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Q&A: What Are the Consequences for Pastors Who Don’t File Tax Returns?

Some ministers incorrectly believe they are exempt from taxation.

Richard R. Hammar

A minister on staff at our church has never filed a federal tax return. What are the consequences?

There are ministers who have never filed a federal income return, and it is easy to understand why. Some ministers believe they are exempt from taxation. Others are not familiar with the exemption of clergy wages from income tax withholding and the need to either elect voluntary withholding (by filing a completed IRS Form W-4 (Employee’s Withholding Allowance Certificate) with the church or prepay taxes using the estimated tax procedure (Form 1040-ES).

Either way, a substantial tax debt can be incurred. Here is a summary of the consequences:

If you don’t file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is usually 5 percent for each month or part of a month that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions).
If your failure to file is due to fraud, the penalty is 15 percent for each month or part of a month that your return is late, up to a maximum of 75 percent.
If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $210 or 100 percent of the unpaid tax.
You won’t have to pay the penalty if you show that you failed to file on time because of reasonable cause and not because of willful neglect.
You will have to pay a failure-to-pay penalty of 1/2 of 1 percent (0.50 percent) of your unpaid taxes for each month, or part of a month, after the due date that the tax isn’t paid. This penalty doesn’t apply during the automatic 6-month extension of time to file period if you paid at least 90 percent of your actual tax liability on or before the due date of your return and pay the balance when you file the return. If a notice of intent to levy is issued, the rate will increase to 1 percent at the start of the first month beginning at least 10 days after the day that the notice is issued. This penalty can’t be more than 25 percent of your unpaid tax. You won’t have to pay the penalty if you can show that you had a good reason for not paying your tax on time.
If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent (or 15 percent) failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $210 or 100 percent of the unpaid tax.
These are some of the civil penalties the IRS can assess if a taxpayer fails to file a tax return and pay taxes. Other penalties may apply, as well as interest.

The calculation of penalties can be a difficult task. The services of a CPA can be invaluable in such cases. And, be sure all clergy staff members understand the quarterly estimated tax procedure.

In addition to the civil penalties listed above, a taxpayer can be subject to criminal penalties for a willful attempt to evade taxes. Criminal liability requires an affirmative act (typically filing a false return). Omissions are generally insufficient. Tax evasion is a felony punishable by a fine of not more than $100,000 or a prison sentence of up to five years or both. But civil penalties are much more likely, as few ministers are convicted and imprisoned for tax crimes.

New ministers will find many of their tax questions answered in 12 Law & Tax Guidelines for New Ministers. And both churches and seasoned ministers will find detailed guidance on a variety of complex tax issues in the Church & Clergy Tax Guide.

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Association Calls for Prevention Commitment by Churches

Resolution calls pastors and church leaders to adhere to high ethical standards and establish practices to prevent misconduct and address accusations appropriately.

Matthew Branaugh, Attorney | Editor, Content and Business Development

Bio

“The Board of Directors of the National Association of Evangelicals (NAE) approved a resolution at its semiannual meeting on March 7, 2019 lamenting the tragic violation of trust by ministers of the gospel who have sexually abused church members, and particularly children.

The resolution also calls pastors and church leaders to adhere to high ethical standards and establish practices to prevent misconduct and address accusations appropriately. … The NAE encourages pastors to sign the Code of Ethics for Pastors, church leadership teams to sign the Code of Ethics for Congregations and Their Leadership Teams, and all church leaders to:

Thoroughly vet all staff hires including rigorous background and reference checks;
Screen and provide child protection training to all volunteers who have access to children;
Establish confidential third party mechanisms for receiving reports of abuse;
Ensure that all members of the church community know how to report concerns;
Investigate reports promptly and thoroughly, without defensiveness;
Take decisive disciplinary action where violations have been corroborated; and
Offer pastoral care and support to those who have been affected by abuse of any kind.”

The Church Law & Tax take: The sexual abuse of a minor remains a perennial top reason churches go to court each year. Attorney Richard Hammar, recognizing the threat in the early 1990s, crafted Reducing the Risk, a turn-key screening, selection, and supervision program for churches to prevent abuse. This resource, which was recently updated, covers many of the recommendations made in the NAE resolution.

Matthew Branaugh is an attorney, and the content editor for Christianity Today's Church Law & Tax.

The New Overtime Rule Proposal: What Churches Should Note

Editor’s note: On September 24, 2019, the US Department of Labor announced the final version

Editor’s note: On September 24, 2019, the US Department of Labor announced the final version of its rule. Of note for churches and church leaders: the adopted “standard salary level” is $684 per week, or $35,568 per year, for a full-year worker. This is slightly higher than the original rule proposed in March.

Editor’s note: For an in-depth treatment of this topic, see Richard Hammar’s analysis in “A Closer Look at New Overtime Rules Taking Effect in 2020.”

On March 7, the US Department of Labor (DOL) “issued its long-awaited replacement of the Obama administration’s controversial overtime rule, raising the minimum salary threshold required for workers to qualify for the Fair Labor Standards Act’s ‘white collar’ exemptions to $35,308 per year,” reported Law360.com. The new weekly minimum salary will work out to be $679. Employees who are categorized with white-collar exemptions, and normally would not receive overtime pay, will become eligible for overtime pay if they earn less than the new threshold amount.

The rule, part of the federal Fair Labor Standards Act, is scheduled to take effect on Jan. 1, 2020. It will not include any exemption for religious employers. Church leaders will need to take note about the proposal and anticipate possible budgetary and payroll changes they will need to make for qualifying staff members.

On page 10 of the original 219-page proposal, the DOL also said it intends to propose updating the salary threshold levels every four years through a notice-and-comment rulemaking process (Editor’s Note: As of Aug. 14, 2019, the link to the proposal is no longer available. The agency now publicly says it will only commit to periodic reviews for potential updates to the threshold.)

The last threshold update occurred in 2004.

The plan proposed by the Trump administration is far less aggressive than the $47,467 annual threshold (or $913 per week) proposed by the DOL under Obama. In 2017, a federal district judge in Texas struck down the increase wanted by the Obama White House.

“Our economy has more job openings than job seekers and more Americans are joining the labor force,” Labor Secretary Alexander Acosta said in a news release. “… [Thursday’s] proposal would bring common sense, consistency, and higher wages to working Americans.”

One important note, per The Kiplinger Letter: “Many states have already set higher thresholds, which supersede the federal standard.” Churches should research their state laws to make certain they do not need to comply with a higher threshold in their respective state.

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A Peek Inside How Churches Spend Their Money

How churches spend money is a constant question from Church Law & Tax members and non-members, alike. And the answers depend on a variety of factors.

Matthew Branaugh, Attorney | Editor, Content and Business Development

Bio

How churches spend money is a commonly-asked question here at Church Law & Tax.

It usually goes something like this:

We’re a small church in Florida. We’re trying to figure out how our spending on personnel compares to other churches like us. Can you help?

The specifics on how churches spend money on personnel always vary. The state differs, as does the church’s size. And while the inquiry often involves personnel expenses, it also looks for insights into other budget topics, such as expenses for buildings, missions, or ministry programs, and processes for approval.

Differences aside, the sentiment is the same. Church leaders like you appreciate the ability to compare their churches’ budget situations to others.

While the practice of making such comparisons isn’t perfect—each church’s situation is unique—it can prove useful when done right. For this reason, Church Law & Tax has conducted its church budget priorities survey periodically since 1999. “Such comparisons can help leaders discern whether what they spend on things like salaries, facilities, ministry programs, and missions, are too much, too little, or just right,” as I noted back in 2014, the last time the survey was offered.

