Unpaid internships are often considered a rite of passage for those entering the workforce. But any business looking to engage an intern must ensure that it does so in accordance with the law. This three-part article series explains the relevant law (Part 1), outlines how to set up a proper intern arrangement (Part 2) and highlights the importance of getting the arrangement right (Part 3).

In this article, Part 3 in our series on internships, we outline what can happen if you fail to engage an intern correctly. Doing so can have both personal and corporate ramifications, including the imposition of serious penalties.

If you’ve properly assessed a worker to be an unpaid intern based on the criteria set out in Part 1 of this series and engaged the intern utilising a properly prepared internship agreement as recommend in Part 2 of this series, you’re well on your way to having a problem-free internship experience.

But if you’ve jumped head first into launching your “internship” program without knowing the relevant law or taking the time to enter into an internship agreement, you may be in for some trouble ahead.

1. Implications of getting it wrong

If the internship arrangement is not a vocational placement and an employment relationship is found to exist, the business will be required to comply with the Fair Work Act 2009 (Cth) (FW Act) and any applicable industrial instrument. In addition to paying wages to the employee, this will also require the business to:

  • advise the employee of their applicable award classification;
  • pay casual loadings, overtime rates, weekend penalty rates, public holiday rates, etc. as applicable;
  • if the employee is part-time, agree in writing the pattern of hours and days that are to be worked;
  • make compulsory superannuation contributions;
  • provide paid leave, including annual leave and personal/carer’s leave;
  • pay annual leave loading;
  • provide notice of termination;
  • issue payslips; and
  • keep other employee-related records as prescribed by the Fair Work Regulations 2009 (Cth).

As you can see from this list, incorrectly categorising an employee as an intern can snowball into a series of breaches of the FW Act.

2. Corporate liability

The use of unpaid internships to exploit young workers has been of particular concern to the Fair Work Ombudsman (FWO) in recent years. For this reason, it pursues investigations and prosecutions of employers that fail to comply with their minimum obligations in respect of these vulnerable workers.

If a prosecution is successful, the court can order an employer to pay a penalty, pay an employee their outstanding entitlements or compensation, reinstate an employee or require the employer to stop the contravening conduct.

In September 2017, the maximum penalty for a breach of the FW Act by a body corporate increased to $630,000. However, it is important to recognise that the penalty imposed is per breach and so multiple breaches may result in multiple fines, as can be seen in the case examples outlined below.

3. Personal liability

Where a company has breached the FW Act, directors or managers can also be held personally liable for the same contraventions. This will be the case if the individual has been "involved in" the contravention.

Under section 550 of the FW Act, a person is “involved in” a contravention if the person has aided, abetted, counselled or procured the contravention, induced the contravention, been knowingly concerned in the contravention or conspired with others to effect the contravention. In other words, the individual must have been a “knowing participant” in the breach.

Where an individual is found to have contravened the FW Act, they may also be liable for a monetary penalty. The penalty that can be imposed is one-fifth of the maximum penalty that can be imposed against a body corporate for the same contravention. This is up to $120,600 depending on the breach.

4. Whoops! They got it wrong!

We outline below a sample of decisions involving contraventions of the FW Act in respect of wrongfully engaging interns. As you will see, the penalties can be significant.

Fair Work Ombudsman v Her Fashion Box Pty Ltd & Anor

On 28 February 2019, Her Fashion Box (HFB) and its sole director and majority shareholder Kathleen Purkis were ordered to pay penalties of $329,133 for underpaying employees, one of which had been engaged under the guise of being an "intern".

One of the employees, a graphic designer, was engaged on the basis of an "unpaid internship" despite the fact that she had completed her university studies and worked 2 days per week for almost 6 months. This was not a legitimate internship and, as such, the young worker was actually an employee who should have been paid for the work she performed.

Another two employees were also underpaid $15,511 and $18,119. Judge Manousaridis of the Federal Circuit Court found that Ms Purkis knew HFB was not paying the workers their entitlements and imposed penalties to deter others from similar conduct.

