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Nonprofit Interns: IRS Regulations and Liability

Question:

It seems unclear for nonprofits who can have volunteer workers what the proper use of interns should be per IRS regulations. Specifically, we’re concerned with liability. What are the differences in terms of liability between volunteers and interns? Is one set preferable over the other?

Answer:

The principal potential liability for the use of volunteers and interns is substantially the same – i.e., the risk that the individual will be deemed as “employee” for wage payment and tax purposes.

Unpaid interns and unpaid volunteers, if properly classified, are not employees for purposes of many federal laws. This means that a nonprofit receiving the benefit from the services of an “intern” or “volunteer” is not generally required to pay the individual wages or provide employee benefits and is not required to pay employment taxes to the IRS or provide other employment related insurance and tax contributions. However, whether an individual is properly classified as an “intern” or “volunteer” requires a review of the relationship between the individual and the nonprofit looking to both federal and state law/standards.

With respect to volunteers, the U.S. Department of Labor’s (“DOL’s”) position is that religious, charitable or other similar nonprofit organizations may properly utilize volunteers where the individual donates their services for public service, religious or humanitarian objectives, usually on a part-time basis and without the expectation of pay. Interns, on the other hand, are considered to be “trainees.” The DOL has issued guidance stating that in order for interns in for-profit enterprises to be properly classified as non-employees, the intern experience must be for the benefit of the intern and the organization must not derive an immediate advantage from the intern’s services, the intern must receive training similar to training that would be provided in an educational environment, the intern must not displace regular workers, the intern must not be entitled to a job at the conclusion of the internship, and there must be an understanding from the beginning that the intern is not entitled to wages. While the DOL suggests in a footnote that “non-profit charitable organizations” will not be subject to the same standards, there is no blanket exclusion for all nonprofit entities.

Thus, while both volunteers and interns are not entitled to wages, the relationships are dissimilar. Whether one is preferable over the other will depend on what activities the nonprofit is seeking to have the individual perform.

A nonprofit utilizing “interns” or “volunteers” should ensure these individuals are properly classified. By aligning your volunteer or internship programs with the DOL’s guidance, a nonprofit can reduce the risk of misclassification. In the event of misclassification, a nonprofit faces potential liability for overtime and back wages, liquidated damages, and attorneys’ fees. In addition, a nonprofit can be liable for back employment taxes such as social security, Medicare, and unemployment tax. Moreover, the individual may be entitled to retroactive employee benefits.

Assuming individuals are properly classified as “volunteers” or “interns” a nonprofit still faces potential liability similar to that faced with regular employees such as claims of harassment, discrimination, and workplace injuries. Proper training, internal policies, and insurance coverage can help to limit potential exposure.

For more information on proper use of volunteers and interns by nonprofits, see the following Venable articles and PowerPoint presentations:

Focus on Misclassification: Are Your Association’s Workers “Employees,” “Volunteers,” or “Contractors?

Turns Out, There’s No Such Thing As “Free Labor” Either: Why Most Employers Should be Paying Interns or Modifying/Abandoning Their Unpaid Internship Programs

Volunteering for Trouble or Trouble with Volunteers?: A Guide to the Liability Risks for Nonprofits and their Volunteers

The preceding question was submitted through GuideStar's social networks, and the answer was provided by Jeffrey S. Tenenbaum and Marina Burton Blickley of Veneble LLP, an AmLaw 100 firm that practices in all areas of corporate and business law from offices in Maryland, California, New York, Washington DC, and Virginia. You can also read an article by Mr. Tenenbaum and Kristalyn Loson about state registration requirements for fundraising on GuideStar.

Jeffrey Tenenbaum chairs Venable's Nonprofit Organizations Practice Group. He is one of the nation's leading nonprofit attorneys, and also is an accomplished author, lecturer, and commentator on nonprofit legal matters.

Marina Blickley is a litigation associate in the firm's Labor and Employment group. Ms. Blickley's practice is focused on management-side employment and labor law counseling and representation.

Topics: Legal