Startups love the idea of interns — fresh energy, early talent pipelines, and extra hands when budgets are tight. But unpaid internships come with real legal and ethical risks, especially for for-profit companies. Many founders assume “it’s just a short internship, so it doesn’t matter.” Unfortunately, the law disagrees.
If you’re considering bringing on unpaid interns, here’s what you need to know before moving forward.
1. The Baseline: Most Internships in For-Profit Companies Must Be Paid
Under U.S. law, interns in for-profit organizations are presumed to be employees. To classify someone as an unpaid intern, the relationship must meet the Primary Beneficiary Test, which focuses on whether the intern — not the company — receives the primary benefit of the internship.
Courts look at the realities of the relationship, not what you call it.
If the intern is doing productive work that replaces or supplements paid employees, they must be paid — wage statutes apply regardless of intention.
2. The Primary Beneficiary Test (The Federal Standard)
The test includes seven non-exhaustive factors, but the heart of it is simple:
Is the intern receiving structured educational value, or is the company receiving free labor?
Courts evaluate:
Whether the internship resembles academic training
Whether it’s tied to an educational program
Whether it accommodates the intern’s academic schedule
Whether the duration is limited to the learning period
Whether the intern’s work complements, not replaces, paid employees
Whether both sides understand there is no expectation of compensation
No single factor is decisive. Instead, courts examine the total picture.
If you’re relying on an unpaid intern to perform meaningful, ongoing work — especially work you’d otherwise need to hire for — they’re likely an employee and must be paid.
3. State Laws Can Be Stricter Than Federal Law
Founders often focus only on federal rules, but several states impose stricter standards:
Some states add additional criteria to qualify as an unpaid intern
Some require that the internship be connected to accredited coursework
A few states effectively prohibit unpaid internships in private companies unless they meet narrow educational exceptions
Rules can vary depending on whether the intern is a student, recent graduate, or not in school
If you operate remotely or have interns working across multiple states, you must comply with each state’s specific requirements.
Takeaway: Don’t rely solely on the federal test — always check the state where the intern works.
4. Modern Expectations: Ethical & Reputational Considerations
Beyond legality, unpaid internships carry significant cultural and reputational risk in 2025.
Unpaid roles:
disproportionately exclude lower-income candidates
can be viewed as exploitative or inequitable
may undermine your employer brand
can affect investor and partner perception of your culture
Paid internships signal professionalism, fairness, and compliance — all traits investors associate with strong companies.
5. What a “Learning Contract” Really Does — and Doesn’t Do
A Learning Contract can help set clear expectations:
Start and end dates
Defined educational goals
Alignment with coursework or skills training
Designated supervisor and feedback structure
No expectation of compensation
Confirmation that work does not replace paid staff
Confidentiality and IP assignment terms
However, it’s important to understand:
A Learning Contract is not a legal shield.
Courts look at what actually happens during the internship. If the intern performs work that benefits the company more than the intern, misclassification still occurs — contract or not.
Think of a Learning Contract as good supporting evidence, not legal protection.
6. Additional Risks Founders Often Overlook
Misclassifying interns doesn’t just trigger back pay. It can create exposure under:
Workers’ compensation
If injured, an unpaid intern may still be considered an “employee” for coverage purposes.
Unemployment insurance
If the intern is found to be an employee, you may owe unpaid contributions.
Discrimination & harassment laws
In many jurisdictions, interns — paid or unpaid — are protected under anti-harassment and anti-discrimination statutes.
Tax issues
Improper classification can create tax reporting and withholding issues.
For early-stage companies with limited HR infrastructure, these risks can be expensive and distracting.
7. When an Unpaid Internship May Be Appropriate
Unpaid internships can work legally when:
The intern is receiving substantial educational benefit
The work is observational or training-focused
The intern’s productivity is secondary to their learning
The company gains minimal immediate benefit
The internship is short-term and structured
Ideally, the internship is tied to an academic institution
These situations are narrower than most founders expect.
8. When Interns Must Be Paid
You should pay your intern if:
They are performing useful work
They contribute to deliverables, operations, or customer output
You’d feel short-staffed without them
You expect consistent hours or availability
They are not receiving meaningful structured training
Their duties resemble those of employees
In these cases, they are legally employees — and must be treated (and compensated) as such.
9. Founder Checklist: Before Bringing On an Intern
Ask:
What will this person actually be doing day-to-day?
Are we designing a learning experience or filling a labor gap?
Do we operate in a state with stricter rules?
Can we structure this as a paid internship to reduce risk?
Do we have documentation in place (offer letter, confidentiality, IP assignment)?
Would this arrangement survive diligence in our next fundraising round?
If you hesitate on any question, reconsider whether the internship is unpaid for the right reasons.
10. Final Thoughts: Internships Can Be Valuable — But They Must Be Lawful
Unpaid internships are legal only in narrow circumstances, and the risk of getting it wrong can be significant for a growing company. Paid internships are often the safer, cleaner, and more equitable choice — and they signal professionalism to both candidates and investors.
If you’re evaluating whether an unpaid internship complies with federal and state law, or you want to structure an internship program that protects both the candidate and the company, Rubicon can help you design a compliant, founder-friendly framework.