California's New Ruling: Employers Must Reassess Unpaid Internship Arrangements
- Susan Shu
- 2 days ago
- 6 min read
These are the most common questions we hear when advising clients. In January 2026, the California Court of Appeal provided clearer answers in Spilman v. The Salvation Army.
If you need to assess the compliance of existing internship programs or draft or revise internship agreements, please contact Susan Shu, Esq. at susan.shu@consultils.com for tailored compliance strategies.
Why "Student Willingness" Doesn't Equal Legality
Many employers believe that as long as students sign agreements and come willingly, there's no legal issue. But California law operates on entirely different logic: courts don't look at whether both parties are "willing"—they examine what the relationship actually is. If the work an intern performs is essentially employee work, then regardless of what agreement they signed or how willing they were, the relationship is legally an employment relationship and wages must be paid.
"Gaining experience" is indeed a benefit for students, but the key question is whether this benefit is primary and substantial. If students primarily perform work that helps the company complete daily operations rather than learning in a structured educational environment, then the company is the primary beneficiary. The U.S. Department of Labor's 2018 "primary beneficiary test" includes seven factors:
Whether both parties clearly understand the unpaid nature
Whether the internship content resembles educational training
Whether it's linked to academic coursework
Whether it aligns with the academic calendar
Whether the duration is limited
Whether the intern supplements rather than displaces paid employees
Whether both parties understand there's no job guarantee after the internship.
These seven factors require comprehensive evaluation, with no single factor being determinative.
As for "major companies also have unpaid interns," this logic has several problems：
First, you may only be seeing the surface. Many large companies' unpaid internship programs have complete academic credit cooperation agreements, structured training plans, dedicated mentorship systems, and clear distinctions between intern and employee work.
Second, even if some companies are indeed pushing boundaries, that doesn't mean their practices are legal—they just haven't been sued yet.
Third, large companies have dedicated legal teams and compliance budgets; if problems arise, they have resources to handle litigation. For small and medium-sized businesses, a single labor law lawsuit could be catastrophic.
What the Spilman Case Clarified
The Spilman case involved a nonprofit organization's substance abuse rehabilitation program where participants were required to perform full-time retail and warehouse work while receiving rehabilitation services. Participants claimed they were actually employees and should receive wages. The trial court ruled in favor of the organization based on participants having signed "non-employee declarations," but the Court of Appeal reversed this decision.
This ruling's value for all employers lies in its very clear answers to two core questions.
1. Written agreements do not have determinative effect.
The Court of Appeal explicitly stated that courts examine the actual economic relationship and program design, not how parties label the relationship. Merely having workers sign "non-employee confirmations" is insufficient to exempt employers from legal liability. This principle itself isn't a new rule—California law has always looked at substance over form—but many businesses mistakenly believed signing agreements could avoid risk. The Spilman decision shattered this illusion through its ruling.
2. The court established a new two-step test that provides a clearer framework for the seven factors requiring comprehensive evaluation.
To reasonably classify workers as unpaid volunteers, both conditions must be met simultaneously:
The unpaid worker must be truly voluntary. Considerations include whether there are express or implied promises of compensation (including in-kind benefits), whether housing or meal allowances are tied to work performance, whether participation is completely voluntary, and the duration of the arrangement and degree of dependence on the organization.
The employer cannot use unpaid labor to circumvent wage laws. Considerations include whether the work reasonably serves the program's educational or charitable goals rather than primarily meeting operational needs, whether unpaid workers replace paid employees or perform substantially similar work, and whether the program structure creates unfair competitive advantages.
The value of this two-step test is that it transforms the previously vague "comprehensive evaluation" into two specific evaluation dimensions. Previously, businesses struggled to assess what "comprehensive consideration of seven factors" actually meant; now there's a clearer self-assessment pathway.
Potential Problems with Your Internship Program
From our practical experience, many companies' unpaid internship arrangements have the following issues. Interns perform work with no substantial difference from regular employees.
