For most early-stage startups, the team will always need one more person to help. Hiring interns, therefore, becomes an ideal choice. Interns can bring new ideas to the team and use their professional skills to the work.

But what start-up companies should be careful about is hiring the “unpaid intern.” It might be appealing for early start-ups to hire an unpaid intern. However, it is not always legal to do so. Startups should be careful about the work they provide to the interns and their relationship before hiring an unpaid intern. Recently, the Department of Labor Wage and Hour Division introduced a new interpretation for for-profit employers under the Fair Labor Standards Act (FLSA).

Under what circumstances should you pay?

FLSA only requires “for-profit” employers to pay employees for their work. There are two kinds of situations the start-up company can hire unpaid interns.

  1. When a start-up company qualifies as a non-profit organization.

State and local governments and non-profit organizations can hire unpaid volunteers. If your start-up company is a non-profit organization, and the intern is hired for the work for a religious, charitable, civic or humanitarian purpose, it satisfies the requirement. What is a non-profit organization? Briefly speaking, the company should have a mission with certain social impact. Any profit the company makes can’t be returned to investors in the form of profits or dividends. The profit should be contributed to the growth of the company and its mission.

  1. When the intern is not an employee.

The FLSA requires an employee to be paid by the start-up company. For an intern to not be an “employee”, the intern has to be the “primary beneficiary” in the hiring relationship. In other words, the intern has to learn and benefit from the work the start-up gives to him.

The benefit the intern gets from the work has to exceed the benefit the start-up company gain. For example, if a student works for a marketing department and has an opportunity to understand the industry as a whole, that can demonstrate that the intern primarily benefits from the program. Also, the startup could provide training and educational programming to the interns to help them learn from the program. If the internship program can be tied to a formal education program, that will qualify the intern as “primary beneficiary.”

There are a few additional requirements for the startup to ensure an intern is not considered an employee. Startup companies cannot use unpaid interns as free labor. The startup should also not use an unpaid intern to fill the position of a paid employee. The startup should be clear at the time of hiring that the intern will not be paid, and there will be no expectation of compensation. Also, the company should inform the intern there will be no guarantee of an offer to return as a paid employee once the internship concludes.


If you have to pay, how much?

If the hiring relationship doesn’t qualify the individual as an unpaid intern, the startup should pay at least a minimum wage as well as overtime pay according to FLSA. The company could also hire the individual as a contractor, and pay a lump sum for the work as a whole.


What the new interpretation changes

Under the previous interpretation, a court would employ a “primary beneficiary test” with seven factors to consider and balance. This caused confusion for both companies and owners.

The new interpretation is good news for startup owners. It gives more flexibility as compared to the 7-factor “primary beneficiary” test. The internship program provided by the company will be determined by a case-by-case standard. Therefore, if a startup can explain why the intern can benefit from the program, and there is no serious violation of one of seven criteria, it may be possible to hire an unpaid intern.