Thousands of unpaid interns could be entitled to compensation after government legal advice emerged suggesting employers are breaking the law by not following national minimum wage rules.

The warning from Whitehall lawyers, seen by the Guardian, comes as growing numbers of companies turn to interns to carry out work that lasts far longer than traditional work experience placements, yet refuse to pay them.

It could also embarrass the government, which has been promoting the wider use of internships as part of its drive to improve social mobility. A separate Guardian analysis of a graduate internships job board run by the Department for Business Innovation and Skills reveals that more than half its adverts are for unpaid or expenses-only internships – placements that could breach employment laws.

In the first of two briefing documents dated 15 July and 15 September 2010, advisers say that the "the concept [of internships] has become endemic". The documents were addressed to higher education minister David Willetts and Lib Dem junior minister Ed Davey, who is in charge of employment relations at BIS.

Of the arts internships advertised on the BIS-sponsored website, 92% were unpaid. Seventy-seven per cent of advertised fashion internships were unpaid, and 76% of PR internships were unpaid. Half of the media internships were unpaid.

Civil servants advise that internships that do not breach minimum wage laws are likely to exist only in short-term placements, normally classified as work experience. "Legal colleagues take the view that most interns are likely to be workers and therefore entitled to the NMW and other worker rights," the document states.

Under NMW laws introduced in 1999, anyone who "works" is entitled to the current hourly rate. That currently stands at £6.08 for those aged 21 and over. However, those who volunteer for charity or a government body can be exempted.

The government's estimate based on Chartered Institute of Personnel figures is that there are between 50,000 and 70,000 internships a year. Between 10,000 and 15,000 of these are unpaid.

However, in the largest online UK internship survey to date, carried out by Interns Anonymous, out of 594 respondents 87% said they were paid below the NMW. This would suggest that there are many more thousands of unpaid interns in the UK than currently estimated.

The TUC fears that internships are replacing paid work for young people and pushing down pay for those in work.

Her Majesty's Revenue & Customs – the government body responsible for enforcing NMW laws has only prosecuted seven companies for breaching the law since its introduction.

However, two recent intern victories in employment tribunals suggest that those seeking back pay for work done as interns have a strong case for claiming hundreds of pounds.

A second Whitehall document, which presents policy options for ministers, showed options that would have increased social mobility were not recommended for fear of damaging the government's policy of increasing the number of internships – paid or not – available to young people.

Instead, ministers appear to have taken a "do nothing" approach.

The heavily redacted documents obtained under a freedom of information request by Interns Anonymous show that the government was aware of how many places advertised on its Graduate Talent Pool website were unpaid and in possible breach of NMW law. But the Guardian's test sample of 624 adverts for 1,709 vacancies in mid October shows the problem has got worse. The department for business spends £250,000 a year on the site.

The Department for Work and Pensions has confirmed that government-run job-centres are recommending that unemployed youth take up long-term "work experience", including positions at supermarkets, to help them gain further skills.

Her Majesty's Revenue and Customs – the government body responsible for enforcing NMW laws has only prosecuted seven firms for breaching the law since its introduction.

However two recent intern victories in employment tribunals suggest that those seeking back-pay for work done as an interns have a strong case for claiming hundreds of pounds in back pay.

Civil servants also recommended that policies to ban unpaid internships, which greatly increase access to work experience to those from poorer backgrounds, would have an adverse affect on the government's big society agenda.

The internally preferred option "B2" – which meant no changes to the law and a focus on increasing both paid and unpaid internships numbers – is at dramatic variance with statements by the deputy prime minister Nick Clegg, who said last spring that he wanted an end to unpaid internships as they reduced social mobility.

Joseph Thomas, policy officer for Interns Anonymous, said: "These documents show cowardice and a lack of determination to do anything. I think it is indicative of a deeper problem in society in that as long as my kids, people like us, are all right, we don't need to do anything about it.

"We speak to interns who say they love the [current] system as it gives them an advantage over equally qualified people. To take proper actions that create a meritocracy, no one is willing to push for that."

A BIS Spokesperson said: "In direct response to previous concerns about the exploitation of interns, the Department for Business has recently updated the Graduate Talent Pool service to include a quality assurance process for all new vacancies. Each vacancy is checked to ensure they offer a genuine internship opportunity and any concerns around unpaid internships and the National Minimum Wage are discussed with the employer. "

Additional reporting by Lisa Evans