Think You Can Hire Unpaid Interns This Summer? Think Again.

Every summer, the same question pops up in founder Slack channels: "Can I just bring on some unpaid interns to help out?" The answer is almost always no — and getting it wrong can cost you far more than just paying someone minimum wage.

Unpaid internships at for-profit companies are one of the most misunderstood areas of employment law. Founders assume that because interns are "getting experience," they don't need to be paid. The Department of Labor disagrees. So do the courts. And so do the plaintiffs' attorneys who specialize in wage-and-hour class actions.

Here's the full breakdown.

The "Primary Beneficiary" Test: 7 Factors That Decide Everything

Since the landmark Second Circuit decision in Glatt v. Fox Searchlight Pictures (2016), courts and the DOL have used a seven-factor "primary beneficiary" test to determine whether an unpaid intern is actually an employee who's owed wages. The DOL adopted this framework in its Fact Sheet #71, which remains the current guidance.

The test asks whether the intern or the employer is the primary beneficiary of the relationship. Here are the seven factors:

1. Both parties clearly understand there's no expectation of compensation. Any implied promise of pay — even hints about future employment — cuts against you.
2. The internship provides training similar to an educational environment. Think structured curriculum, not "go update this spreadsheet."
3. The internship is tied to a formal education program — integrated coursework or academic credit.
4. The internship accommodates the intern's academic calendar. It works around school, not the other way around.
5. The internship's duration is limited to the period of beneficial learning. Once the learning stops and the work continues, you have an employee.
6. The intern's work complements — not displaces — paid employees, while providing significant educational benefits.
7. Both parties understand there's no entitlement to a paid job at the end.

No single factor is dispositive — courts weigh them as a whole. But here's the practical reality: if your intern is doing productive work that benefits your company, you're probably on the wrong side of this test.

What this means for you: Read those seven factors and honestly assess your internship. If the intern is doing work that a paid employee would otherwise do — answering emails, writing code, managing social media, doing design work — that's not an internship. That's uncompensated labor.

The Big Misconception: "Startups Can Use Unpaid Interns"

This is the myth that gets founders in trouble. The logic goes: "We're a scrappy startup, we can't afford to pay people, and interns are getting valuable experience at an early-stage company."

The law does not care how scrappy you are. The FLSA applies to for-profit companies regardless of size, stage, or funding status. In fact, startups are arguably worse candidates for unpaid internships than large companies, because:

• Startups rarely have structured training programs. You're building the plane while flying it — there's no "educational environment" to offer.
• Every person's work matters. In a 3-person startup, the intern's work by definition isn't merely complementary — it's core to operations.
• The intern is almost certainly displacing paid work. If you need someone to do the work, and you'd otherwise have to pay someone, the intern is an employee.

The exception to all of this? Nonprofits and public sector organizations can generally use unpaid volunteers and interns much more freely. But if you're a Delaware C-Corp with a cap table and investor updates, you're a for-profit company. Full stop.

What this means for you: Being a startup doesn't give you a special exemption. If anything, the nature of startup work makes it harder to justify unpaid internships, not easier.

State Laws Make It Even Harder

The federal test is just the floor. Several states impose stricter requirements that can trip you up even if you think you've satisfied the DOL's factors.

California

California is the strictest state for unpaid internships. The DLSE's enforcement position essentially requires that the internship be conducted through and supervised by an accredited school or vocational program. California also applies its own multi-factor test that's more employer-hostile than the federal version. Key additions:

• The employer can derive no immediate advantage from the intern's work
• The intern must receive training that would be given in a vocational school
• The internship must be for the benefit of the intern, period

If you're a startup based in California (or hiring California-based remote interns), unpaid internships are effectively off the table unless formally run through a university program.

New York

New York applies the DOL's primary beneficiary test but enforces it aggressively through the NY Department of Labor. New York also extends anti-discrimination and anti-harassment protections to unpaid interns — meaning even if your unpaid internship is otherwise legal, you still have compliance obligations typically associated with employees.

Colorado

Colorado follows the federal primary beneficiary test but adds teeth through its own wage laws. The Colorado Overtime and Minimum Pay Standards Order (COMPS) applies to interns who qualify as employees — and Colorado's minimum wage is $14.81/hour as of 2026, well above the federal floor. Colorado also requires overtime for hours worked over 12 in a single day (not just 40/week), which catches a lot of employers off guard. If your intern pulls a long day at a hackathon or product launch, you could owe overtime you didn't plan for. Colorado also has youth labor laws with strict hour limits for interns under 18, enforced by the CDLE.

Utah

Utah is more employer-friendly than most states on this issue. The state generally defers to the federal DOL primary beneficiary test and doesn't impose significant additional requirements beyond federal law. Utah's minimum wage matches the federal rate of $7.25/hour — the lowest floor in the country. However, that doesn't mean unpaid internships are automatically safe in Utah. The federal test still applies, and if your intern is doing productive work, the FLSA still requires payment. Utah's Labor Commission handles enforcement, and while the state is less aggressive than California or New York, a federal DOL investigation doesn't care what state you're in.

Other States to Watch

• Oregon and Washington have strong intern protection laws
• Illinois requires that unpaid internships not displace regular employees and must primarily benefit the intern
• Massachusetts has some of the broadest wage-and-hour protections in the country

What this means for you: If you have interns in California, New York, or other strict states, the analysis isn't just "do we pass the federal test?" — you need to satisfy state requirements too. And with remote work, your intern's location matters, not yours.

The Real Risks: It's Not Just Back Pay

Founders tend to think the worst case is "we'd have to pay them anyway." It's much worse than that.