Why is this project important? Aside from equipping you with the insights this information provides to individual churches, it also sheds light on broader trends. Over the past 20 years, we’ve determined some recurring benchmarks. We’ve also observed a few shifts.

Below are five notable highlights of these trends, broken down by year. But before we share them, please note these disclaimers:

The methodology and line of questions have shifted over time. In 1999, the survey was entirely paper-based and targeted subscribers of various Christianity Today publications. In 2009 and 2014, the survey was entirely online-based, allowing a much wider net to be cast for survey responses. The more recent surveys have also delved further into general economic factors, something that wasn’t done in 1999.

The respondent pools changed each time, so comparisons are not scientific. Only general observations can be made, and even then, caution must be exercised, given any number of variables that affected outcomes specific to the survey. For instance, the smaller net that was cast in 1999 likely contributed to smaller budget sizes when compared to 2014.
The 2009 survey reported only median figures—not averages. Again, general indicators can be gleaned from this information, not hard-and-fast lessons.
All actual dollar figures shown below were adjusted to 2019 dollars using the US Bureau of Labor Statistics inflation calculator.

1999

Both the average and median budget sizes among the roughly 1,200 qualified responses was about $445,500.
Personnel (salary and wages) represented the largest budget expenditure (40% of the average budget, 26% of the median).
Facilities ranked second (18% of the average budget, 10% of the median).
For sources of income, 93% came from tithes and offerings.
For budget planning and approval processes, 73% said they used a traditional calendar year (January 1-December 31), rather than some type of alternative fiscal year (e.g., July 1-June 30). About 10% said their church spent one month or less on preparation and approval, 17% spent one to two months, 35% spent two to three months, and 35% spent three to six months.

2009

The survey, conducted through a Christianity Today polling website, drew 1,800 qualified responses. The median budget size was about $350,000 (again, no averages were reported with this survey).
Personnel was again the largest budget expenditure (38%).
Facilities ranked second (12% of the median).
For sources of income, 87% came from tithes and offerings.
For budget planning and approval processes, 73% said they used a traditional calendar year (January 1-December 31), rather than some type of alternative fiscal year (e.g., July 1-June 30). About 6% said their church spent one month or less on preparation and approval, 12% spent one to two months, 20% spent two to three months, and 26% spent three to six months.

2014

The average and median budget sizes among the nearly 2,200 qualified responses was significantly higher (again, note the disclaimer above). The average church budget was $937,400, while the median budget was $654,600.
Personnel again was the largest budget expenditure (47% of the average budget).
Facilities again ranked second (with 7% devoted to a mortgage or rent payment, 7% spent on utilities, and 5% spent on maintenance, cleaning, and landscaping in the average budget).
For sources of income, 91% came from tithes and offerings.
For budget planning and approval processes, 71% said they used a traditional calendar year (January 1-December 31), rather than some type of alternative fiscal year (e.g., July 1-June 30). About 7% spent one month or less on budget preparation and approval processes, 14% spent one to two months, 30% spent two to three months, and 41% spent three to six months.

Matthew Branaugh is an attorney, and the content editor for Christianity Today's Church Law & Tax.

Requirements for Hiring Foreign Nationals at Your Church

From eligibility to site visits to records, recent headlines reiterate the need for compliance

Richard R. Hammar, Gerald Cipolla, and Lina Yen Hughes

Churches are increasingly hiring foreign nationals as employees and independent contractors. Federal immigration law regulates the admission, status, and employability of foreign citizens in the United States, and imposes requirements on employers who seek to hire such persons. These requirements generally apply to religious organizations.

Church pastors and leaders must become familiar with these requirements and actively monitor developments and changes. In particular, leaders must educate themselves on the various types of visas available, record-keeping requirements employers must meet, and the Form I-9.

Headlines from the past year illustrate the increased scrutiny the government is placing on the employment of foreign nationals:

In June of 2018, The Kiplinger Letter reported the Trump administration was “tackling illegal immigration from all angles,” particularly I-9 audits, unannounced site visits, and stricter rules regarding student visas. In January of 2019, the publication reported the results of this increased action for 2018: I-9 audits quadrupled, 2,300 people were arrested, and $20 million in fines were doled out. The publication’s guidance to employers for the year ahead: “[B]e extra careful that workers’ I-9 forms are filled out correctly. Audit them yourself to make certain.”
In September of 2018, the Evangelical Council for Financial Accountability (ECFA) reiterated the increase in I-9 audits, adding “[o]rganizations may be selected at random, and have only three business days after receiving a notification from ICE to produce their I-9s and all associated hiring and employment records. If ICE detects any compliance issues after reviewing the documentation, the organization has 10 business days to correct the problems before fines and penalties are issued.” The ECFA highly recommended religious organizations conduct regular internal audits of their I-9s.
Also in September of 2018, The Kiplinger Letter reported the Trump administration was closely scrutinizing “abuses of H-2B visas, passes that allow employers to bring in foreign nationals for seasonal work.”

The following observations, adapted from Pastor, Church & Law, Fifth Edition, will provide:

