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“Do You Have to Pay Interns?” – What Businesses Need to Know About Hiring Interns

  • 19 May 2022
  • Studio Legal

Written by Alyce Evans and Jennifer Tutty, Principal

The topic of unpaid internships is one of significant debate and diverse opinions.

For many young Australians, these arrangements are seen as a way to boost resumes, make connections, and gain skills and experience within their chosen industry.

On the flipside, it is argued that unpaid internships exploit young workers and reinforce socio-economic divides (many people cannot afford to work for free), while damaging the job market by replacing entry-level jobs.

When it comes to the law, however, there is a right (legal) and a wrong (illegal) way for businesses to offer unpaid internships under the Fair Work Act 2009 (Cth) (Fair Work Act).

In this blog, we explain how businesses can stay on the right side of the law when hiring interns.

Unpaid Work

Unpaid work can take on many different forms, including vocational placements, unpaid internships, unpaid work experience and unpaid trials. Unpaid work arrangements can be entered into for a number of reasons. Typically, they are seen as a way to gain experience in a job or industry. These arrangements can be initiated by employers, the person wanting the work or experience, or education/training institutions.

Is Unpaid Work Lawful?

Unfortunately, there is no simple yes or no answer. Some unpaid work arrangements are lawful and others are not.

For example:

– If an arrangement involves a ‘vocational placement’, it will be lawful;

– If the arrangement is not a ‘vocational placement’ but an ‘employment relationship’ exists at law in relation to the arrangement, it will be unlawful; and

– If the arrangement is not a ‘vocational placement’ and an ‘employment relationship’ does not exist at law in relation to the arrangement, it will lawful.

Still confused?!  Read on.

Are They Undertaking A Vocational Placement?

The first question to ask is whether the person is undertaking a vocational placement with your business. If they are, you may not need to pay them. Vocational placements that meet the definition under the Fair Work Act are lawfully unpaid, regardless of whether an employment relationship exists or not.

What Is A Vocational Placement?

A vocational placement is a formal work experience arrangement, which is part of an education or training course. For example, a university student may be required (by their course) to undertake a certain number of hours in a formal work environment.

The term ‘vocational placement’ also has a specific definition under the Fair Work Act. If you cannot tick off all of the criteria required by this definition, it is not a vocational placement under the Fair Work Act. Legally, this means you may need to pay the person.

To be a vocational placement under the Fair Work Act, all of the criteria below must be met:

1. There must be a placement

This can be arranged by the educational or training institution, or a student may initiate the placement with an individual business directly, in line with the requirements of their course.

2. There must be no entitlement to pay for the work the student undertakes

Where a student’s contract with the host business or organisation entitles them to receive money for the work they perform, the vocational placement will likely have turned into an employment relationship. Similarly, work arrangements covered by industrial awards or agreements are not vocational placements.

3. The placement must be done as a requirement of an education or training course

The placement must be a required component of the course as a whole, or of an individual subject or module of the course. It doesn’t matter whether that subject is compulsory or an elective chosen by the student.

4. The placement must be one that is approved

The institution delivering the course (which requires the placement) must be authorised under an Australian, state or territory law or an administrative arrangement of the Commonwealth or a state or territory to do so. Courses offered at universities, TAFE colleges and schools (whether public or private) will all satisfy this requirement, as will bodies authorised to offer training courses under state or territory legislation.

Is there an Employment Relationship?

Where an unpaid work arrangement is not a vocational placement, the arrangement can only be lawful if no employment relationship exists. If there is an employment relationship, the person is actually an employee and legally entitled to conditions under the Fair Work Act including:

– A minimum wage;

– The National Employment Standards; and

– The terms of any applicable award or enterprise agreement.

1. Is there an employment relationship?

So, how do you work out whether or not a person is classified as an employee? There is no definition of ‘employment’ under the Fair Work Act, which means that each case must be considered on its own facts.

Firstly, (and we’ll repeat this a few times), this is not about titles. Hiring someone as an ‘intern’ or for ‘work experience’ does not prevent them from being legally defined as an employee. The law is concerned with the true nature of the arrangement.

An important factor in determining this is asking whether the arrangement to work involves an ‘employment contract’. An employment contract can be in writing, however it does not have to be. A purely verbal agreement may also count.

For an employment contract to exist it must be clear that:

– The parties intend to create a legally binding arrangement;

– There is a commitment from the ‘worker’ to perform work for the benefit of the business or organisation; and

– The person performing the work is to get something in return (which might be just experience or training).

There may be an ‘employment contract’ at law, even if the contract was called something different like an unpaid intern agreement or work experience contract.

2. Nature of the arrangement

When looking at whether an employment relationship exists, the nature of an arrangement should be considered, not just how the parties have chosen to describe it in any written or verbal contract. For example, placing a job advertisement for an ‘intern’ or for a ‘work experience role’ and/or referring to a person as an ‘intern’ or ‘work placement student’ in any contract, does not necessarily mean that these roles can be lawfully unpaid. Depending on the nature of the arrangement, the person doing the work may actually be classified at law as an employee. If this is the case, they are entitled to be paid the legal minimum rate of pay for the type of work they’re doing, along with other minimum employment entitlements. In other words, it is a breach of the law not to pay them.

