Working for a startup can be a great resume and experience builder. With so much eager and available student labor, can your startup hire an unpaid intern?

For most startup companies, the practical answer is no. Technically, a company can host an unpaid internship, but there are limited circumstances under which it may do so. An unpaid internship must be primarily for the intern’s educational benefit, not the company’s economic benefit. If you’re thinking about hiring an unpaid intern to write business-critical code, be the sole designer of your company’s app, or execute your company’s go-to-market strategy for free, you should think again. If an internship is primarily for a company’s economic benefit, the company must pay the intern under regular federal and state wage and hours laws.

At the federal level, the US Department of Labor uses a seven-factor test for whether an unpaid internship at a for-profit company is primarily for the intern’s educational benefit. No single factor is determinative. The factors are:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation suggests that the intern is an employee, and employee compensation must comply with wage and hour laws.
  2. The extent to which the internship provides training similar to that which would be given in an educational environment, including clinical and other hands-on training provided by educational institutions.
  3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  7. The extent to which the intern and the employer understand that the internship is conducted without the intern being entitled to a paid job at the end of the internship.

Some states have unpaid internship laws that are stricter than federal law. For example, California uses a rigid six-factor test to determine whether a company must pay an intern a minimum wage. One requirement for a California unpaid internship is that “The employer that provides the training receives no immediate advantage from the activities of the [unpaid intern] and, on occasion, the employer’s operations may even be impeded.” Where laws in a jurisdiction overlap, we generally advise companies to comply with the stricter standard. For a California-based early-stage startup, hiring an unpaid intern is likely to be a losing proposition. 

If an internship program is in your company’s plans, work with a lawyer to ensure that it meets applicable federal and state labor law requirements.