Many companies rely upon unpaid interns as a way to minimize costs and provide opportunities to eager workers who are willing to work for free in hopes of ultimately securing a paid position. However, such an approach is risky, and more than likely, illegal in the state of California.
The U.S. Department of Labor has articulated six criteria to determine whether an “intern” or “trainee” is exempt from the Fair Labor Standard Act’s federal minimum wage coverage. In order to qualify as an unpaid internship, all six factors must be satisfied under state and federal law. The six criteria are as follows:

    1. The training, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school.
    2. The training is for the benefit of the trainees or students.
    3. The trainees or students do not displace regular employees, but work under their close observation.
    4. The employer derives no immediate advantage from the activities of the trainees or students, and, on occasion, the employer’s operations actually may be impeded.
    5. The trainees or students are not necessarily entitled to a job at the conclusion of the training period.
    6. The employer and the trainees or students understand that the latter are not entitled to wages for the time spent in training.

California Division of Labor Standards Enforcement issued an opinion letter on April 7, 2010 that concluded that all six criteria also must be satisfied in California. A contemporaneous New York Times article regarding internships quoted Nancy J. Leppink, the acting director of the federal Labor Department’s Wage and Hour Division, as stating, “There aren’t going to be many circumstances [where for-profit companies can have unpaid internships and] still be in compliance with the law.”
As a result, employers must understand that there are severe negative consequences from using unpaid internships. As with misclassifications of employees as an independent contractors, employers with misclassified unpaid interns face potential liability for unpaid wages and violations relating to failure to pay minimum wage, overtime, and missed meal or rest periods. Combined, the amounts past due could be staggering, especially if a group of unpaid interns combine to bring their claims to the Labor Commissioner or to court.  Moreover, the employer could be liable for various penalties under California’s Labor Code (including waiting-time penalties for failing to pay wages on a timely basis), as well as the IRS and California Franchise Tax Board for unpaid employment-related taxes.