Fair Work Ombudsman v Kjoo Pty Ltd & Ors [2017] FCCA 3160

Kjoo operated a fast food sushi take-away store that employed three young Korean nationals pursuant to an “internship arrangement” it had with a Korean education provider. The workers were paid between $12 and $13.50 per hour to perform duties typical of employees working in a sushi store, including food preparation, cooking, receiving orders and serving meals. As outlined in Part 1 of our article series, this would not constitute a “vocational placement” for the purposes of the FW Act as the employees were paid remuneration and did not undertake the internship as a requirement of an education or training course. The employees were underpaid a gross amount of $51,025.84.

The Federal Circuit Court handed down penalties of $161,760 against Kjoo, $32,352 against Kjoo’s manager and part owner, and $4,608 against Kjoo’s external accountant (who was involved in preparing false records).

FWO v AIMG BQ Pty Ltd & Anor [2016] FCCA 1024

AIMG advertised for the position of "Event planner internship". Despite calling the position an internship, the successful candidate, Ms Shen, performed more than 180 hours of productive work for AIMG, such as organising events, editing its magazine, reception duties, telephone and email correspondence regarding event partnership and general office cleaning. These were the same duties that Ms Shen performed when later engaged as a permanent part-time employee, indicating that there had been an employment relationship from the outset. In addition, the internship did not have any affiliation or connection with the tertiary studies being undertaken by Ms Shen and so it did not meet the requirements for a vocational placement under the FW Act.

Ms Shen was not paid for the work she performed during the "internship" resulting in an underpayment of $2,272.01. AIMG also failed to comply with a range of employer obligations under the FW Act.

The maximum penalty that the Court could impose on AIMG was $867,000. This was based on 18 contraventions associated with Ms Shen’s "internship", as well as the later employment of Ms Shen and another employee. Ultimately, the Court imposed a penalty of $272,850.

FWO v Naomi-Jayne Aldred [2016] FCCA 220

Nexus Coaching Group Pty Ltd advertised two unpaid internship positions – a "Graphic Design Intern" and a "Multi Media Intern". Three "interns" were ultimately engaged by Nexus. They were later offered employment or required by Nexus to become independent contractors because the business was "moving to a freelance model".

Nexus went into liquidation and, following the company’s collapse, the FWO pursued its director and chief executive officer, Ms Aldred who had been responsible for the day-to-day management, direction and control of the company’s business.

Ms Aldred was investigated for multiple breaches of the FW Act including:

  • not paying minimum rates or overtime in accordance with the relevant awards;
  • not paying leave payments throughout employment and on termination;
  • misrepresenting employment as independent contractor arrangements;
  • failing to respond to a notice to produce; and
  • altering payslips.

Although Ms Aldred rectified all underpayments and took responsibility for the actions that occurred, the Court found that her practices were "at best misleading and deceptive… and at worst formed part of a calculated and carefully executed fraud upon these three young women". A penalty of $17,500 was imposed on Ms Aldred personally.

Fair Work Ombudsman v Crocmedia Pty Ltd [2015] FCCA 140

Crocmedia was approached by two young people (a current student and a recent graduate) who asked if they could complete a period of work experience. They were engaged by Crocmedia as “interns” for 3 weeks of unpaid work experience.

At the completion of this initial period, Crocmedia retained the two for 6 and 12 months as "volunteers". This arrangement involved reimbursement for expenses of $75 for weekday shifts and between $80 and $120 for weekend shifts.

The "interns" were considered to be employees given their work as producers on Crocmedia’s radio programs, with duties including:

  • sourcing and arranging interviews;
  • preparing audio for programs;
  • cutting of audio for the programs;
  • taking calls during the program;
  • preparing and delivering on air a sport program; and
  • preparing run sheets for the program.

Given their employment status, Crocmedia contravened the FW Act by failing to:

  • pay minimum wages;
  • pay casual loadings;
  • pay in full at least monthly; and
  • provide pay slips.

Despite co-operating with the FWO’s investigation, penalties totalling $24,000 were imposed on Crocmedia.

5. Compliance is key

The articles in this series outline the limited circumstances in which you can properly engage an individual as an unpaid intern. They also highlight the importance of using an intern agreement. As set out in this article in particular, the consequences of getting it wrong can cause significant financial and reputational damage.

McCabe Curwood’s Employment Team can assist you to avoid making the same mistakes as these employers did by:

  • Providing advice on the correct classification of workers;
  • Preparing suitable documentation, to mitigate any risks associated with engaging non-employee workers, including unpaid interns.