Unpaid Internships – Who benefits most?

With constant pressure on organisations to keep employment costs down and graduate unemployment at its highest level for 17 years, there is concern that unpaid internships have become less of a beneficial exercise for the intern and more of a free-labour mechanism for employers.

In many cases internships offer young people a genuine opportunity to gain insight into a potential career and to get a foot in the door come interview time. With competition for jobs so fierce, top internships have become gold-dust – the UK Prime Minister David Cameron was recently accused of ‘gross insensitivity’ after internships at top hedge funds were auctioned to attendees at the Conservative’s Black and White party for around £3000 each. Some employers have taken advantage of this demand by giving internships to people to do tasks in place of a paid employee with little training benefit in return.

As a result, legislators and judiciaries across the world are taking a harder look at internships and an increasing number are being challenged in court. International employers should take the time to review their internship schemes in order to make sure they are keeping up both with recent legal developments and also with changing attitudes that may end up causing them reputational harm.

Mislabelling internships in the United Kingdom

This issue is more widespread in the UK than most imagine – the UK government’s own lawyers claim that the majority of those working in unpaid internships in the UK should in fact be paid. To combat this the Department for Business Innovation and Skills (BIS) has announced a campaign to encourage the naming of questionable employers.  BIS has so far helped unpaid interns recover £200,000 in wages. UK Employers getting caught face financial costs of up to six years back-pay as well as damage to their brand.

The key question for the employment tribunals is whether the intern’s role amounts to that of a ‘worker’. People who work set times, do set tasks and contribute value to an employer’s organisation constitute workers and ‘workers’ and as such, are entitled to be paid at least the national minimum wage.

Another common occurrence is promising the intern paid work at the end of an unpaid internship. In these cases the intern will automatically qualify as an employed ‘worker’ if he or she is given the expectation of paid work.  Unpaid internships therefore cannot be used as a form of mock ‘trial period’.

A global review

Reform of employment law governing internships has been rolling across Europe in recent years. For instance in Italy hiring unpaid interns for periods up to 12 months was usual practice until legislation was introduced in 2012 which guaranteed graduate and postgraduate interns a fair wage.

In France, similar legislation calling for limits on how businesses could use interns was implemented in 2009 & 2011. However, a widespread lack of enforcement has caused the ministers for Labour and Higher Education to announce consolidating legislation that will set:

  1. A maximum internship length of six months within one academic year;
  2. A ratio of interns to employees which cannot be exceeded (the proposal is 10%);
  3. A limitation of student internships to those with a genuine university degree;
  4. A measure to stop continuous employment of interns to fill a position. This will require a gap between the hiring of interns (i.e. two months between every six month internship).

In the US, the case law states that even those conducting activities synonymous with traditional views of work experience should be paid if they add value to an operation. A US District Judge ruled that Fox Searchlight, a film division of Fox Entertainment which employed interns to take lunch orders, answer phones, file papers and other such activities, violated minimum wage and overtime labour laws by not providing remuneration. The Judge stated that internships should only be used in very limited circumstances. The case has opened the floodgates for claims against employers who have taken advantage of an intern’s labour without providing pay or educational experience in exchange.

The US test for legality of internships, provided by the Fair Labour Standards Act (FLSE) is as follows:

  1. Though the internship might benefit the employer, the training given to the intern is similar to the training given in an educational environment.
  2. The internship clearly benefits the intern.
  3. Regular employees are not displaced from their jobs, and the intern works under staff supervision.
  4. The employer received no immediate advantage from hiring the intern, and in fact, company activities might be impeded by the presence of the intern.
  5. The internship does not guarantee or suggest the possibility of employment once it is over.
  6. Both the employer and the intern understand and agree that no wages will be awarded to the intern for the internship.

Canada has a similarly rigid set of guidelines governing the use of unpaid labour. All employees are entitled to the statutory minimum wage except those falling within certain exclusions. One of these exclusions is if the individual, having been told that they won’t be paid, receives training which is similar to that given in vocation school and doesn’t take the place of a genuine job or contribute noticeable benefit to the employer.

In Asia the law is, for the time being, more open. In China, recent case law states that those who sign internship contracts rather than employment contracts don’t actually technically share an ’employment relationship’ with those instructing them and therefore are not protected by employment law. In Japan, meanwhile, ‘open desk’ internships in which graduates spend 3-6 months with an employer without pay are almost seen as a rite of passage in order to gain a foundation in a career.

An overarching theme

While global labour laws take different approaches to addressing unpaid internships, in the main they strive to strike a balance between encouraging employers to give young people a work experience opportunity that might not otherwise be available to them and preventing employers from taking advantage of the possibility of cheap or free labour.  The direction of legal travel is clearly greater protection for the interns.

For the global employer, it is obviously important to comply with the local rules on unpaid internships in each jurisdiction and to keep up to date with changes.  The more challenging question is whether to take a universal approach and apply best practice standards that might go beyond what is required in any particular jurisdiction.