Can my startup have unpaid interns? What the law allows

October 13, 2026

A for-profit company can have an unpaid intern only when the intern, not the company, is the primary beneficiary of the internship, which in practice means a program built around the intern’s education. That rarely fits a startup that needs real work done. The safe course is to pay interns at least minimum wage as part-time, non-exempt employees and have them sign a Confidential Information and Invention Assignment Agreement (CIIAA) like everyone else.

Key takeaways

Federal law uses a “primary beneficiary” test. If the company benefits more than the intern, the intern is an employee and must be paid.
New York and California apply their own rules, which are at least as strict.
A stipend is pay. A paid intern is an employee entitled to minimum wage and overtime for every hour worked.
Equity can’t replace wages for an intern.
Interns must sign a CIIAA, or the company may not own what they create.

Can a startup have unpaid interns?

Legally it’s possible, but it’s hard to do right. The question isn’t what you call the person, or whether they agree to work for free. It’s whether the arrangement is really education for the intern or work for the company. An intern who writes code that ships, handles customers, or does work you’d otherwise hire someone for is an employee under federal and state law, and an agreement to work for free doesn’t change that.

What is the primary beneficiary test?

The Department of Labor and the federal courts look at the “economic reality” of the relationship to decide whether the intern or the company is the primary beneficiary. The factors are:

Both sides understand there’s no expectation of pay.
The training is similar to what the intern would get in school.
The internship is tied to the intern’s education, through coursework or academic credit.
It fits the academic calendar.
It lasts only as long as it’s providing real learning.
The intern’s work complements the work of paid employees rather than replacing it.
Both sides understand there’s no promise of a paid job at the end.

No single factor decides the question, and not every one has to be met. But a startup with a handful of people and a lot to build will struggle to show that an intern’s work isn’t displacing paid work. Programs run for academic credit with a university, which often requires its own written agreement, are the most defensible unpaid internships.

What do New York and California add?

New York’s Department of Labor applies its own, stricter list of criteria to unpaid internships at for-profit companies. Among other things, the training has to be general rather than designed for a job at your company, the company can’t get an immediate advantage from the intern’s work, and the intern must be told in writing that they won’t be paid. If the internship doesn’t meet every condition, the intern is an employee entitled to the state minimum wage, which in 2026 is $17.00 an hour in New York City, Long Island and Westchester and $16.00 an hour elsewhere in the state.

California’s Labor Commissioner has historically applied a strict, education-focused test of its own, and state law hasn’t clearly followed the federal change to the primary beneficiary test. Treat California as at least as strict as the federal rules. California’s 2026 minimum wage is $16.90 an hour, and many cities set higher rates. Interns under 18 also need to follow state child labor rules, including work permits in states that require them.

Does a stipend or equity count as pay?

A stipend is pay. Once you pay an intern, you’re treating them as an employee, and they’re entitled to at least the minimum wage for every hour worked, plus overtime, because a paid intern is almost always non-exempt. A flat stipend that works out to less than minimum wage for the hours worked is a wage violation. Track hours.

Equity can’t replace wages. You can grant an intern equity on top of a minimum wage paycheck, but stock or options don’t satisfy the minimum wage. See Can Startup Workers Be Paid Only in Equity?

What should an intern sign?

The same core documents as any employee: an offer letter that sets the hourly rate, the expected hours, the end date and at-will employment, and a CIIAA. Without the CIIAA, the company may not own the code, designs or content the intern creates. If the intern works through a university program, sign the school’s agreement as well, and make sure it doesn’t conflict with your IP assignment. See The CIIA Agreement and Employee Onboarding for Startups.

What does a paid internship cost?

Less than founders expect, and much less than a claim. A summer intern working 30 hours a week for 12 weeks at $18 an hour costs about $6,500 in wages, plus payroll taxes and workers’ comp. If an unpaid intern is later found to be an employee, the company can owe back wages, an equal amount in damages, and the intern’s legal fees. Paying interns also widens the pool of people who can afford to take the job, which helps you hire better and more diverse candidates.

For more, see Independent Contractor vs Employee, Exempt vs Nonexempt Employee and What Should Founders Know About Startup Employment Law? If you’d like help setting up an internship program or intern paperwork, see our Employment Agreement service or contact us.