An overview of record-keeping compliance requirements that church and ministry organizations must establish, especially in the event of an I-9 audit or workplace visit from the government. While this article will not address all of the record-keeping requirements, it should be used as a starting point. Not maintaining compliant record-keeping procedures can lead to penalties and fines for a church (as an employer), as well as potential employment law violations, including discrimination-related charges.
A helpful overview of the various types of visas that churches should know and understand for hiring purposes within their own organizations, with a specific emphasis placed on the ones most relevant to churches. The aim of this article is to inform churches and ministry organizations that an employee must have employment authorization inside the United States. The consequences of hiring a foreign national without employment authorization can lead to severe immigration violations for the foreign national. Churches also can face penalties and sanctions from the US government—and criminal penalties in extreme cases where there is a pattern of violations.
Working for compensation
In general, foreign nationals cannot perform services for compensation in the United States unless they meet one of the following conditions:
The foreign national is a lawful permanent resident (any category of immigrant visa) and holds a Permanent Resident Card (“green card”). Such persons generally can live and work permanently in the United States without limitation.
The foreign national has a nonimmigrant temporary work status that permits certain kinds of work for a specified period of time.
The foreign national has received employment authorization through being an asylee or having another form of employment authorization through programs such as Temporary Protected Status (TPS), Deferred Action for Childhood Arrivals (DACA), a student’s Optional Practical Training (OPT), Curricular Practical Training (CPT), or a pending green card application, among other forms of authorization.
Unless a foreign worker meets one of these conditions, he or she generally is not legally permitted to perform work for compensation in the United States. As mentioned above, working without authorization can lead to severe consequences for both the foreign national and the employing church.
Record-keeping requirements
Every employer, including churches, must complete a Form I-9 for each employee—both citizens and noncitizens—to verify the individual’s identity and employment authorization.
While R-1 visas are one of the most common types of visas used by churches to hire religious workers on a temporary part-time or full-time basis, as this article suggests, there are other potential immigration categories for employing foreign nationals. Establishing methodical processes for both preparing and maintaining I-9 records is essential to complying with immigration and employment law requirements, which can lead to potential fines or potential discrimination implications. The prudent organization should consult with both their employment law and immigration law professionals in developing and implementing compliant record-keeping processes.
Churches should note the following records to keep to ensure readiness in the event of an I-9 audit or a government site visit. Churches also should note the importance of keeping these records separate. As the Society for Human Resources Management states on its website (shrm.org):
Forms I-9 should be maintained separately from employee personnel files. Most often, I-9s are maintained in a file (electronic or hard copy) or binder that is accessible only to a few individuals in the human resource department. Supervisors or managers should not have regular access to I-9 forms and documents because national origin, immigration status, marital status, and other protected information may be disclosed on these forms or in the documents provided for their completion.
Records for an I-9 audit
The church should keep one I-9 file containing all I-9 forms completed for all employees. This is the only file a church needs to produce for an auditor in the event of an I-9 audit.
Records for government site visits
In the event of a USCIS or government site visit, churches also should keep the following records in an R-1 religious worker’s personnel file:
• The R-1 petition submitted to USCIS;
• Other employee documents, including payroll documentation; and
• Employee reviews.
In the event of a site visit, the investigator may want to review the R-1 petition and ask other employees and representatives of the organization questions about the R-1 worker’s role. Site visits are often conducted to identify fraudulent R-1 cases, so it is important that the actual duties and roles of the R-1 worker are properly described in the R-1 petition. Any “substantial deviations” to the R-1 worker’s duties and roles often merit filing an amended R-1 petition or a new R-1 petition. Substantial changes could include changes in worksite, promotions, changes in duties, and a change from part-time to full-time employment, among others.
Hiring foreign nationals
Churches frequently encounter situations in which the possible hiring of a foreign national arises.
Consider the following examples:
Example 1: Paul is a citizen of a foreign country where he is employed as a pastor. Paul is in the United States on a visitor’s visa. He speaks in a church, and an offering is collected for him. The offering amounts to $700. The church treasurer is not sure how to handle this payment. Should she issue Paul a 1099 form? Does she need to withhold federal income taxes and Social Security taxes? Is speaking in front of the church for compensation unauthorized employment?
Example 2: Mary is a citizen of a foreign country and speaks very little English. A church hires her as a custodian. The church treasurer is not sure how to report her income. He is wondering if he should issue her a W-2, and if taxes need to be withheld. Does Mary have authorization to work in the United States? If so, what records must be maintained?
Example 3: Joe is a pastor in a foreign country. While traveling in the United States on a visitor’s visa, he frequently attends a church that consists mostly of former residents of his native country. The church would like Joe to become a full-time associate pastor. What immigration options are available to Joe so that he can work as a full-time associate pastor for the church? What records must be maintained during his employment after obtaining employment authorization?
These examples illustrate the importance of church leaders being familiar with the application of immigration and federal tax law to current or prospective workers who are not citizens of the United States. Unfortunately, immigration law is complex and poorly understood, and the long processing times at the different government agencies involved means employers need to plan ahead when hiring foreign religious workers. Below is an overview of basic immigration principles and some common visa categories. Some of the immigration options are more complex than others. Each church and foreign national’s situation is unique and should be analyzed based on the specific situation.
Immigration visa basics
Visas—in general
What is a visa? Are foreign citizens required to have a visa to enter the United States? Must they have a visa to work for a church as either an employee or independent contractor?
Citizens of most foreign countries need a visa to enter the country. A visa does not permit entry into the US, but rather indicates that the visa holder’s application has been reviewed by a US consular officer at an American embassy or consulate, and that the officer has determined that the individual is eligible to enter the country for a specific purpose. Consular affairs are the responsibility of the US Department of State.
A visa allows the holder to travel to the United States as far as the port of entry (airport or land border crossing) and ask the customs and border patrol officer (CBP) to allow entry into the country. Only the CBP officer has the authority to permit entry into the country. The CBP officer can either deny entry or admit the person on a particular type of immigration status for a specified period of time. The specific immigration status controls the activities the foreign national is permitted to conduct, such as pursuing employment, pursuing studies as a student, traveling as a tourist, conducting business travel, and more. Most immigration matters inside the US are the responsibility of the US Citizenship and Immigration Services (USCIS), a bureau of the US Department of Homeland Security. The former Immigration and Naturalization Service (INS) no longer exists.
There are two categories of US immigration status: immigrant and nonimmigrant status. Immigrant status applies to people who intend to live permanently in the country. Nonimmigrant status applies to people with permanent residence outside the US but who wish to be in the US on a temporary basis for tourism, medical treatment, business, temporary work, or study, among other types of statuses. Both kinds of visas are described below.
It is worth noting two other types of immigration situations exist: asylee status and Deferred Action for Childhood Arrivals (DACA).
Asylee status applies to a person who has been granted asylum, either by the USCIS asylum office or an immigration judge, based on the person’s fears that he or she will face persecution based on his or her religion, race, nationality, political opinion, or membership in a particular social group upon returning to his or her home country.
DACA involves the government either deferring prosecution or declining to issue removal proceedings against persons that entered the US as children, assuming certain requirements are met. DACA is not an immigration status, but rather, the deferral of prosecution. DACA recipients are allowed to live and work for a temporary period of time in the country without being placed in removal proceedings unless they violate DACA requirements.
Immigrant visas
An immigrant is a foreign national who has been granted the privilege of living and working permanently in the United States (a “green card” holder—more details below). It is important to note that an immigrant or green card holder is not a US citizen. Becoming a US citizen has its own requirements and process, generally referred to as the naturalization process, which is separate from the application process to become a lawful permanent resident.
Applicants must go through a multi-step process to become an immigrant. In most cases, USCIS must first approve an immigrant petition that usually is filed by an employer or relative. Then, an immigrant visa number must be available even if the applicant is already in the United States (some exceptions apply). After that, if the applicant is already in the United States, he or she may apply to adjust to permanent resident status. Persons who are outside the United States will be notified to go to the local US consulate to complete the processing for an immigrant visa.
Immigrants to the United States are divided into two categories:
1. Those who may obtain permanent residence status without numerical limitation. This includes immediate relatives and previous lawful permanent residents. As an aside, someone granted asylum can often pursue permanent residence status; and
2. Those subject to an annual limitation, generally through family or employment sponsorship. This category is further divided into the following groups:
Family-sponsored. Under Section 201 of the Immigration and Nationality Act, an annual minimum of 226,000 immigrant visas are available for certain relatives of US citizens or permanent residents who are classified into four preference categories:
(1) unmarried sons and daughters of US citizens (F-1);
(2) spouses and children of permanent residents (F-2A);
(3) unmarried sons and daughters (21 years of age or older) of permanent residents (F-2B) and married sons and daughters of US citizens (F-3); and
