The misclassification of employees as independent contractors is a common and serious issue affecting employers and workers in the technology sector. We recently touched on the legal challenges facing “on demand” technology companies such as Uber and Lyft due to their classification of drivers as independent contractors.

But employee vs. independent contractor is not the only classification issue that technology companies and investors must grapple with. As reported by the Wall Street Journal, a Silicon Valley venture capital firm, Fenox Venture Capital, recently agreed to pay $331,269 in back wages after the U.S. Department of Labor (“DOL”) found the company misclassified 56 workers as unpaid interns.

The interns, who displaced regular employees, were used to screen startups for potential investments, compile reports and recruit employees. An assistant director at the DOL, Michael Eastwood, said it was the first case he was aware of in which a venture capital firm engaged in this practice.

Most interns working at for-profit organizations must be paid at least the minimum wage, plus applicable overtime. The DOL, pursuant to the Fair Labor Standards Act, uses a six-part test to determine whether or not a worker can be classified as an unpaid intern. The following six criteria must be met:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment.
  2. The experience is for the benefit of the intern.
  3. The intern does not displace regular employees but works under close supervision of existing staff.
  4. The employer providing the training derives no immediate advantage from the activities of the intern and on occasion its operations may actually be impeded.
  5. There is no guarantee of a job at the conclusion of the internship.
  6. Both parties understand that the intern is not entitled to wages for the internship.

These criteria can be found in a 2010 fact sheet published by the DOL’s Wage and Hour division.

In litigation over the issue of unpaid internships, judges have weighed the importance of the six criteria differently. In a case in the U.S. District Court for the Southern District of New York, Judge William Pauley ruled that a class action case brought by unpaid interns could proceed against Fox Searchlight. Judge Pauley’s opinion was primarily focused on the six criteria. In another unpaid internship case in the Southern District involving The Hearst Corporation, Judge Harold Baer, in ruling against plaintiff’s right to file a class action, didn’t necessarily discount the six criteria, but said that the “totality of circumstances” must be considered in such cases.

The point is that the law is not clear in this area--each case is fact specific. Given that the government and plaintiffs’ lawyers are keeping a close eye on employee classification issues, technology sector employers would be wise to think twice about unpaid internships. It’s important to consult with legal counsel to make sure that unpaid internship programs don't lead to unnecessary risk.