The so-called "learning plan" is just a sentence in the agreement with no substantive content support. For example, the agreement states "the intern will learn marketing skills," but in reality there's no designated mentor, no structured training arrangements, no regular feedback mechanisms—the intern is simply used as free labor.
The internship duration is too long. Unpaid internships lasting three months, six months, or even longer are difficult to justify as educational in nature. The longer the duration, the more courts tend to classify it as an employment relationship. There's no academic credit linkage. If interns cannot earn academic credit through the internship, then the "educational nature" classification lacks the most direct evidence.
Practical Recommendations
After the Spilman decision, if for-profit businesses wish to legally hire unpaid interns, they need to pay attention to the following compliance points:
1. Sign written internship agreements.
Agreements should clearly specify learning objectives, internship duration, unpaid nature, and no job guarantee after completion.
2. Ensure interns receive academic credit.
Employers can sign written cooperation agreements with schools to arrange credit recognition. A simpler approach is to only recruit students participating in credit-bearing externship programs. Some institutions have such credit internship programs where students come with institutional endorsement, and employers only need to confirm the internship content meets the program's credit requirements.
3. Distinguish between intern and regular employee job responsibilities.
Interns should only undertake observational and auxiliary work, not replace core functions of paid employees. If a position needs immediate filling after an intern leaves, that position is essentially an employee position.
4. Consider paid internship arrangements.
If a business struggles to meet all compliance requirements for unpaid internships, we recommend converting to paid internships. Paid internships only require payment according to California's minimum wage standard and actual work hours. The employment cost is relatively limited but can effectively avoid potential legal risks.
5. Additional considerations for F-1 students:
If businesses accept F-1 student interns, whether paid or unpaid, CPT or OPT authorization must be obtained; otherwise it constitutes visa violations, and employers also bear compliance risks.
During the academic term, F-1 students cannot work more than 20 hours per week, and employers must comply with this requirement.
If F-1 students accumulate 12 months of full-time CPT during school, they lose eligibility for post-graduation OPT. This risk must be explained to interns before establishing long-term internship arrangements.
Conclusion
The compliance threshold for unpaid internships continues to rise. The new ruling in Spilman v. The Salvation Army once again demonstrates that written agreements alone are far from sufficient to avoid legal risks. From the substantive content of program design and reasonable definition of intern functions to the implementation of school cooperation arrangements, every aspect could become a point of dispute.
If you need to assess the compliance of existing internship programs or draft or revise internship agreements, please contact Susan Shu, Esq. at susan.shu@consultils.com for tailored compliance strategies.
Disclaimer: The materials provided on this website are for general informational purposes only and do not, and are not intended to, constitute legal advice. You should not act or refrain from acting based on any information provided here. Please consult with your own legal counsel regarding your specific situation and legal questions.
As Partner and Head of Transactions at ILS, Fiona delivers professional legal and strategic support to tech companies—with a focus on AI, medical devices, and fintech. Beyond full-spectrum technology law, she specializes in export control and compliance: supporting tech firms at all growth stages, aiding startups in scaling operations, and helping mature enterprises address regulatory challenges.
Previously, Fiona gained hands-on experience building legal frameworks from scratch. She advised unicorn companies on global expansion and regulatory hurdles, developing deep insight into clients’ growth challenges. Combining legal expertise with commercial judgment, she helps clients establish sustainable legal processes and provides clear guidance to advance their business.
Email: fiona.xu@consultils.com | Phone: 626-344-8949
Susan is specialized in employment law and compliance, with additional experience advising logistics and supply chain companies on workforce compliance and risk management, as well as cross-border investments. With years of experience advising multinational clients, Susan focuses on workforce structuring, employee transfers, terminations, compensation and benefits, and workplace policies. She has extensive experience helping companies navigate complex labor regulations, manage cross-border employment issues, and resolve workplace disputes.
In addition, Susan advises on M&A, private equity, venture capital, and cross-border investments, including VIE frameworks, and prepares due diligence reports and transaction documents.
Email: susan.shu@consultils.com | Phone: 626-344