Does Your Company Have to Pay Payroll Taxes on Unpaid Interns?

Many businesses have had to file bankruptcy for not paying payroll taxes, negative litigation outcomes, and employee problems.  Payroll taxes include Medicare and Social Security.  For example, in 2011 Hung Ry, a noodle shop in NoHo, filed for Chapter 11 bankruptcy.  A former chef pursued “relentless” litigation against the restaurant, according to Crain’s New York.

Some businesses get into debt from not paying payroll taxes when they hire summer interns willing to work for free.  There is no exception under the Fair Labor Standards Act for students or interns.  Businesses get into trouble for payroll taxes when unpaid interns get into conflicts with them over wages.  On February 1, 2012, for example, a former intern at Harper’s Bazaar sought wages for herself and other unpaid interns against the Hearst Company.  In her lawsuit, the named plaintiff claims to have worked as much as 55 hours weekly without pay.  When a company ends up having to pay wages, it means the company will also have to pay payroll taxes.  This could spell a lot of debt when there are interests and penalties added.

To properly classify persons as unpaid interns, and not employees, determine if the person is:

  • Being trained in a classroom or educational setting:  It is easier to consider someone to be a trainee if the person gets training in an educational setting, and even gets a training certificate that could be listed as a job qualification on subsequent job applications.
  • Receiving training for the benefit of trainee:  It is easier to get away with not paying a person when the training or internship program tends to increase a person’s hireability in the job market.
  • Displacing regular employees:  In a training environment, the trainees are not trusted to do actual work for the company; the actual production would be done by regular employees.
  • Providing immediate advantage to the business from the activities:  In a training environment, operations may be impeded.  Productive work done by trainees would have to be insubstantial and secondary to the training.
  • Getting a job at the completion of the training period:  Have a written agreement that trainees have no expectation or guarantee of employment upon completion training.

When a business benefits first from a free intern, the individuals will be considered employees.  The business will have to pay wages, and end up liable for payroll taxes.  Taxes are usually not dischargeable when a business files bankruptcy.  If the individuals are the ones who primarily benefit from the work experience, they will be considered trainees.

For bankruptcy questions affecting a business, contact an experienced New York bankruptcy attorney.