To determine the true nature of the relationship, the following factors should be considered:

1. What is the nature and purpose of the arrangement?

Was it to provide a learning experience or was it to get the person to do work to assist with the ordinary operation of the business or organisation?

Where the arrangement involves productive work rather than just meaningful learning, training and skill development, it is likely to be an employment relationship.

2. How long is the arrangement for?

The longer the period of the arrangement, the more likely the person is an employee. However, even relatively short engagements can still be employment relationships.

3. How significant is the arrangement to the business?

Is the work normally performed by paid employees? Does the business or organisation need this work to be done? The more integral the work is to the function of the business, the more likely it is that an employment relationship could be found.

4. What are the person’s obligations?

In some cases, a person might do some productive work to aid their learning.

3. What factors indicate that it is not an employment relationship, and that there is an lawful unpaid internship arrangement?

The following factors would indicate that an internship arrangement is not an ‘employment relationship’ and that the internship can be lawfully unpaid:

– The role is primarily observational and for the benefit of the intern;

– The intern is free to come and go at their discretion and is not required to work set hours;

– The expectation or requirement to perform activities for the workplace is incidental to the learning experience; and

– The role is not required for the workplace to successfully operate.

What Happens If You Get It Wrong

If an employment relationship is found to exist, then you should have been complying with the Fair Work Act and any applicable awards in relation to your intern. A number of consequences can flow from this error.

1. Repayment on entitlements

As well as having to pay wages to the intern, you will need to comply with your other employer obligations. These may include the payment of annual leave, sick leave, casual loadings, overtime and super. 

2. Penalties

If you were meant to have been supplying these benefits and entitlements and you have failed to do so, you and your business will have breached the Fair Work Act. Consequently, you and your business will be subject to penalties which can be significant if the breaches are serious.

3. Director liability

If a business breaches the Fair Work Act, the director or manager of that business can also be held personally liable. Just like the business, a director or manager in breach of the Act will be subject to financial penalties, which can be significant if the breaches are serious.

Top Tips For Staying On The Right Side Of The Law When Hiring Interns

1. Be very wary of hiring unpaid interns.

2. Seek out interns looking to conduct a formal vocational placement and get confirmation of their placement from the relevant training institution.

3. Paying an intern something ‘token’ is not recommended. In fact it insinuates an employment relationship.

4. If an intern is not on a vocational placement but conducting work experience, make sure the work or tasks you assign to them are to benefit them and to give them meaningful learning experiences.

5. Don’t get an unpaid intern not on a vocational placement to do tasks, which you would otherwise pay someone to do. This might include filing, working on reception or photocopying.

6. We don’t recommend asking an unpaid intern or work experience student to get coffee or run errands.

7. An unpaid intern not on a vocational placement should be free to come and go if they need to and not strictly governed by the trading hours of the business.

8. Ask the intern to sign a document prior to starting that deals with key legal considerations. At a minimum, this should include clauses assigning all intellectual property that they create to your business, and agreeing to keep everything they hear at your business strictly confidential.

Case Studies: What Not To

1. An Unfashionable Error – Fair Work Ombudsman v Her Fashion Box Pty Ltd & Anor

In 2019, a former Shark Tank fashion industry start-up, Her Fashion Box Pty Ltd (Her Fashion Box), and its sole director and majority shareholder, Kathleen Purkis found herself in dangerous water. The company and Ms. Purkis received fines totalling $329,133 for underpaying three young workers.

In particular, one of those workers, a graphic designer, was hired as an ‘unpaid intern’. The designer had a degree in her field and worked two days a week for nearly six months. Looking at the actual working arrangement, the court held that the young worker was actually an employee, not an intern. Therefore, she should have been paid.

In relation to this case, Sandra Parker of the Fair Work Ombudsman speaking to the media said that “business operators cannot avoid paying lawful entitlements to their employees simply by labelling them as interns.”

This incident, in addition to the underpayment of two other workers, landed Her Fashion Box a fine of $247,278. Ms. Purkis was personally fined an additional $54,855.

2. The Law Bites Back – Fair Work Ombudsman v Crocmedia Pty Ltd

Another case, which business owners should be aware of, is that of Crocmedia. In this matter, a university student and graduate approached Crocmedia, seeking to complete some work experience with the business. Crocmedia agreed to take them on as unpaid ‘interns’ for three weeks.

After those three weeks passed, the young workers were kept on for six and 12 months. They were now labelled as ‘volunteers’. They received some reimbursement for their expenses during shifts ($75 on weekdays and $80-$120 on weekends). During their time at Crocmedia, the interns/volunteers worked on the production of the business’ radio programs.

The court found that, given their work as producers for the business, the intern/volunteers were actually employees. By failing to pay these employees minimum wages, casual loadings and in full (at least monthly) as well as failing to provide pay slips, Crocmedia breached the Fair Work Act. The business received fines of $24,000.

These are simply two examples from a long list of cases. Fortunately, by understanding the law regarding unpaid internships, you can make sure your business’ name isn’t added to this list. 

Written by: Jennifer Tutty and Alyce Evans

Further Information

If you have any questions relating to unpaid internships or employment law, please contact us through our online form or via email at hello@studiolegal.com.au.

DISCLAIMER

The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.