Linda has just formed an LLC. She has a great new idea for a business. She has no money as she has no clients yet, but her friends love her and want to volunteer their services. She has vaguely promised them some sort of eventual profit or ownership percentage when the company becomes more successful. Or even better, she has found a college student who wouldn’t mind “interning” (otherwise known as working without pay) who will help her run her errands in return for a line on a resume or a referral letter.
Linda has a problem. Most unpaid internships are illegal and violate the minimum wage and overtime laws. The United States Department of Labor has put out a fact sheet that delineates the test for unpaid interns. Here are two particularly sticky tests for Linda:
- The intern does not displace regular employees, but works under close supervision of existing staff;
- The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded.
In other words, Linda should be paying her intern at least minimum wage. She’s getting all the benefit. By having an intern, she is able to not hire an employee, and she’s certainly getting an advantage.
The same thing is true for her friends that she has offered some eventual piece of the profits. First, the terms of the deal should be in writing so that everyone understands exactly what they are giving and what they can expect to get in the end when the business is successful. Second, without an agreement, this is just another form of unpaid labor that is likely to lead to violations.
How will this end up being a huge problem for Linda? One of the unpaid workers files a claim against Linda, for unemployment benefits; for worker’s compensation if they get hurt on the job; for another employee harassing them. Linda is facing huge fines for not properly paying her employees and for not paying the proper taxes.