(4) brothers and sisters of adult US citizens (F-4).
Because there generally are more applications than available visas in the family preference system each year, there is often a multi-year wait within each preference category. The US Department of State publishes a visa bulletin each month to explain the current wait time by preference category and by country.
Employment-based. An annual minimum of 140,000 immigrant visas are available for this category, which is divided into five preference groups:
(1) persons of extraordinary ability in the sciences, arts, education, business, or athletics; outstanding professors and researchers; and certain multinational executives and managers (the EB-1 visa);
(2) professionals holding advanced degrees, and persons of exceptional ability in the sciences, arts, and business (the EB-2 visa);
(3) professionals holding baccalaureate degrees, skilled workers with at least two years’ experience, and other workers whose skills are in short supply in the United States (the EB-3 visa);
(4) certain religious workers, ministers of religion, certain international organization employees and their immediate family members, and qualified, recommended current and former US government employees (the EB-4 visa); and
(5) persons who create employment for at least ten unrelated persons by investing capital in a new commercial enterprise in the United States (the EB-5 visa).
Note that most of these employment-based immigration visa categories (generally in the EB-2 and EB-3 categories) require the US employer to complete the Permanent Labor Certification process (PERM). In the PERM process, the employer tests the labor market to determine if there are any minimally qualified US workers ready, willing, and able for the position being offered to the foreign national. If there are not any minimally qualified US workers ready, willing, and able, the employer submits a labor certification application for the applicant to the US Department of Labor’s Employment and Training Administration using Form 9089. The Department of Labor must either grant or deny the certification request. In some situations, there are alternatives to the EB-2 and EB-3 labor certification process. For instance, the EB-4 category is available for religious workers, which avoids the labor certification process.
Note regarding the EB-4 visa: This visa—given at least two temporary extensions—may not be available. Those wishing to pursue this option will need to confirm its availability.
Lottery. The diversity lottery makes available a maximum of 55,000 immigrant visa numbers annually to persons selected at random from countries with low rates of immigration to the United States.
Note: 5,000 of these are designated for Nicaraguan Adjustment and Central American Relief Act (NACARA), which reduces the total available diversity immigrant visas to 50,000 per year.
Certain applicants, such as priority workers, investors, certain special immigrants, and diversity immigrants, can petition for an immigration visa on their own behalf. All others must have a relative or potential employer petition for them.
Key Point. Most visitors to the United States enter the country as tourists. With the introduction of visa-free travel to citizens of 27 countries, it is now possible for many travelers to enter the United States without a visa under the Visa Waiver Program (VWP) if they meet several requirements. One requirement is that the length of stay in the United States cannot exceed 90 days and a change of status to another visa classification is not permitted for travelers who enter under the VWP.
Green cards
Persons whose applications for immigrant visas are approved become lawful permanent residents of the US and generally may live and work indefinitely in this country. As proof of their status and eligibility to work, they are issued a Permanent Resident Card, also known as a “green card” or “Form I-551.”
Key Point. An immigrant visa followed by an admission to the United States is evidence of resident status. Upon being admitted into the United States with an I-551 resident stamp as a resident, USCIS will mail the resident a permanent resident card (green card). Until the green card is received in the mail, an endorsed immigrant visa inside the foreign national’s passport is generally evidence of resident status and is evidence of employment authorization inside the United States.
Work permits pending application decisions
Applicants for adjustment to permanent resident status are eligible to apply for a work permit while their cases are pending. Form I-765 is used to apply for a work permit. Persons do not need to apply for a work permit once they adjust to permanent resident status.
Note: Separate work permits are available for those who are here under DACA, as asylees, or TPS—but those situations are not addressed in this article.
Key Point. Any person traveling to the United States with the intention of working temporarily must obtain a nonimmigrant work visa. Persons entering the United States on a visitor or business visa are not permitted to work.
Nonimmigrant visas
The Immigration and Nationality Act provides several categories of nonimmigrant visas for a person who wishes to work, study, train, or operate a business temporarily in the United States. There are annual numerical limits on some classifications. The most relevant classifications for church leaders include the following:
B-1 temporary business visitor
Business visitors generally are not permitted to perform work in the United States for compensation. Some religious workers enter the United States with a B-1 visa, as noted below:
(1) Missionary work. Persons who are performing missionary work on behalf of a religious denomination may be eligible for a B-1 visa, provided they will receive no salary or compensation from the United States other than an allowance or other reimbursement for expenses incidental to their stay, and the work they are to perform in the United States will not involve the selling of articles or the solicitation or acceptance of donations.
(2) Evangelical tours. Persons coming to the United States to engage in an evangelical tour, and who do not plan to take an appointment with any one church, may be eligible for a B-1 visa, provided they will receive no compensation from a US source, other than the offerings contributed at each evangelical meeting.
(3) Preaching. Persons who will be preaching in the United States for a temporary period, or will be exchanging pulpits with their US counterpart, may be eligible for a B-1 visa, provided they will continue to be reimbursed by their church in their home country and will receive no salary from the host church in the United States.
(4) Voluntary service program. Persons who will participate in a voluntary service program which benefits a US local community, and who establish that they are a member of, and have a commitment to, a particular recognized religious or nonprofit charitable organization, may be eligible for a B-1 visa if the work to be performed is:
• traditionally done by volunteer charity workers;
• no salary or remuneration is received from a US source, other than an allowance or other reimbursement for expenses incidental to their stay in the United States; and
• they will not engage in the selling of articles or the solicitation and acceptance of donations.
A voluntary service program is an organized project conducted by a recognized religious or nonprofit charitable organization to provide assistance to the poor or the needy, or to further a religious or charitable cause.
Note that travelers who qualify for a B-1 visa may also be eligible to travel visa-free under the visa waiver program.
R-1 visa (temporary nonimmigrant religious workers)
An R-1 visa authorizes a foreign national to work in the United States temporarily in a part-time (at least 20 hours per week) or full-time basis (at least 35 hours per week) in the following capacity:
As an ordained minister of the religious denomination; or
in a professional capacity in a religious occupation for an organization within the denomination; or
in a religious vocation or occupation for an organization within the denomination, or for a bona fide organization which is affiliated with the religious denomination.
The term “minister” for R-1 visa religious workers does not apply to lay preachers but is someone who is authorized by a denomination to conduct religious worship and perform clergy duties. The minister must also be fully trained in accordance with the denomination’s standards to conduct religious worship and other sacerdotal functions.
A religious occupation means a position that primarily relates to, and clearly involves, inculcating or carrying out the religious creed and beliefs of the denomination. It does not include primarily administrative or support positions such as janitors, maintenance workers, clerical employees, fundraisers, solicitors of donations, or similar occupations. However, administrative duties that are only incidental to religious functions are permissible.
A religious vocation means a calling to religious life, evidenced by a lifelong commitment, such as taking vows. Examples include nuns, monks, and religious brothers and sisters.
Applicants may qualify for the R-1 visa if, for the two years immediately preceding the time of application, they have been a member of a religious denomination which has a bona fide nonprofit religious organization in the United States. Denominational membership is not defined by formal affiliation, but by shared faith and worship practices in the same type of religious denomination. The term “religious denomination” applies to a group of believers who are governed or administered under a common type of ecclesiastical government, such as:
A recognized common creed or statement of faith shared among the members;
A common form of worship;
A common formal code of doctrine and discipline;
Common religious services and ceremonies;
Common established places of religious worship or religious congregations; or
Comparable indicia of a bona fide religious denomination.
Nondenominational churches can submit a description of its own internal governing or organizational structure.
The R-1 petitioner must have tax-exempt status as an organization described in section 501(c)(3) of the federal tax code, or be affiliated with a religious denomination and authorized by a group tax exemption holder to use its group tax exemption.
The US-based religious organization that wants to employ the applicant must file Form I-129 Petition for Nonimmigrant Worker (in duplicate) with the US Citizenship and Immigration Service (USCIS). USCIS may conduct a preapproval inspection, and a satisfactory completion of the site visit at the religious organization’s location is a condition for approval. It is important to indicate a physical address where members generally congregate to worship so that USCIS can conduct a site visit and verify that the place of worship actually exists. If the religious worker is applying from outside the United States, an R-1 visa cannot be issued at a US Embassy or Consulate abroad without prior USCIS approval of Form I-129. The petition that is filed stateside with USCIS must include evidence of R-1 eligibility:
Currently valid tax determination letter from the IRS showing that the organization is tax-exempt or that the group is tax-exempt;
Proof of salaried or non-salaried compensation, such as past evidence of compensation for similar positions, budgets showing money set aside for salaries, or evidence that room and board will be provided to the religious worker. Evidence of self-support may be considered only for certain nonimmigrant missionaries if the temporary, uncompensated missionary work is part of a broader, international program of missionary work sponsored by the denomination;
Proof of beneficiary’s two-year membership in the religious denomination immediately prior to filing; and
Proof of ordination in the denomination if the religious worker will be working as a minister, as well as evidence that he or she completed any course of prescribed theological education and training if normally required by the denomination.
