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Written By: Robert J. Olson

Neil, Dymott, Frank, McFall & Trexler APLC

San Diego, California

How to distinguish interns from employees in California

A New York District Court recently held employers cannot use an internship program in order to avoid paying wages or paying less than minimum wage. The court separated and defined interns and employees and adopted the Department of Labor’s (DOL) guidelines. If your company employs an internship program now would be a good time to review it. Complicating matters, since the passage of the Patient Protection and Affordable Care Act, the courts ruling may reach further then just unpaid internships. Finally, it is highly likely a California Court will follow the same reasoning the NY court used.

Patient Protection Affordable Care Act (Obamacare)
The court defined when an intern becomes an employee. This is especially noteworthy because of the implications of the Patient Protection Affordable Care Act (ACA). The ACA does not differentiate interns from employees, so DOL and Courts are left to make the definitions. Under the ACA if an individual is an employee they are either a full time employee, part time employee, or a seasonal worker. As the ACA currently stands, unless your intern meets the six factor test they are classified as an employee under the ACA.

Intern vs. Employee
There is no reason to cancel or decide against an internship program just yet. Perhaps your internship program simply needs a few tweaks.

California generally follows Federal Labor Laws
The U.S. Department of Labor essentially followed a US Supreme Court holding which created a six factor test distinguishing an employee from a trainee. (Walling v. Portland Terminal Co.; DOL Fact Sheet #71 [April 2010].) In the recent New York case, the court used both the Walling decision and the DOL’s Fact Sheet to hold a company cannot use an “intern” classification to get around paying wages.

California’s Division of Labor Standards Enforcement (DLSE) prepared its’ own opinion letter regarding interns in 2010 (2010.04.07). California’s DLSE aligned California’s internship classification with the FLSA and adopted the same six factors. As well, California’s labor laws are generally compared and associated with the FLSA. Furthermore, California and Federal laws share similar definitions of “employee” and “employ,” therefore it is reasonable to assume a California Court would adopt the same rationale the NY court.

The six criteria are:
1. Even though an intern is involved in the operations of a for-profit business, the interns are more involved in training (like the training given in an educational environment);
2. The internship experience is for the benefit of the intern;
3. The intern does not displace regular employees, but works under close supervision of the existing staff;
4. The employer providing the training derives no immediate advantages from the activities, in fact training the intern may actually impede its operations
5. Intern is not entitled to a job at the conclusion of the internship; and
6. Both the employer and employee understand the intern is not entitled to wages while acting as an intern.

Evaluating the Six Factors in your Company
A factor test means you do not need to achieve every factor. The more factors you meet the better you are. Courts often give more weight to certain factors; therefore you should try to meet those factors. This paper will outline where courts typically place more emphasis in their analysis.

1. Training is similar to an educational environment.
There must be some training beyond “on-the-job training.” Even paid employees receive on-the-job training. An internship should involve teaching “fungible” skills useful in the industry and not just skills and techniques unique to your company. The training interns receive should be something more or different from training paid employees receives.
Perhaps the best way to develop an unpaid internship program is to incorporate your program with the intern’s academic program. Another way to create an educational system is cycling interns through the various communities of your company (e.g. few weeks in operations, marketing, accounting, sales, etc).

2. The internship experience is for the benefit of the intern.
This factor is similar to (1), but the focus is defining “skills” the program intends to use to teach the intern. Since learning is subjective, the courts analyze this factor objectively. The courts will evaluate how the program was designed and how well it meets its objectives to train interns. The court evaluates whether your company expends resources to train the interns in matters relating to the industry and if the intern obtains skills valuable to more than just your company.
Note: It is insufficient to claim the intern benefited by getting experience on his resume. A paid employee also receives this benefit.

3. The intern does not displace regular employees, but works under close supervision of the existing staff;
The key question to ask is: if your intern leaves would you need to hire someone else to do the work? Past cases have placed more weight on this factor than others. In other words, was an unpaid intern doing a job a paid employee could perform?
Courts will consider: how closely the interns work with the employees in your business? Are your employees giving up their time to train and discuss work with the interns? Do the interns go to a work station every day and sit there working or are they following employees around and going to higher level meetings and functions?

4. The employer derives no immediate advantages from the interns work, in fact training the intern may actually impede its operations
This factor closely relates to (3) and the courts give it more weight as a factor. Is your company providing its interns company time and resources? Is your company taking the intern to meetings or business functions? Are you taking time away from your job to provide training to the interns?
The benefits of the intern’s work should not produce an immediate profit nor provide improvements in efficiency. However, gaining future advantages from an internship program is still encouraged and usually the main purpose of the internship program.
These last two factors are the least important, but are the easiest factors to comply with.

5. The intern is not entitled to a job at the conclusion of the internship; and
If the intern was entitled to a job at the conclusion of the internship the program is actually considered training. You can easily adjust your program by informing interns they are not guaranteed employment and when they are finished with the internship and they will need to apply to the position if one is open.

6. Both the employer and employee understand the intern is not entitled to wages while acting as an intern.
This is perhaps the least important factor and also begs the question of an intern. Under the FLSA an employee cannot contract around his rights under the law. The FLSA sets the minimum wage. However, if its considered an internship under these factors the intern must also understand they will not receive wages for their work.

Conclusion
Factor tests can be tricky and after the publicity of the New York case it could potentially open the door to lawsuits for lost wages, back pay, interest, and attorney fees. If you have an unpaid internship program, or if you are looking to start one, it might be wise to consult your attorney to evaluate your program.
President Obama recently delayed the employment piece of the Affordable Care Act until 2014. It would be wise to stay alert to the changes and updates especially regarding how ACA will define employees. Beware, if interns are classified as employees, it will open a whole new set of concerns under the ACA.
If you have a paid or unpaid internship program, it would be wise to review your program and see how many of the factors your program meets. As you evaluate your program, consult with your attorney. Remember it’s cheaper to evaluate the program now before you get stuck in a class action lawsuit and cheaper to prevent ACA fines from being levied against your company.

For more information about Neil, Dymott, Frank, McFall & Trexler APLC or to learn more about their Employment Law practice in San Diego, please visit www.neildymott.com or the International Society of Primerus Law Firms.