Who Is a Contractor? What Is an Internship? 

Before you start laying off employees and replacing them with unpaid volunteers or interns, know the law.

It's a great time to be a small business owner. There are so many talented people out there that are willing to work for free. But before you hire all those unpaid workers, make sure you understand how to do it right.

Generally, anyone who works for a business is an employee and must be paid at least the minimum wage. Under federal and California law, volunteering is only allowed for a nonprofit organization. Even within a nonprofit, volunteering is only allowed "for public service, religious, or humanitarian objectives." So, for example, a thrift shop cannot use volunteers. Even if someone agrees to volunteer, he or she can come back later and make a claim for back wages. In fact, a third party can make a claim on behalf of that person. The business owner can be personally liable for violations.

But there are exceptions to the general rule that a for-profit business must pay everyone at least minimum wage. The owners of the business are not considered employees and do not need to be paid. A business whose only regular employees are members of the owner's immediate family is not covered by the minimum wage. And someone who works for you as an independent contractor is not an employee.

How do you know if someone can be classified as a contractor? If the person meets the following requirements, it is likely that he or she can be classified as a contractor. You have no right to direct or control the details of the person's work — as long as he or she delivers a particular result. You do not need to give the person detailed instructions or training — he or she is an expert. The person has invested his or her own funds in the equipment needed and other costs to do the work. The person actively seeks out and provides services to other clients. The engagement is not open-ended — there is an expected end date.

The typical independent contractor is an attorney, accountant, or consultant with expertise in the field in which he or she is providing services. These people are free to volunteer their services.

Interns are the category where businesses put themselves at risk because they are not familiar with the law. An internship should meet all of the following requirements, or the intern will have the right to make a claim for unpaid wages. The internship should provide actual training, similar to that which would be given in a school. The internship is for the benefit of the intern. The intern does not displace regular employees. The intern receives close supervision. The business derives no immediate advantage from the activities of the intern and on occasion operations may actually be impeded because of the time it takes to make sure the intern is learning something. The intern is not necessarily entitled to a job at the completion of the internship. There is a clear understanding that the intern is not entitled to wages.

This topic has gotten some attention lately because of a recent article in The New York Times. According to the article, officials in California and other states have been investigating unpaid internships and imposing fines on companies that use them.

The California Division of Labor Standards Enforcement recently issued an opinion regarding an internship program called Year Up, a Boston-based organization that runs internship programs throughout the United States. According to its web site, Year Up is a one-year, intensive training program that provides urban young adults, ages 18-24, with classroom instruction and placement in internships in corporations. Because of the following characteristics, the California Division of Labor Standards Enforcement determined that the Year Up interns were not employees and therefore did not have to be paid minimum wage. The internships are coordinated with classroom learning. Interns receive college credit. The program provides other services to the interns such as college and career counseling. Year Up representatives visit internship sites to ensure the students are being meaningfully supervised. The short-term nature of the internship makes it less likely that the interns are displacing regular employees. While the interns may do some work, such as cleaning, that is unrelated to their learning objectives, these are just "isolated instances." Even though the businesses where interns are placed receive some benefit from the work done by the interns, the primary benefit is to the interns. There are significant costs to the businesses due to the amount of supervision time devoted to the program.

The lesson from this opinion is that unpaid internship programs need to involve intensive supervision and skills-building opportunities. The topic of unpaid internships is heavily debated on web sites like UnfairInternships.com. Posting an unpaid internship on Craigslist can result in messages threatening lawsuits. Partnering with a nonprofit organization or educational institution can be a great way to structure a legally compliant internship program.

Now that you know who can and cannot work for you for free, the next step is to put your agreement in writing. Someone may seem really gung ho right now about donating his or her precious time to your business, but if that person becomes disgruntled in the future, it is very nice to be able to point to a document that clearly lays out the intentions of everyone involved.

Employment law is much more than minimum wage. If someone falls within the definition of an employee, there are numerous additional requirements such as workers compensation insurance, unemployment insurance, verification of the employee's right to work (Form I-9), anti-discrimination laws, breaks, overtime, injury and illness prevention policy, employment tax withholding, etc. It really pays to become familiar with these regulations before hiring your first employee.

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