The initial admission period for ministers and religious workers entering the United States under R-1 status is limited to 30 months. If employers want to extend that period, they must file another I-129 petition with the USCIS to request an additional 30 months (for a total maximum stay of five years). USCIS counts only time spent physically in the United States in valid R-1 status toward the maximum period of stay. After five years, the religious worker will need to live outside the United States for at least one year before applying for a new nonimmigrant R-1 visa. These limitations do not apply for religious workers who did not reside continuously in the United States and whose employment was seasonal, intermittent, or for an aggregate of six months or less per year, or for religious workers who reside abroad and commute to the United States to work part-time.
Nonimmigrant religious workers must maintain the intent to depart the United States when their nonimmigrant stay expires. The petitioner must notify USCIS within 14 days of any change in the nonimmigrant worker’s employment, or when the employment is terminated. If the religious worker wants to change employers, a new R-1 petitioner must file another Form I-129 attestation and supporting evidence. Changes in location of employment may constitute material changes to the terms and conditions of employment. The petitioner may be required to file an amended petition and receive an approval prior to the beneficiary’s move to a new location of employment.
An R-1 visa holder’s dependents, which includes spouses and unmarried children under the age of 21, may be eligible for R-2 classification, but they will not be authorized to work.
Beneficiaries not eligible for an R-1 visa may have alternative options. These include the F-1 OPT, H-1B, J-1, and TN visas, among other potential alternative options, depending upon the specific circumstances. While the R-1 visa is the primary option for religious workers, when an R-1 visa is not an option, alternative options should be explored. Several are described further below.
Other classifications that may be relevant to church leaders, although less common, include the following:
For tourism: B-2
Tourist visitors generally are not permitted to perform work in the United States for compensation. This visa provides them with legal entry.
For academic purposes: F, M, and J visas
F-1 visa (academic student)
The F-1 visa is the most common type of student visa. It requires a full-time course of study.
A nonresident alien admitted to the United States as a student generally is not permitted to work for compensation or to engage in business while in the United States. In some cases, a student admitted to the United States with an F-1 visa is granted permission to work, generally pursuant to On Campus Employment (described in more detail below), Curriculum Practical Training (CPT), or Optional Practical Training (OPT). CPT and OPT are generally noted on the student’s I-20, while On Campus Employment is not noted on the I-20—but permission should be obtained from the student’s designated school official (DSO).
USCIS permits on-campus work for students in F-1 status if it does not displace a US resident. On-campus work means work performed on the school’s premises. On-campus work includes work performed at an off-campus location that is educationally affiliated with the school. On-campus work under the terms of a scholarship, fellowship, or assistantship is considered part of the academic program of a student taking a full course of study and is permitted by the USCIS.
Employment due to severe economic necessity and for OPT is sometimes permitted for students in F-1 status. Students granted permission to work due to severe economic necessity or for OPT will be issued Form I-688B or Form I-766 by USCIS. Some F-1 students, upon completing a degree program, may be eligible for 12 months of OPT. Those who earn a degree in science, math, or technology may be able to pursue up to 36 months of OPT.
It is possible for a student holding an F-1 visa to change to an R-1 visa if a religious organization submits a Form I-129 to the USCIS. Often, a new graduate will have OPT and can work for a religious organization with OPT while a change of status to R-1 status is pending and approved.
M-1 visa (vocational student)
People wanting to pursue full-time vocational studies are usually admitted to the United States on an M-1 nonimmigrant visa. The M-1 category includes students in vocational or other nonacademic programs, other than language training.
Students in M-1 status who have completed a course of study can accept employment or practical training for up to six months and must have a Form I-688B or Form I-766 issued by USCIS. In all other cases, any services performed by a nonresident alien student are not considered as performed to carry out the purpose for which the student was admitted to the United States.
Persons holding an M-1 visa may not accept employment in the United States. However, they may apply for practical training after they complete their studies. If approved, they will be allowed to have one month of practical training for every four months of study they have completed. They are limited to six months total practical training time. Vocational students must apply to the USCIS for authorization to work under these limited circumstances (Form I-538).
J-1 visa (exchange visitors)
J-1 visas are for international exchange students. The J-1 visa has other purposes beyond international exchange students, such as internships and medical professionals. Spouses of J-1 visa holders can apply for employment authorization with USCIS. The J-1 visa recipient and dependents should be cautious in whether the two-year home residency requirement applies.
For specialty occupations, seasonal needs, or extraordinary abilities: H-1B, H-2B, and O-1
H-1B (specialty occupation)
The H-1B is a nonimmigrant classification used by an alien who will be employed temporarily in a specialty occupation. A specialty occupation requires theoretical and practical application of a body of specialized knowledge, along with at least a bachelor’s degree or its equivalent. For example, architecture, engineering, mathematics, physical sciences, social sciences, medicine and health, education, business specialties, accounting, law, theology, and the arts are specialty occupations.
As of this writing, there are only 65,000 available H-1B visas each year and an additional 20,000 H-1B visas available each year to holders of master’s degrees. The demand for these visas exceeds the number of visas made available each year (for instance, for fiscal year 2019, there were approximately 190,000 H-1B petitions). Because the demand exceeds the supply, USCIS conducts a random lottery each year with all H-1B petitions received within the first five business days of April each year.
H-1B status requires a sponsoring US employer. The employer must file a labor condition application (LCA) with the Department of Labor attesting to several items, including payment of prevailing wages for the position, and the working conditions offered. The employer must then file the certified LCA with a Form I-129. Based on the USCIS petition approval, the foreign national may apply for the H-1B visa, admission, or a change of nonimmigrant status.
If a foreign national receives an H-1B visa, he or she is granted that status for a term of three years inside the United States, which can be extended for another three years (for a total of six years).
Note: Exceptions exist—church leaders should consult with qualified legal counsel regarding the H-1B visa program.
Under current law, when the H-1B recipient completes the sixth year, he or she must remain outside the United States for one year before another H-1B petition can be filed. However, in some circumstances, when an H-1B holder is the beneficiary of an employment-based immigrant petition, but there are country-based backlogs for available green cards, a beneficiary can sometimes hold H-1B status beyond six years. The country-based backlogs generally apply to foreign nationals born in China and India.
H-1B recipients may only work for the petitioning US employer and only in the H-1B activities described in the petition. The petitioning US employer may place the H-1B worker on the worksite of another employer if Department of Labor and USCIS rules are followed. H-1B recipients may work for more than one US employer but must have a Form I-129 H-1B petition approved by each employer.
An H-1B recipient may work in full- or part-time employment and remain in status—as long as the recipient works in accordance to the terms stated in the H-1B petition.
An H-1B recipient often can take steps toward Lawful Permanent Resident status without affecting H-1B status. This is known as “dual intent” and has been recognized in the immigration law since passage of the Immigration Act of 1990.
H-2B (temporary nonagricultural workers)
This classification applies to temporary or seasonal nonagricultural workers. It requires a temporary labor certification issued by the Secretary of Labor.
O-1 (extraordinary abilities)
This visa applies to persons with extraordinary abilities within their fields of endeavor, such as the arts, sciences, education, entertainment, business, or athletics—and those abilities have resulted in national or international acclaim. Eligibility requirements are strict. For individuals who apply, they must accurately describe their field of endeavor and submit ample evidence of their accomplishments and acclaim.
Visas available based on treaties: E-1, E-2, TN, H-1B1, and E-3
E-1 Treaty Trader and E-2 Treaty Investor
E-1 Treaty Trader and E-2 Treaty Investor visas are for entrepreneurs who are from a country that has a treaty with the United States and either conducts substantial trade between their home country and the United States or makes a substantial investment into a commercial enterprise in the United States. Spouses of E-1 and E-2 visa holders in dependent status can apply for employment authorization with USCIS.
TN
This work visa is made possible through the North American Free Trade Agreement (NAFTA) that is available to Canadians and Mexicans performing an occupation listed on a specifically approved occupation list. Examples of included occupations include seminary teacher, social worker, and vocational counselor, among other specified occupations. It is the job duties that control the outcome of the application, while the offered job title is relevant. TN visas are generally applied for at the US Consulate in Mexico or Canada. Canadian nationals can apply at the border. In some instances, the TN renewal is petitioned for inside the US with USCIS.
Note: At publication time, NAFTA appeared set to be replaced by the U.S.-Mexico-Canada Agreement—a new trade pact between the three countries. The full extent of the changes the new pact would bring was not yet clear, but it appeared the availability of the TN visa, and the parameters involved with it, would not be affected.)
H-1B1 and E-3 visas
Similar to the H-1B visa, there is a special H-1B1 visa available for Chilean and Singaporean nationals that can be applied for directly with the US Consulate overseas. Additionally, there is a special E-3 visa available to Australian nationals, which can also be applied for directly with the US Consulate overseas. Many of the H-1B requirements are similar to the H-1B1 and E-3 requirements, primarily available for “specialty occupation” positions that require a bachelor’s degree in a specialized field.
Adapted from Pastor, Church & Law, Fifth Edition, by Attorney Richard R. Hammar, senior editor of ChurchLawAndTax.com. Gerald Cipolla is an attorney and the founder of the Chicago-based Cipolla Law Group, a firm specializing in immigration law (immigrationvisaus.com). Lina Yen Hughes is an attorney and the founder of the Sacramento, California-based Yen Hughes Law, P.C., a firm specializing in immigration law (yenhugheslaw.com).

