The big risks of unpaid internships

Posted: 09/12/2015

Staffing costs can be a big issue for startups and many use unpaid interns to provide low cost labour. However, internships can lead to litigation and even criminal liability for failure to pay the national minimum wage (NMW). 

What’s in a name?

Some believe that, simply by using the label “intern”, you can avoid paying the NMW. Wrong. Entitlement depends on legal status. There is no legal definition of internship. Interns’ rights depend on whether they are employees, workers or volunteers.

Many interns will be employees. Employees have the most rights, including protection against unfair dismissal and entitlements to written terms, the NMW, paid holidays and sick pay. 

“Workers” include employees, but also individuals who have entered into a contract (written, verbal or implied) to perform personally work for another party to the contract who is not a client/customer of any profession/business carried on by the individual. Their entitlements include the NMW, paid holiday and sick pay. 

Volunteers and exemptions

Startups can use unpaid or “expenses only” interns if they are genuine volunteers or an NMW exemption applies. Volunteers work on a truly voluntary basis. They will not suit many startups as they have no obligation to turn up. Volunteers have no contract and receive no pay or benefits (except out-of-pocket expenses). “Volunteers” on a promise of future work are likely to be workers as such promises are deemed benefits. Just because interns say they want to work for free does not make them volunteers. 

“Voluntary workers” (as defined by the NMW; they are not the same as volunteers) are exempt. Few startups benefit from this exemption which applies to charities, voluntary organisations, associated fund-raising bodies and statutory bodies, subject to conditions. 

Some students have no NMW entitlement, including those on work experience placements for up to one year as part of a higher, or further, UK education course. Student exemptions are limited and would not apply to someone simply on a gap year. 

What if interns sign away their rights to pay at the outset? If they are entitled to the NMW, such waivers are ineffective. 

The down side

If you breach NMW rules, interns can claim unlawful deductions from wages or breach of contract. HMRC could take enforcement action (with criminal penalties). There may be reputational damage. The Government could name and shame you. 

Using unpaid interns can also restrict social mobility. Those from less privileged backgrounds may not have the connections to obtain internships or the financial backing to afford unpaid work. This may prevent you from attracting the best candidates.

Practical steps

If you use unpaid interns, be clear on their legal status from the outset and have a written record of the arrangements. 

Key considerations are:

• How long will the internship last? It should be a short fixed period. If longer than a few weeks, HMRC may view interns as employees/workers.
• What will they be doing? If interns are working (technically, even just photocopying), rather than work-shadowing, they may be employees/workers. Be clear about what they can and cannot do.
• What hours are expected? Set hours suggest employee/worker status.
• Is the arrangement likely to lead to paid work? That may indicate employee/worker status.
• What expenses or other benefits will be provided?
• Avoid mission creep. Interns are often given additional responsibilities and extended placements, increasing the risk of employee/worker status.
• Retain records including details of hours, work and expenses paid in case of claims.
• Ensure issues such as insurance, health and safety, data protection, confidentiality and IP are covered. If interns are not employees, IP they create will not automatically pass to your business. 

If interns are doing more than just observing, the chances are they are employees. If in doubt, it is safest to pay the NMW. Otherwise, you may have HMRC breathing down your neck. 

This article was published in Disrupts in November 2015.

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