and Hour Division for violation of the Fair Labor Standards Act (“FLSA”). They’d be very interested in talking to the CEO of your company, which is most likely you if your company is a startup, for her failure to pay your “employee” minimum wages and overtime.

The federal view on whether you can use interns without paying them stems from the FLSA’s definition of “employee”. This definition was codified in the 1947 Supreme Court case Walling v. Portland Terminal Co., which expanded the FLSA’s definition from “any individual employed by an employer” to exclude those who work on a job site for their own benefit.  The case laid out a six part test that courts still use today when ruling on internships:

  1. The training on the job has to mirror what the student would learn in a vocational school. In other words, you have to turn your office into Apex without the prospect of student loans. Your interns should receive on the job training. A DOL opinion on the issue stated that a company’s program fit this criteria
  2. Your company must train the intern for her benefit. This should be easy, unless you’re a horrible teacher… Anyone that learns something benefits, unless she has a horrible memory.
  3.  The interns can’t displace regular employees, and you must closely supervise them. Companies using interns must not leave them all in a room and check on them once a day.
  4. The employer can’t derive any benefit from the intern’s presence on site, and should even anticipate  and accept business interruption in furtherance of teaching the interns. Scared now? You should be. This is a very hard hurdle to climb, and not many startups can. You can see how this would be easier for an IBM, an established company that’s considered a dinosaur in comparison to most companies that may actually be using interns to grow their business.
  5. The interns can’t apply to the internship in hopes of securing a permanent position in the future
  6. Both parties must enter into the relationship with the understanding that the interns are not entitled to wages for the training. Wages meaning at least minimum wage. A lot of companies try to circumvent this requirement by paying the intern a small stipend. This is not enough to skirt mis-classifying an intern as an employee.

THE NEW YORK VIEW

Startups in New York must be weary of the New York Minimum Wage Act (NYMWA) when seeking to hire free help. New York’s labor laws impose even stronger scrutiny on the definition of a “trainee/intern” and “employee” . New York standards add an additional 5 criteria to the Fed test.  And you thought the feds were bad…

The first five mirror the Fed test outlined above. On the sixth test, regarding both parties understanding the non-payment of wages for the training, New York codifies that the understanding must be in writing. The rest are as follows:

  1.  The person that’s supervising and supervising the intern must be knowledgeable about the subject matter he’s teaching. In other words, the intern shouldn’t be doing any work that his supervisor/trainer can’t do. I’m sure you can see why. This scenario would make it very hard for the startup to allege that it isn’t deriving any benefit from the intern’s presence.
  2. The trainees can’t receive employee benefits. This means that you can’t give the interns any medical or pension benefits. I’m sure that makes a lot of you happy. This also applies to free or discounted goods so you probably don’t want to invite the interns out for beers with the rest of the crew. I know, it’s harsh.
  3. The training must be general and transferable to future employment. If your startup is technology related, you probably don’t want your interns training on how to use proprietary software in the beta phase, but you may conceivably train them to code by creating the software.
  4. The startup can’t use the same screening process to select interns as it does for employees, and shouldn’t appear employment driven. It should mirror the criteria for an “independent educational program”.  This means that you can’t turn your internship program into a recruitment vehicle, especially in light of the fact that the intern shouldn’t go into the program with the expectation of employment.
  5. Advertisements for your interns must stress the educational and wage free component of the internship rather than the employment aspects. This furthers the “in writing” component of New York’s criteria for both parties awareness of the intern’s unpaid tenure at the startup.

THE PUNISHMENT

Misclassified unpaid interns are entitled to 100% minimum wage back pay less any amount the startup may have paid. Remember the stipend I mentioned earlier? A lawsuit can turn that into the equivalent of a down payment on future minimum wage payments. This also means that the longer you have misclassified unpaid interns on your site the greater the possible exposure. Scared now? It gets worse. New York also imposes punitive damages of 100%. This means your startup may be liable for double damages. It gets worse. Violation of The FSLA (the first 6) adds the possibility  of an additional 100% in compensatory liquidated damages to the intern. New York also allows the losing party to recover attorney fees and costs. This means that if an intern has a good case, you may find yourself in court sooner than you think, because your intern can find an attorney even if she’s living on ramen  noodles and kool aid.

Oh, by the way, overtime will be included in the damages, but I’ll address that topic in a future post.

MY VIEW

The most troubling of the criteria from the startup perspective is the one disallowing the company to derive any benefit from the intern’s presence. This is counter-intuitive to the goals of most early startups, as most would view compliance as a waste of valuable resources. This makes it difficult to comply with. Depending on what stage you are in business, its better to just shell out pay any interns at least minimum wage. Paying at least minimum wage can make your internship a valuable resource for training and grooming future talent for your startup. This would also make it possible for your startups to recruit from the pool of experienced unemployed workers looking for a career change that surround us today.

Alternatively, if you want to start one you could always have the intern sign a written memo of understanding that you will not pay her for the vocational training that she will receive from an supervisor experienced in the subject matter who will teach her in a vocational environment without trying to further the company’s goals, and that both  parties don’t expect the intern to work for the startup at the end of it. Or you could put that in an advertisement… Good luck.

Patrick Marc, Esq.

 

 

 

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