Startup Internships: Why They Matter for Your Business

Free interns sounds great right? Well, startups should understand that the rules surrounding unpaid internships are fraught with complexity.

In this article, we will unpack the federal and some state regulations that govern this often nebulous aspect of employment law. Before hiring unpaid interns for startups, you’ll need to understand regulatory requirements; the potential benefits and drawbacks; and the impact on diversity, equity and inclusion in the workplace.

Legal Requirements for Hiring an Unpaid Intern

In the United States, the Fair Labor Standards Act (FLSA) provides guidelines that outline when an intern can work without pay. These guidelines ensure that the internship is primarily educational and beneficial to the intern rather than just a source of free labor for the company.

Federal Criteria for Hiring an Unpaid Intern

In the United States, hiring unpaid interns in the for-profit sector is heavily regulated by the U.S. Department of Labor (DOL) to prevent exploitation of workers. The DOL uses a “primary beneficiary test” to determine whether an intern at a for-profit company qualifies to work without pay.

As of my knowledge cutoff in September 2021, the following seven criteria form the basis of the “primary beneficiary test”:

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

Companies that misclassify employees as unpaid interns may face penalties, including owing back pay, taxes and fines. Therefore, before hiring an unpaid intern, startups should consult with a legal professional to ensure compliance with all regulations.

In addition to federal regulations, startups must comply with any state and local regulations. As an example, see the New York and California regulations below.

New York

New York State Department of Labor has guidelines that align with the DOL’s Fair Labor Standards Act regarding unpaid internships at for-profit organizations and add a few more requirements. In New York, to legally hire an unpaid intern, all of the following 11 conditions must be met:

1. The training, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment.
2. The training is for the benefit of the intern.
3. The intern does not displace regular employees but works under close supervision.
4. The activities of trainees or students do not provide an immediate advantage to the employer. On occasion, operations may actually be impeded.
5. The trainees or students are not necessarily entitled to a job at the conclusion of the training period and are free to take jobs elsewhere in the same field.
6. The trainees or students are notified, in writing, that they will not receive any wages and are not considered employees for minimum wage purposes.
7. Any clinical training is performed under the supervision and direction of people who are knowledgeable and experienced in the activity.
8. The trainees or students do not receive employee benefits.
9. The training is general, qualifying them to work in any similar business. It is not designed specifically for a job with the employer that offers the program.
10. The screening process for the internship program is not the same as for employment and does not appear to be for that purpose. The screening only uses criteria relevant for admission to an independent educational program.
11. Advertisements for the program clearly discuss education or training rather than employment, although employers may indicate that qualified graduates may be considered for employment.

If all the above conditions are not met, then the individual is considered an employee who must be paid at least the state minimum wage and is entitled to all wage protections under the New York State Labor Law.

California

For an internship to be considered legally unpaid under California law, the following six criteria (similar to the federal Fair Labor Standards Act) must all be met:

1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an educational environment.
2. The internship experience is for the benefit of the intern.
3. The intern does not displace regular employees but works under close supervision of existing staff.
4. The employer that provides the training derives no immediate advantage from the activities of the intern. On occasion, its operations may actually be impeded.
5. The intern is not necessarily entitled to a job at the conclusion of the internship.
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

California has more stringent child labor laws than many other states, which might be applicable if the intern is under 18.

The Pros and Cons of Hiring an Unpaid Intern for a Startup

While hiring an unpaid intern may seem like an attractive option for cash-strapped startups, it’s important to weigh the potential benefits and drawbacks before making a decision.

Benefits:

• Cost Savings. Hiring an unpaid intern can save startups money on wages, payroll taxes and benefits.
• Fresh Perspectives. Unpaid interns can bring fresh perspectives, ideas and skills to the table. They are often eager to learn and contribute in any way they can.
• Recruitment Opportunities. An internship program can be a great way for startups to identify potential candidates for employment who are already familiar with their company culture and operations.

Drawbacks:

• Legal Risks. Failure to meet the legal requirements for an unpaid internship could result in legal action against your company.
• Low Morale. Unpaid interns are not fiscally compensated for their work, which could lead to low morale or feelings of exploitation. This may also be in direct conflict with an organization’s commitment to equity and inclusion, and an organization should ensure that there is no misalignment with an organizational commitment before launching a program that is unpaid versus opting for a stipend-based program with a fixed cost, or otherwise paying wages to them as an employee. (See the section on Diversity, Equity and Inclusion below.)
• Limited Availability. Not all students or recent graduates are able to take on unpaid internships due to financial constraints or other obligations. Startups may even find that they miss out on high-quality intern candidates who are able to get paid internships elsewhere.
• Required Capacity Building. Interns often need support and guidance. It is important to acknowledge when internships may need support for a specific project, and how much guidance and management will be needed to set up the intern and the project for success. If time cannot be provided to build capacity in an intern, the organization should consider not moving forward with hiring an intern.

Before deciding whether or not to hire an unpaid intern, startups should carefully evaluate these pros and cons and determine whether or not an internship program aligns with their goals and values as a company.

The Effect of Unpaid Internships on Diversity, Equity and Inclusion in the Workplace

Although unpaid internships can provide valuable experience for students and recent graduates, consider their impact on diversity, equity and inclusion in the workplace. Research has shown that unpaid internships can reinforce inequality by restricting opportunities to those who can afford to work for free.

In many cases, unpaid internships are only practical for people who have financial support from family or other sources. This means that people who come from lower-income backgrounds or marginalized communities may be unable to access these opportunities, perpetuating existing disparities in the workforce.

Furthermore, research has shown that unpaid internships often result in a lack of diversity in hiring practices. Companies may rely on their pool of unpaid interns when filling entry-level positions, resulting in a homogenous workforce that lacks diverse perspectives and experiences.

To address these issues, startups should consider providing paid internships or other opportunities that provide compensation for work. By doing so, they can attract a more diverse pool of candidates and ensure that individuals have an equal opportunity to gain valuable experience in their field.

In addition, companies should prioritize creating internship programs that provide mentorships and professional development opportunities for all interns. This includes offering training on diversity, equity and inclusion topics; connecting interns with employee resource groups; and providing feedback on areas for growth.

By taking these measures, startups can not only establish a more diverse and inclusive workforce but also offer valuable learning experiences for all interns regardless of their background or financial situation. It is also more equitable, overall.

Conclusion

In conclusion, while hiring unpaid interns may seem like an attractive option for startups, it’s important to understand and comply with the legal requirements outlined by federal and state labor laws. Startups must ensure that their internships are primarily educational and beneficial to the intern, and must provide the necessary training and supervision to comply with regulations. The potential benefits of cost savings, fresh perspectives and recruitment opportunities must be weighed against the drawbacks of legal risks, low morale, limited availability and required capacity building.

Moreover, startups should prioritize creating internship programs that provide mentorship and professional development opportunities for all interns, including training on diversity, equity and inclusion topics. By doing so, startups can establish a more diverse and inclusive workforce while also offering valuable learning experiences for all interns, regardless of their background or financial situation.