Ten Things About American Labor Law（4） Unpaid Interns – Can Your Company Legally Hire Them?

Startups often hire unpaid interns to cut costs, only to realize it’s not as simple as it seems. From interns demanding back pay to competitors reporting violations to the Department of Labor, the risks are real. So, can any company legally hire unpaid interns? What conditions must be met? And if unpaid internships aren’t allowed, what’s the minimum wage you must pay?
Today, we’ll unpack the legal landscape of unpaid internships.

10 Things About U.S. Labor Law: Stories Between Employers and Employees

1. Conditions for Hiring Unpaid Interns

Many confuse unpaid interns with volunteers , but only non-profit organizations can legally use volunteers. Let’s say it three times: Only non-profits can hire volunteers. Only non-profits can hire volunteers. Only non-profits can hire volunteers.

This means for-profit companies must pay anyone who performs work—no exceptions.

“But my product is free!” you argue. “We’re building software to help people, not make money!”
Well, Facebook started as a free college directory. Google offers free search and email. Do they not profit? Many businesses monetize indirectly—free services often fuel billion-dollar revenue streams.
“Fine, I’ll just start a non-profit!”
Establishing a non-profit organization is far harder than you think. (Check Episodes 9 and 10 of my Startup Legal Guide for details.)

Aren't there any loopholes For a for-profit Company to exploit? U.S. law does allow for-profit companies to hire unpaid interns (Unpaid Interns), but they must meet seven strict criteria under the Fair Labor Standards Act (FLSA).

Many misunderstand the rules, thinking internships are legal if they’re “for educational purposes” (i.e., the intern learns skills without generating value for the company). Wrong.

The seven criteria are “AND” conditions, not “OR”—all must be met.
The dealbreaker for most startups? Academic Credit (Academic Credit).
- It’s not enough to claim the intern “learned something.” The internship must provide school-approved academic credit—meaning the company must negotiate directly with the intern’s university.

2. How Much Should You Pay Interns?

By now, many startups feel defeated—what university would partner with a brand-new company on an academic credit program?

2.1 Federal Minimum Wage

“Fine, I’ll pay wages. Can I just pay the federal minimum wage?” How much? $7.25.

“Hmm, obviously not.”

2.2 State Minimum Wages

Let’s break down the reality: Most states have minimum wages far exceeding the federal $7.25/hour—especially in economically vibrant regions. For example:Economically developed states like California and New York have a minimum wage of $16, more than double the federal minimum.

https://www.ncsl.org/labor-and-employment/state-minimum-wages

Here

2.3 City and County Minimum Wages

Think that’s all? Think again. Beyond federal and state rules, many cities and counties set their own minimum wages—often far higher.

California Examples:

San Francisco: $18.07/hour
San Jose: $17.55/hour
West Hollywood: A staggering $19.08/hour

Here：

https://www.paycor.com/resource-center/articles/california-minimum-wage/

2.4 Industry-Specific Wage Requirements

Still think the $19.08/hour in West Hollywood is daunting? It gets tougher. For interns with advanced degrees (e.g., PhDs or MBAs), you can’t pay them the same as a high school grad flipping burgers. Employers must pay them a prevailing wage that aligns with their industry and role.

Example:

Software engineering interns earn an average of $36/hour nationwide.

Some of the better treatment of the company, the salary of software engineer interns can reach 50 dollars or even 60 dollars/ hour.

So, not only do interns have to pay, but it's also quite expensive

3. Interns Are Employees (Employees)

Today’s discussion leads us to another counterintuitive truth: Interns are legally classified as employees (Employees). Let’s say it three times:
Interns are employees. Interns are employees. Interns are employees.

“Why does my payroll software (e.g., ADP) automatically label interns as employees?”
- Answer: It’s not a glitch. Under U.S. law, interns must be treated as employees—whether they work for 4 weeks or 8 weeks. They must be added to your payroll system, with taxes withheld.

Then many people have a further question, if the intern is an Employee, then is it necessary to buy insurance for the intern? Why can't interns be hired as contractors? If an intern is an Employee, is it necessary to Pay a Sevance Pay when fired, as most employees do?

This involves the provisions on Employee and Contractor in American law, which is completely contrary to our simple understanding of the public. In the next installment, we'll look at the Employee and the Contractor.

10 Things About U.S. Labor Law: Stories Between Employers and Employees
I’m Xiaoxiao Liu, a U.S. attorney. Stay tuned for our next episode on the critical differences between employees and contractors!

Here

ADP