The idea of offering unpaid internships is attractive for startups trying to maximize their labor force while minimizing spending. However, using unpaid interns can pose significant legal risks. This post will help you understand the risks of intern misclassification, navigate the federal and state legal requirements for unpaid internships, and learn how to structure compliant unpaid internships if they are appropriate for your company. 

Understanding the Law Regarding Unpaid Internships

Both federal and state laws govern who is considered an employee and therefore must be compensated for services performed. For example, the federal Fair Labor Standards Act sets minimum-wage and overtime requirements for employees and requires that individuals who are “suffered or permitted” to work must be compensated for the services they perform. Most interns in the private sector will be considered employees under federal law; only if they receive training for their own educational benefit and meet the following six criteria may they be considered interns or trainees who do not have to be paid at least minimum wage:

  • The internship must be similar to training provided in an educational environment;
  • The internship experience must be for the benefit of the intern;
  • The intern must not displace regular employees and must work under close supervision;
  • The company must derive no immediate advantage from the activities of the intern; in fact, its operations may actually be impeded;
  • The intern must not be entitled to a job at the end of the internship; and
  • The company and the intern must understand that the intern is not entitled to wages for the time spent in the internship.
  • Some states, such as California, apply these same factors in determining whether an individual is an employee or an unpaid intern under state law. Other states, such as New York, require that companies satisfy additional, more stringent factors in order for an individual to be properly classified as an unpaid intern. Make sure to consider both federal law and the laws of any states in which you plan to offer internships when determining whether such internships may be unpaid.

    Tips for Structuring an Unpaid Internship Program

    After considering the factors outlined above, if you determine that it is appropriate for your company to offer unpaid internships, here are some tips for creating an unpaid internship program that is more likely to meet legal requirements:

    • Structure the internship around a classroom or academic experience. It is best if interns receive educational credit for internships and if a college or university exercises oversight over the internship program.
    • Provide interns with skills that can be used in multiple employment settings.
    • Focus on the skills and knowledge to be gained by interns and minimize productive work performed by them; such productive work should be merely incidental to their gaining of those skills and knowledge.
    • Offer structured learning opportunities at least weekly.
    • Do not have interns perform the routine work of your business on a regular and recurring basis.
    • Do not use unpaid interns as substitutes for regular workers or to augment your existing workforce during specific time periods.
    • Provide job shadowing opportunities and close supervision of interns.
    • Make sure internships are for fixed durations.
    • Do not use an internship as a trial period for employment and do not guarantee employment at the end of an internship.
    • Provide a clear written notice that no job offer or guarantee of an offer exists and that the intern is not an employee and will not be paid.
    • Document the terms and conditions of the internship with a good offer letter that is different than an employee offer letter.
    • Make sure that the reality of the internship aligns with the description and documentation of the internship.

    Requirements for Paid Internships

    Because the legal requirements for an unpaid internship are often difficult to meet, you may determine that it would be more beneficial and less risky for your company to hire paid interns rather than offer unpaid internships. Misclassified interns may have claims for unpaid wages, overtime and other benefits, and a number of high-profile cases have generated significant press coverage. Offering paid internships may not only be less risky, but may also attract higher quality candidates and possibly reduce future recruiting costs.

    If there is any doubt that your company’s interns would meet the requirements for compliant unpaid internships, your company’s interns should be classified as employees and paid at least the applicable minimum wage and overtime compensation (both of which are more stringent under California law than under federal law). Providing interns with equity in the company cannot substitute for payment of wages.

    Moving Forward

    Determining whether an internship can properly be designated as unpaid depends upon all of the facts and circumstances of the particular company, intern and internship program. Do not hesitate to consult with legal counsel for assistance in making the determination.