When Free Isn’t Free – The Dangers of Volunteer Labor

The Idea

Startups and rapidly growing small businesses are often tempted to use volunteer labor or unpaid internships with young people seeking experience to help their business reach the next level. It seems beneficial to both – the company gets some enthusiastic though inexperienced help. The volunteer/intern gets some badly needed hands on business experience. Seems like a win-win right? Sadly it’s not!

The Reality

A recent story in the San Jose Mercury News highlights the dangers of for-profit businesses using volunteers or unpaid interns. As reported, a winery in Castro Valley was fined $115,000 (ten years of profits) by the California Department of Industrial Relations for using volunteer workers.

State Labor Rules

The use of volunteer workers at for-profit businesses is specifically prohibited under both state and federal law. In California, the rules are defined under the California Labor Code and further refined by opinion letters from the Division of Labor Standards Enforcement (DLSE), which enforces California wage and hour laws. The DLSE only allows individuals to volunteer for civic, humanitarian or charitable purposes and must offer those services to a public agency or non-profit organization.

Fair Labor Standards Act

Similarly at the federal level, the Fair Labor Standards Act (FLSA) issued by the US Department of Labor restricts volunteer work to public sector employers and non-profit employers, but not for-profit employers. The FLSA further requires that the volunteer work be for civic, charitable or humanitarian purposes; be provided freely and without coercion from an employer; and not be employed by the same public agency or non-profit business to perform the same type of services as those for which the individual proposes to volunteer.

Internships

Workers may also provide free labor as interns, but internships must qualify under a set of fairly restrictive criteria. Some of the criteria echo the rules used for non-profit businesses. As of April 2010, the DLSE applies six criteria based on federal law when determining the legality of unpaid internships:

  • the training must resemble those of vocational schools (although no direct affiliation with a school is required),
  • the training is primarily for the benefit of the intern,
  • the intern does not displace a regular employee,
  • the intern’s services provide no immediate advantage to the employer,
  • the intern is not entitled to a job at the end of the internship,
  • both employer and intern understand that no compensation is expected for internship

The Learning

Businesses must be aware of the rules for using “free” labor, otherwise it can potentially cost them much more than they expected financially plus some less than appealing publicity if their plight is reported in the news.

 


 

Jerry Johnson ver 2Jerry is an expert in Cleantech financial matters and has over 25 years of executive and CFO leadership experience guiding companies through financial and regulatory challenges.  He leads the Cleantech practice group at CFOs2GO and is a member of Financial Modeling and Analysis; Small Business; Startups, Rapid Growth Companies and pre-IPO; Financial Systems & Reporting practice teams.  Jerry has a BA in Physics and Economics from Washington University in St. Louis and a MBA from the University of Rochester.  He is a Certified Management Accountant.

Jerry enjoys spending time with his wife going for long runs, traveling and tasting wines. When his son is home from college, they like to play sports (skiing, golf and tennis) and discuss what is going on in the business world.

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