Last week there were reports that Condé Nast, whose titles include Vogue and GQ, would be ending its internship programme in the US after being sued by two former interns. In the UK, the fashion industry was given a sharp warning last year when HMRC cracked down on unpaid schemes, and in June 2013 it was reported that nine companies including Arcadia, whose brands include Topshop and Dorothy Perkins paid out almost £200,000 compensation to unpaid interns and received fines. So is there any future in the unpaid internship or, as we approach Halloween, is everyone too spooked by the risks? If not, what traps and pitfalls should businesses be wary of when offering work placements?

What is an intern?

The term “internship” has no defined meaning or special status under UK law. The term is used broadly to cover a number of different scenarios: the key is to look behind the title and to consider what is hidden beneath and determine the true legal status of the “interns”.  

Interns and pay

A business is required to pay National Minimum Wage (NMW) to all “workers”, however short the assignment, subject to certain exemptions. The exemptions include those who are on a placement of up to 12 months as part of a recognised further or higher education course, often referred to as a “sandwich placement” or “industrial placement”, or those on a placement who are still of compulsory school age.

Where interns are required to turn up for a defined period during specified working hours and are given tasks to carry out that are to the benefit of the business, they are likely to be classed as “workers”.  Interns on genuine work experience placements, or those who are in reality volunteers, may not have this status and the guidance from BIS suggests that those genuinely work shadowing will not qualify for NMW.

In trying to determine the legal status of an intern a business should ask itself who really benefits from the work placement? To avoid worker status businesses should ensure the internship is focussed on the interns’ learning.  Businesses should consider asking interns to both assist with practical tasks and observe/shadow the work of others. If it is possible to move the intern around departments this would also be helpful. Avoid getting the intern too involved with practical tasks that are not to their benefit or having them spend too much time on administrative tasks; an intern that spends their time filing, sending out mail shots or stacking shelves is likely to be a worker. 

The National Minimum Wage is currently at a rate of £6.31 an hour, and with the ability to claim back-payments for up to 6 years and the risk of HMRC imposing fines, it could be costly to get this wrong. 

Interns, holiday and benefits

If an intern is classed as a worker, they are entitled to annual leave as well as NMW. Annual leave should be pro-rated for the length of their assignment and accrues however short the assignment. The annual leave entitlement cannot just be rolled into the hourly rate but could potentially be taken at the end of the assignment. 

In terms of enhanced holiday pay and other benefits, if the interns have employee status employers need to be wary of treating them less favourably than permanent employees carrying out equivalent roles in order to avoid discriminating against them on the basis of their fixed-term status (again there are exemptions for those on higher education work placements not exceeding one year and other government or institution funded schemes). 

Also, once a business qualifies for auto-enrolment interns may need to be auto-enrolled, potentially with an obligation on the business to make pension contributions.

Interns and legal rights.

If an intern obtains employee status, (which may be the case if under the control and direction of the business while on assignment) the intern will have further protection under employment legislation.  The intern could obtain unfair dismissal protection and the right to a redundancy payment; although usually this will not be an issue if interns do not obtain qualifying service (currently two years).  However, there are some circumstances in which qualifying service is not a pre-requisite to bringing an unfair dismissal claim and businesses should also be wary of interns obtaining qualifying service through a number of linked assignments.  Employees also have other rights that may be applicable, such as the right to minimum notice, statutory sick pay and maternity rights.  Further employee interns would need to be considered in a TUPE transfer scenario.  Interns are also likely to have protection under discrimination legislation this is one reason that business should ensure they operate a fair recruitment process.  

So what is the future of the internship?

The rights associated with worker and employee status should not put businesses off using interns. The issues are manageable, it is just a case of accurately identifying how interns are used, being aware of the relevant rights and obligations, and correctly documenting the agreement.

Many unpaid internship programmes are still successfully run and are increasingly popular in light of the continued competition in the market place. Unfortunately, some businesses still abuse the system, relying on the fact that the intern will not raise a complaint out of desire to secure a permanent role.  This approach is risky remember that HMRC can still investigate and issue fines, and with the six-year time limit on filing complaints the ghosts of interns’ past could come back to haunt employers.