Image: Maki Nakamura | Getty

Don’t Be Blindsided by Three “Unexpected Expenses”

Planning ahead can keep you from being caught off guard.

Karl Vaters

Small-church pastor Karl Vaters offers these tips that could keep you from being caught off guard by three types of expenses.

Set aside money every month for annual bills

Most bills come monthly. But every church has annual bills (like insurance) that we have to stop being surprised by. Any healthy church anticipates these bills and plans for them by laying some money aside every month so it’s there when the bill inevitably arrives.

Start an emergency fund

Heaters break. Roofs leak. Regular givers lose their jobs and move away. Wise church leaders plan for such eventualities. No matter how little we have coming in, we need to create a line item [for] a fund to cover such emergencies. . . . According to most financial experts, an ideal amount in that fund would be six months’ worth of income. (Yes, I can hear you laughing from here. Our church doesn’t have that either.) In lieu of that, we should aim for three months’ worth. We can get there by setting up a budget that saves one month’s worth of income every year until the three months of income is reached. That can be done by setting aside eight percent of your income every month for three years.

Have an ongoing building maintenance plan

Don’t let deferred maintenance build up. Having an annual cleanout of the plumbing lines will be cheaper in the long run than letting things build up until the toilets overflow in the middle of a Sunday morning service. The same goes for cleaning, painting, cracked windows, and so on.

What to Include in a Severance Package

Determine what to include in a severance package by establishing your budget and reviewing the

Determine what to include in a severance package by establishing your budget and reviewing the paid benefits that the employee receives. Often a severance package will include full pay, paid insurance premiums, continued contribution to retirement, and outplacement services for the length of the severance agreement.

Create a policy that outlines the length of the package. For instance, employees receive X number of weeks for every X number of years employed.

The extent of the package offered often depends on the available budget, the position the employee holds, and the length of tenure.

As with anything that intersects with employees and employer relations, it is always wise to consult a labor law expert to help advise, create a severance agreement, and implement a severance package that is fair and within the mandates of state law.

—SmartChurchManagement.com, adapted

Removing a Church Board Member

What to do when someone must be removed from office.

Richard R. Hammar, Attorney, CPA

Bio

Imagine a member of your church’s board has engaged in behavior that violates the church’s understanding of Scripture. In doing so, they’ve probably also violated the qualifications for serving on the board. In cases like this, the congregation or board may determine that the individual must be removed from office. What do you do next?

Start by reviewing your church’s bylaws to see if there is any provision dealing with the removal of a board member. If there is such a provision, it must be followed.

If the church bylaws do not address this issue, then check state nonprofit corporation law if the church is incorporated. It may contain a procedure that will guide you in the removal of the board member.

If your church is incorporated under your state nonprofit corporation law, your bylaws will almost always take precedence over the nonprofit law. So, by addressing a matter in your church bylaws, you eliminate the application of your state nonprofit corporation law in most cases.

Church bylaws often contain vague language when describing the grounds for removing a board member. An example would be unscriptural conduct. Obviously, there may be strong disagreement about whether particular behavior is unscriptural or not.

It’s important to refer to a group or body that has the ultimate authority to conclusively determine such issues. For example, if your church bylaws permit board members to be removed for unscriptural conduct, or on the basis of some other vague standard, then be sure to specify that the church board, or some other specific body, such as the church membership, shall have the final authority in determining whether or not such a standard has been violated. This will reduce the risk of litigation and of a civil court becoming involved in a church’s decision to remove a board member.

Excerpt from Essential Guide to Liabilities and Duties for Church Boards, available on ChurchLawAndTaxStore.com.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Image: Piotr Powietrzynski | Getty

When the Church Office Closes for Bad Weather, Does Everyone Get Paid?

The legal—and logical—considerations regarding how to handle an office closure.

Sally Wagenmaker

Winter weather advisories always urge caution when dealing with snow, gusty winds, ice, and bitter cold.

But how should churches address inclement weather issues for their employees? And are employees entitled to pay for time missed due to bad weather?

As an overarching human resources matter, caution and common sense must be practiced when it comes to inclement weather situations.

No employer should expect employees to risk life and limb to get to the office.
It may be prudent to cancel or postpone program activities, too.
Watching the weather forecast and staying attentive to public service announcements (e.g., school closings, public transit schedule adjustments) should help church leaders make responsible decisions.
Remote-working options can help as well, with employees handling tasks from home through available technology.

With respect to employers’ pay obligations, three key factors apply: (a) whether the employees are “exempt” or “nonexempt” under the federal Fair Labor Standards Act (FLSA) and comparable state laws, (b) whether the employer is open for business, and (c) whether money matters more than morale.

The FLSA distinguishes between exempt and nonexempt employees.

To be classified as “exempt,” an employee must (a) be paid a salary, (b) of at least $455 per week, and (c) have certain skills or duties (e.g. executives, professionals, or administrative employees who regularly exercise discretion over significant matters—this is known as the “white-collar exemption”; but also note how the “ministerial exception” plays a role for certain positions).

All other employees are considered “nonexempt,” and are entitled to overtime pay and other legal protections.

On inclement weather days, exempt employees are slightly better off than nonexempt employees. The key difference is that nonexempt employees are entitled to pay only if they work, unless the business is closed.

Exempt employees, on the other hand, are entitled to pay regardless of the circumstances.

One common mistake churches make is to improperly deduct pay for exempt employees, essentially giving them unpaid leave for missed work. At least theoretically, a risk may then arise that employees may be reclassified as nonexempt based on such a pay modification. That’s why it’s better for churches to make certain that exempt employees receive their regularly scheduled compensation.

Some churches also may consider requiring both types of employees to take paid leave (e.g., vacation and personal days) as a result of an office closure.

The legal considerations aside, requiring church employees to take paid leave days or deducting their pay due to inclement weather may prove very unpopular.

Accordingly, churches are well-advised to adopt an inclement weather policy providing clear guidelines addressing potential use of paid leave, pay deductions for nonexempt employees’ missed work, and perhaps even extra paid “snow,” “cold,” or other inclement weather days when circumstances warrant such a benefit.