If an unpaid intern is reclassified as an employee, you could owe:

• Back wages at minimum wage (or state minimum, whichever is higher) for every hour worked
• Overtime pay if they worked over 40 hours/week (common with eager interns at startups)
• Liquidated damages — the FLSA allows double the back wages as a penalty
• State penalties — California, for example, adds waiting time penalties, pay stub violations, and more
• Plaintiffs' attorney fees — the intern's lawyer gets paid by you if they win

And here's the real nightmare scenario: class actions. If you had multiple unpaid interns across multiple summers, a single complaint can become a class or collective action covering all of them. The Glatt v. Fox Searchlight case itself started as a class action brought by just two interns.

Berger Montague and other plaintiffs' firms actively investigate and recruit unpaid interns for wage-and-hour class actions. This is not theoretical.

What this means for you: The cost of paying an intern minimum wage is trivial compared to the cost of defending a wage claim. A summer intern at $15/hour for 20 hours/week for 12 weeks costs you $3,600. A wage-and-hour lawsuit? Easily $50,000+ in legal fees alone, before any judgment.

When Unpaid Internships Are Legal

There are narrow situations where unpaid internships work:

1. Formal Academic Credit Programs

If the internship is part of a university program, supervised by a faculty advisor, with integrated coursework and graded academic credit, you're on much stronger ground. The key: the school must be genuinely involved — not just rubber-stamping credit after the fact.

2. Nonprofit Organizations

The FLSA explicitly permits volunteers at nonprofit and public sector organizations. If you're a 501(c)(3), the rules are fundamentally different. But if you're a for-profit startup with a nonprofit-sounding mission, that doesn't count.

3. Observation/Shadowing Programs

Very short-term programs where someone observes but doesn't perform productive work can potentially qualify. Think "spend a week watching how a startup operates" — not "build our landing page."

What this means for you: If you want to go the unpaid route, the safest path is a formal partnership with a university where the intern receives academic credit, the school provides oversight, and the experience is structured around learning objectives — not your product roadmap.

Better Alternatives (That Won't Get You Sued)

If you can't afford a full-time salaried employee, you have options that are legal, affordable, and often better for both parties.

Paid Part-Time Internships

This is the answer for most startups. Pay minimum wage (or slightly above), limit hours to 15-20 per week, and cap the duration at 8-12 weeks. The math:

Scenario	Cost
Federal minimum ($7.25/hr), 20 hrs/wk, 10 weeks	~$1,450
$15/hr, 20 hrs/wk, 12 weeks	~$3,600
$20/hr, 15 hrs/wk, 10 weeks	~$3,000

For a startup that just closed a pre-seed round, this is a rounding error on your burn rate. And you'll get a more motivated intern who isn't silently resenting the arrangement.

Stipends

A fixed stipend can work, but it doesn't exempt you from wage-and-hour laws. If the stipend works out to less than minimum wage for the hours worked, you're still in violation. Treat stipends as a budgeting tool, not a legal workaround.

Equity

Some founders think: "What if we give them equity instead of cash?" This is a minefield within a minefield. Equity:

• Does not satisfy minimum wage requirements under the FLSA
• Creates securities law complications (are you issuing unregistered securities to a 20-year-old?)
• Can create tax problems for the intern (83(b) elections, anyone?)
• Is often worth nothing at the stage when startups use interns

Equity can be a supplement to fair pay, but never a substitute for it.

Project-Based Contractors

For specific, well-defined projects, you could engage someone as an independent contractor instead of an intern. But this has its own classification risks — you need a legitimate contractor relationship with real independence, their own tools, and a defined deliverable. Don't just relabel "intern" as "contractor" and think you've solved the problem.

What this means for you: Just pay them. Seriously. A paid part-time internship at minimum wage is cheap, legal, and attracts better candidates. The "savings" from not paying interns aren't savings — they're deferred legal liability.

How to Structure a Legitimate Paid Internship

If you're ready to do this right, here's the checklist:

Compensation:

• Pay at least your state's minimum wage (not federal — check yours here)
• Track hours and pay overtime if they exceed 40/week
• Use your normal payroll system — yes, they're on payroll

Structure:

• Set a clear start and end date (8-12 weeks is standard)
• Define specific learning objectives alongside work tasks
• Assign a mentor or supervisor
• Include some exposure to different parts of the business, not just repetitive task work

Legal:

• Have them sign an offer letter specifying pay, hours, duration, and at-will status
• Complete I-9 verification and W-4 (they're employees, treat them like it)
• Add them to your workers' comp policy
• Apply your harassment and discrimination policies to interns

Documentation:

• Keep time records
• Document the educational components
• If tied to a school program, maintain records of the academic relationship

What this means for you: A legitimate paid internship isn't complicated. It's just an employee with a short tenure and (ideally) a learning-oriented experience. Treat it that way and you'll stay out of trouble.

The Bottom Line

Unpaid internships at for-profit startups are legally risky, ethically questionable, and — honestly — not even a good deal for founders. You get someone who may be less committed, you take on real legal exposure, and you save a few thousand dollars that probably wouldn't move your runway either way.

Pay your interns. Structure the role properly. Document everything. It's not expensive, it's not complicated, and it keeps you on the right side of an area of law where plaintiffs' attorneys are actively looking for cases.

If you're setting up an internship program and want to make sure you're doing it right — or if you've already had unpaid interns and want to understand your exposure — we can help you sort it out.

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This post is for informational purposes only and does not constitute legal advice. For advice specific to your situation, reach out to Flux.