Intern or Employee? Take Care with Intern Placements

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By Malcolm Davis, Partner and Paul Ludeke, Special Counsel

A recent successful prosecution by the Fair Work Ombudsman serves as a stark reminder that the short term benefits of unpaid “interns” can have costly consequences if the “internship” continues and can be regarded more correctly as employment.

The Federal Circuit Court of Australia in the matter of Fair Work Ombudsman v Crocmedia Pty Ltd has ordered the company to pay penalties of $24,000, even after the company agreed to pay the two employees their minimum entitlements, amounting to approximately $22,168.08 in total.

The employees commenced as interns after they had contacted the company seeking work experience in the media industry, one employee was a university student, the other a recent graduate. The parties agreed that the first three weeks of the employment could be characterized as vocational placements (an exception under the Fair Work Act 2009) however, after that period expired, Crocmedia accepted as part of the Ombudsman’s investigation that the relationship moved beyond a true vocational placement and to one of employment. In particular, it was noted that in cases of genuine work experience or vocational placements the benefit should flow to the person doing the placement. If the business is gaining a significant benefit that itself may be an indication that there is a employment relationship.  One of the interns was engaged for a further six months after the initial three week vocational placement, and the other intern for twelve months.

This is the first prosecution since a report by Adelaide University Law School Professors was released (commissioned by the Fair Work Ombudsman) that expressed concerns regarding the common occurrence of employment of university students as interns. The report highlights that investigating sham work experience or vocational placement arrangements is not just to protect a vulnerable student but “is to assert a principle – a fair day’s pay for a fair day’s work – that underpins our system of minimum labour standards.

The FWO commenced legal proceedings despite the fact that the company fully co-operated with the FWO’s investigation and paid the employees their entitlements immediately. The FWO stated that they pursued the prosecution due to the “strong public interest in deterring employers from significantly underpaying young workers’ entitlements through unpaid work arrangements.”

The employees were owed $13,970 and $3,750 respectively and despite the company having made payments characterized as expense reimbursements (between $75 to $120 per shift), the company was required to pay each employee their full entitlements as payments characterized as “expenses” cannot be offset against wages due and owing.

Determination of penalties
The company was fined for four separate categories of penalties:

  1. Failure to pay minimum wages;
  2. Failure to pay casual loadings;
  3. Failure to pay in full, at least monthly; and
  4. Failure to provide pay slips.

The company received a 30% reduction in the penalties imposed as:

  • The Judge was not persuaded that the company had been openly defiant of the law, but rather engaged in an arrangement it believed avoided the consequences of the minimum wages requirements;
  • The practical loss was around 20% due to the expense reimbursement payments, and in fact the employees ended up receiving more than their minimum entitlements;
  • The company made full rectification of the error in a timely fashion;
  • The company full cooperated with the investigation, admitted it had engaged in the conduct and did not attempt to claim that the minimum entitlements should be offset against the expense reimbursements;
  • The company demonstrated genuine remorse;
  • The legal proceedings appeared to act as sufficient deterrence for the company not to engage in similar conduct again

However, the Judge also noted that the following matters that could influence the magnitude of the penalty:

  • If there had been evidence on similar conduct on previous occasions;
  • The size of the business – a larger business is expected to place considerable focus upon ensuring compliance with workplace laws;
  • Whilst the Judge was not convinced that the company had engaged in a deliberate strategy to exploit the employees, it was clear that it was content to receive the benefits that flowed from the arrangement, and that the arrangement itself, when viewed objectively, was exploitive. The Judge found that the company cannot “avoid the proposition that it is, at best, dishonourable to profit from the work of volunteers and, at worst, exploitative
  • If there had been involvement of directors of the company.

The Judge noted that:
“There is little doubt that this case, and cases like it, will attract considerable media attention, which will have a positive effect in informing and educating employers generally. For this reason there can also be little doubt that the penalties are likely to increase significantly over time as public exposure of the issues in the press will result in the respondents not being in the position of being able to claim that a genuine error of categorization was made” [emphasis added].

Next Steps
Businesses should review any vocational placement or work experience arrangements they currently have in place to ensure that they are not unwittingly exploiting students and young workers. Should you wish to enter into such arrangements in the future carefully consider who will be benefiting from the placement or experience, and what its length will be. Even if your business does not actively seek to recruit unpaid interns, but merely responds to such requests, this does not excuse the business from the consequences of engaging in such arrangements.

As time goes on it will become more difficult to claim ignorance or genuine error as a defence to any prosecution by the Fair Work Ombudsman.

For further information, please do not hesitate to contact us.

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