Sally Wagenmaker is a partner at Wagenmaker & Oberly, a law firm serving nonprofit organizations across the nation with offices in Chicago and Charleston, South Carolina. She provides legal counsel in corporate, tax, employment, and real estate matters for clients, including churches and other religious organizations, social service providers, and schools. Sally is the current president and board chair of Christian Legal Society.

Image: getty/javier ghersi

Does Your Church Have a Capital Reserve Account?

Setting and building a capital reserve account fund can help your church prepare for inevitable future expenses.

A capital reserve account is one that is established to save money in a designated account to pay for a major capital expenditure (replacement, repurposing, and so on) when an expensive item’s effective life is over.

For example, the average life of your church’s HVAC systems may be 15 years. If you spend $100,000 on a new HVAC system today, how much should you set aside in a reserve account to have the adequate funds to replace it in 15 years? Is it $100,000? More? Less?

Here are five considerations that will help determine future costs and develop a capital reserve account for any inevitable expenditures:

Deferred maintenance. If you have any deferred maintenance, you must develop a plan to bring things current based on their age and expected life. If that is not done prior to developing the ongoing capital reserves, you will always be playing catch up.

Current replacement value. What would it cost today to replace the item?

Expected life. How many years of life are still expected from this item?

Annual inflation. As you look at the economic environment, what percentage of annual inflation would be prudent to plan on?

Annual budget. Based on the above four considerations, how much money should be set aside every year?

Adapted from 5 Intentional Steps to Establish a Capital Reserve Account, an eBook from the Cool Solutions Group.

How to Remove a Church Board Member

Avoid potential litigation and internal strife with proper bylaws, policies, and procedures.

Myron Steeves

One of the biggest difficulties faced by a church board occurs when the pastor, congregation, or other board members decide that individual board members should be removed from the board. In many instances, there is no effective means of removing board members without costly litigation.

Recently, several church members sought to have two church board members removed because of perceived moral failures. The board anticipated a quick and smooth process. However, the church’s bylaws were not very clear about how to remove board members, and the targeted board members, perceiving a personal vendetta, fought back. Tension between the two factions escalated, and a lawsuit was filed with the hope of driving the entrenched board members into a quick resignation. But the opposite effect occurred. The targeted board members dug in and the matter went to trial. After two years of litigation, the church was hundreds of thousands of dollars in debt, and barely survived. While the facts behind the dispute were tragic, the costs of resolution were caused, to a great extent, by an inadequate process set forth in the church’s bylaws for removing board members.

To reduce risks of litigation like this, and the disruptions it causes to church life, churches should review state law where it is organized, as well as any church articles of incorporation and bylaws that address the process of removing a board member. If a church finds its governing documents do not provide a clear and appropriate means of removing a board member from the board, the church should consider adding a provision to the bylaws that best meets the expectations of the church. The right time to undertake the creation of such a provision is when the board is smoothly operating. It is often too late to address the problem after the need to remove a board member arises.

Why remove a board member?

The reasons for removing a board member vary widely. Sometimes health or career issues make it impossible for the board member to effectively fulfill his or her legal obligations to the board. A departure from the doctrines of the church or a failure to meet the lifestyle standards of the church also are reasons a board member should be removed. Some of the reasons are less clear, such as personality conflicts that prohibit the board from functioning well until the disruptive member is removed.

Fortunately, the issue of whether to remove a board member from the church board is a rare occurrence. Many churches have terms of office for board members that are one to three years, and churches are willing to endure the problem until the board member’s term ends. Some board members will resign if asked to do so by the pastor or board chair, avoiding an often embarrassing and painful removal process.

What does state law say?

When a board member refuses to resign, the process set forth in the governing documents of the church will determine the conditions under which removal takes place. If the church bylaws are silent on this, state business organization law may apply, often with surprising and undesirable results.

State laws regarding the removal of board members fall into three categories:

1. States that allow the removal of board members for any reason by church members or the board. In states that have these laws, it is generally possible for the body that put the board member in office to simply vote him or her out of office for any reason at all. For example, if the membership is authorized to elect board members, the membership can remove them. Similarly, if the board elected its own board members, it can remove board members for any reason as well.

This approach is the simplest one. It gives fewer grounds for lawsuits in disputes about the removal of board members. Because of this, it is the approach used in the Model Nonprofit Corporation Act, which is influential in many states.

2. States that allow removal of directors only for “cause.” “Cause” is a narrow category of reasons set by states to justify an organization’s removal of board members. These include very good reasons, such as being declared of unsound mind by a court, being convicted of a felony, failing to attend board meetings, and failing to meet the standards for membership. This list, while covering very important issues, is often too narrow for churches that have another compelling reason to remove a board member. For example, a church may wish to remove board members if they depart from church doctrines, engage in lifestyle choices that are opposed by the church, or exhibit attitudes out of step with the types of attitudes expected of church leaders. As important as these reasons for removing board members might seem, they would generally not be considered “cause” under secular corporate statutes.

3. States that give no guidance on the issue at all. The states that have statutes that are silent about when board members can be removed are problematic. Churches that attempt to remove board members do so with uncertainty about the legal outcome—unless their bylaws address the issue instead.

The value of church bylaws

Typically, state laws regarding removal of board members are considered “default provisions,” meaning that an organization can set different standards—if it chooses to do so—by addressing the matter in its bylaws or articles of incorporation. The narrower statute requirements are not broad enough to meet most churches’ needs. For these reasons, every church’s bylaws should provide clear guidance on when and how a board member can be removed. No church board should rely on the default statutory requirements unless the church has determined that the statute provides precisely what the church believes serves its governance needs best.

When churches draft bylaw language regarding how and when a board member can be removed, they should keep in mind that bylaws are written for two audiences: the church that will apply them and the courts that will be called upon to interpret them if disputes lead to litigation. While many churches wish to have bylaw provisions that are crafted in a way that shows great deference to spiritual direction, a lack of clear and concrete language may make it difficult to predict how a court will interpret the bylaws.

For example, a church may wish to have a bylaw provision that states that a board member may be removed for behaving in an “ungodly manner.” Because of the First Amendment’s religion clauses, secular courts will not be drawn into determining what kind of activities are consistent with the values of a church. However, if the bylaws indicate who the decision-maker is for removal of the board member, the courts can readily apply the provision without interfering with the values of a church. For instance, a bylaw provision may state that a board member will be removed if the senior pastor determines, after counseling, that the board member is engaged in an ungodly lifestyle. This type of provision gives a court a path for decision-making that does not call on it to interpret church standards. The court will defer to the pastor’s decision on the grounds for removal, and then enforce that standard without having to determine what an ungodly lifestyle is.

Three approaches to bylaws that address removal

In preparing bylaws that address the removal of board members, there are three basic approaches: removal by the church membership, removal by the church board, and removal by a designator. Each approach is outlined below.

1. Removal by church membership. This approach is most common when the church membership is empowered to elect board members. Churches that are congregational in governance often must have this form of removal because of church polity. In these circumstances, allowing a board member to be removed for any reason has practical advantages. Consider a large church—not all members will be well-informed on church governance issues. Such a congregation may be ineffective in determining if specific standards are met. If the standard turns on a factual determination, such as whether a board member engaged in wrongful conduct—and the board member denies engaging in the conduct—the congregation may not be equipped to make such a factual determination.

These problems are generally avoidable if the bylaws authorize the members to remove board members without requiring the members to vote on whether a specific standard was violated. For example, some bylaws state that board members can be removed for financial impropriety. The pastor may possess clear evidence of embezzlement by a board member, but is reluctant to let details out to the congregation because of the pain and damage this could cause others. Since the pastor understandably does not want to disclose this information, the church membership will never have sufficient information to vote on removal of the board member. In contrast, if the bylaws allow church membership to remove a board member for any reason, the pastor may provide sufficient information to the church membership to call for a vote without disclosing information that should remain private.

