San Diego Business Law: What is an Unpaid Internship?

Unpaid internships can be beneficial to both the young intern and to the San Diego business “hiring” the intern. But businesses must be careful because under some circumstances, the “intern” might be considered an “employee” who must be paid for his or her work. The US Department of Labor recently issued new guidelines for internships. Here are a few rules for determining whether your intern is really an intern.

San Diego Corporate Law: What is an Unpaid Intern?

Both federal and California state laws are implicated in resolving whether an unpaid intern is actually an “employee” who must be paid. The US Department of Labor has set these guidelines. If it is determined that the intern is an employee, as the case discussion shows, it is possible that an employer will be liable for unpaid wages and statutory damages. The factors are:

• Is the training similar to what is provided in an educational environment?
• Is the internship tied to a formal education program allowing the intern to receive academic credit or some other academic advantage?
• Does the internship coincide with the academic school period?
• How much does the intern benefit vs. the company? companies cannot derive “immediate advantage” from the intern’s activities
• What is the level of supervision? interns must generally work under close supervision/observation
• Does the intern displace a regular employee?
• Is it explained, and does the intern understand, that interns are not entitled to wages or to a job at the completion of the internship?

These factors are non-exhaustive and no one factor is predominant. The courts will take a “totality of the circumstances” approach.

San Diego Corporate Law: What are the California Rules?

The California Division of Labor Standards Enforcement (“DLSE”) has its own set of internship rules. They are similar to the new DOL guidelines, but are more focused on the idea that an unpaid internship must relate to an established educational course, agency, or institution. See long DLSE Opinion here.

Under the California rules, an intern — or a “trainee” — can receive a reasonable stipend to cover expenses as long as the stipend is reasonably related to the intern’s actual expenses. A recent case is a good example of what not to do. See Ming-Hsian Kao v. Holiday, No. A147540 (Cal. App. 1st Dist. June 15, 2017). In that case, the “trainee” was paid $1700 a month for nearly 10 months while waiting for his work visa to be approved. The court deemed that to be a “substantial sum” and determined that those were wages as defined by federal and California wage laws. The court highlighted several facts in support of this conclusion including:

• Employer noted the payments as “salary” on its books and ledgers
• “Trainee” was promised $2500 a month when he agreed to come to California
• When his work visa was approved, “trainee” was hired as the computer systems administrator and during his “training” he conducted activities consistent with being a systems administrator
• There was little evidence that the “trainee” received any benefit from his activities
• The tasks assigned were not similar to those assigned in an educational environment
• Tasks assigned were commercial in nature including website management, sales calls, and distribution of travel brochures
• Tasks assigned benefited the business
• “Trainee” worked the same shift as employees

Taking all these facts into consideration, the court held that the “trainee” was, in fact, an employee and was entitled to wages and statutory damages pursuant to federal law and Cal. Lab. Code, § 515.

Contact San Diego Corporate Law Today

If your business is thinking of retaining unpaid interns or if you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. If done correctly, an unpaid internship can be a helpful “leg up” to start one’s career. In this sense, internships are to be encouraged. However, internships must comply with the law. Mr. Leonard can be reached at (858) 483-9200 or via email.

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