This article was written by Joanna Cowie, Senior Associate at SA Law LLP.

What can organisations do if they want to offer short-term unpaid work experience placements to graduates without facing the risk of attracting unwelcome attention from HMRC?

Once again the controversial issue of unpaid internships has hit the headlines this week with the news that, following an investigation by HM Revenue & Customs, nine companies have been forced to make payments of around £200,000 to interns, who were working without being paid. The companies in question, many of which are household names, have also faced fines for breaching minimum wage legislation.

Most people agree that work experience placements and internships provide students and graduates with an invaluable insight into the world of work and undoubtedly improve their employability, particularly in today’s challenging market. At the same time, employers welcome the opportunity to assess a potential applicant’s aptitude and skills over a longer period than the normal application process permits, which enables them to better evaluate how the candidate will fit into their organisation. At first glance, this seems a win-win arrangement. However, the problem arises when employers abuse the relationship by using interns as a long-term free labour resource. The use of unpaid internships has also been criticised for encouraging elitism, as only those from well off families are able to take up unpaid work placements.

The difficulty arises because under UK law, there is no definition of an “intern”. Consequently, if an intern qualifies as a “worker”, rather than a “volunteer”, then they will be entitled to receive at least the National Minimum Wage (NMW) for any work they undertake (currently £6.19 p.h. for over 21’s) as well as a raft of other employment rights, including paid holiday and protection from discrimination in the workplace. A worker is defined as someone who either works under a contract of employment (and this can be express or implied, written or oral) where the individual concerned agrees to carry out work personally. Volunteers, on the other hand, typically have no contractual relationship with the organisation, so are free to come and go as they please and have no obligation to perform any work. Volunteers are also specifically excluded from entitlement to receive NMW. As such, volunteers are not entitled to receive wages, paid holiday or protection from discrimination. Therefore, an organisation can use unpaid interns, providing they are genuinely undertaking the work placement on a voluntary basis.

Although the Government has stated its commitment to encourage organisations to pay interns, regardless of whether or not they are legally obliged to do so, what can organisations do if they want to offer short-term unpaid work experience placements to graduates without facing the risk of attracting unwelcome attention from HMRC and, potentially, very costly claims from the intern? There are a few simple steps an organisation can take to minimise the risk of their interns being classified as “workers”:

• Provide a simple agreement to the intern, setting out the arrangement. This should be non-legalistic and refer to “experience” or “shadowing an employee” and “learning objectives”, rather than “duties”;
• Make sure any payments are for expenses only (with receipts required) and cannot be construed as wages;
• Make sure there are no penalties or sanctions for poor attendance or for failure to attend for an agreed period;
• Ensure that the intern is required to abide by the usual equality and confidentiality obligations within the organisation;
• Make sure there is no obligation for the organisation to provide any work or for the intern to carry out any specific tasks.

HMRC has warned that, in future, it will carefully scrutinise complaints from unpaid interns, so organisations need to be careful when offering internships, particularly where these are unpaid.