Churches that allow for the removal of board members by the church membership should make sure that their bylaws provide a means for the church to call a meeting of the membership on short notice. For example, the bylaws only allow for the membership to meet for business once each year. If an incident giving rise to removal takes place 11 months before the only annual members meeting, no action may be taken before the board member’s term ends. This type of removal process is not very effective.

The Model Nonprofit Corporation Act has a provision for membership organizations like congregational churches that can be very useful if incorporated into a church’s bylaws. This provision provides that while the membership can remove a board member for any reason, the board can remove one of its members without the need for a vote from church members. This would allow the board to discreetly remove a board member without a lot of public embarrassment and anguish. This provision stipulates, however, that the specific reasons for such a removal must be spelled out in the bylaws.

When bylaws provide for the removal of board members by the church membership, the bylaw provisions also should be very clear on the process needed for the removal. Consider, for example, the timing of meeting notification. When should notice be given before a special meeting is called for voting on removal? Many church bylaws require a notice of at least two weeks before a special meeting, either by an announcement from the pulpit or publication in a church newsletter or bulletin. Further, the bylaws should state whether or not to include the purpose of the meeting in the notice. It could be viewed as unfair to remove a board member at a meeting that was poorly attended because many church members were unaware that an important vote was going to take place.

The language in the bylaws that describes how notice for a meeting is to be given should be very clear, and not so complicated that claims of defective notice can be raised. Bylaws should avoid use of the term “posted notice” when what is meant is publication in a newsletter or bulletin. “Posted notice” may mean different things under state law than is intended by a church, making this provision ambiguous and creating grounds for a claim of ineffective notice. In some jurisdictions, posted notice would mean that an announcement is placed in a prominent location in the church, such as a door or wall. That is not an ideal way to inform a congregation, especially in churches that have more than one entrance.

The bylaws also should clearly state whether the board member has any rights at that meeting, such as the right to be present to make a statement before the vote. While providing such a right may lead to highly contentious meetings, it also gives a degree of fairness to a process that might otherwise be viewed as forced upon a congregation that lacks the information it needs to decide an important outcome.

Since the election of board members by the general membership is the most common form of governance in churches, this model as a provision for bylaws can be adapted to the unique needs of a given church:

The membership of the church may remove, with or without cause, one or more board members at a meeting of the church membership.

The membership of the church may remove one or more board members at a meeting of the membership for the following reasons: The bylaws would then list what constitutes cause, including, for example, being declared of unsound mind, being convicted of a felony, missing a specified number of consecutive board meetings, and failing to meet doctrinal or lifestyle requirements.
Board members may be removed at either a regularly scheduled business meeting of the membership, or a specially called meeting. However, no board members may be removed from the board at such a meeting unless advance notice of the motion for removal of the board member has been given to the membership.
For purposes of this provision, “advance notice” of a meeting at which the removal of a board member shall be considered requires that a statement be made in the church newsletter at least two weeks before the meeting, indicating the date, time, and location of the meeting, as well as indicating that a resolution will be presented on the removal of a board member from the board. The notice must state the name of any board member or board members whose removal from the board will be considered.

2. Removal by the other board members. This is most common in churches that do not have a membership system. In these churches, the board is “self-perpetuating,” and it makes sense that the board that voted to put an individual on the board should be able to decide if that person ought to be removed from the board.

As with the removal by the church membership, removal of a board member by the other board members for any reason at all is the easiest to describe in the bylaws, and the easiest to apply in practice. Unlike congregational membership, boards tend to meet frequently, and consist of members who are highly informed on issues and are passionate about the decisions they make. This can be good, but it also can be problematic. Where church boards are sharply divided on issues, they may engage in tactical and divisive maneuvers for political advantage. By introducing standards for removal, some of these maneuvers can be minimized. For example, the bylaws could require that once a board member is elected to the board, he or she can only be removed because of excessive missed meetings, lifestyle or doctrinal issues, commission of a crime, disruptive behavior, or similar issues.

For a church that has a history of sharply divided boards, one way to avoid frequent debates regarding the removal of board members is to shorten the length of terms. Churches with one-year terms for board membership may often avoid the need to seek removal of a board member, while those with three-year terms will experience more frequent incidences of motions for removal.

3. Removal by a designator. While this approach to removing board members is not as common in churches as it is in other types of nonprofit organizations, it can be adopted for the church context. A church may require a specific person or a group of people (such as denominational leadership or a nominating committee) to have rights in the appointment of board members. If well-suited to a church’s needs, designators could be given the exclusive right to consider grounds for the removal of board members. The advantage of this approach is that it can ensure the decision to remove a board member is done by an individual or group that has unique expertise or knowledge needed to make a wise decision. Further, this approach could also ensure that the decision-maker is detached from the day-to-day operation of the church. If the desire is to have decisions on removal made for reasons related to the spiritual life of the board member, a specific designator or designators may be better suited for this task than the general membership of the church or the board itself. Church leadership, however, must carefully select a designator to make sure that one or two people are not able to manipulate church leaders for a personal agenda. This risk is minimized by making a group of people the designator, rather than just one person. The group should include someone outside of local church leadership, such as a denominational leader.

Concluding Thoughts

Disputes over the removal of board members are among the most difficult for a church to face. Fortunately, when these issues do arise, most of them can be resolved through counseling the board member in question so that he or she resigns in order to avoid scandal or turmoil. However, the fact that many board members have willingly, if reluctantly, resigned should not lull a church into thinking that this will always be the case. Every church should be prepared for the possibility that it may need to follow formal action to remove a board member who resists action.

Careful preparation of bylaws provisions that set forth a clear process for removal in concrete language can help avoid painful and costly conflict. The very presence of such language can provide an incentive for board members to resign rather than resist a well-crafted removal procedure. It is important this language be drafted and inserted into bylaws long before problems arise since they are very difficult to add once problems arise. Planning ahead in board member removal provisions are an effective way to protect a church from what can be a costly risk.

Attorney Myron Steeves has practiced law for more than 25 years in California. He founded the Church Law Center of California (ChurchLawCenter.com) in 1995, where he continues to help meet the legal needs of churches and nonprofit organizations. Steeves also was dean of Trinity Law School from 2010 to 2016. He is an active member of the American Bar Association’s Model Nonprofit Corporation Act Subcommittee.

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Minimizing the Risks of Child Molestation in Churches

How this 14-step plan can help protect the most vulnerable.

Richard R. Hammar, Attorney, CPA

Bio

Overview

For many years, I used a five-step checklist for minimizing the risk of child sexual abuse on church property or during church activities:

a written application
an interview
reference checks
a six-month rule (no one considered for youth or children’s ministry who has not been a member of the church for at least six months)
a two-adult rule (no child allowed to be alone with one unrelated adult at any time)

In recent years, I added a sixth precaution—a criminal records check (national database and national sex offender registry).

After reviewing numerous recent precedents, developments, and key insights related to public revulsion of child abuse, I now recommend a 14-step set of precautions to manage the risk of child sexual abuse in churches.

Background court case

The Massachusetts Supreme Judicial Court ruled that a Catholic diocese was not liable on the basis of negligent hiring or breach of a fiduciary duty for a priest’s molestation of two young boys, but could be liable on the basis of negligent retention and supervision. Andrews v. Cronin, 34 Mass. L.. Rep. 663 (Mass. Super 2018).

The bishop of a Catholic diocese in Massachusetts was responsible for governing it. In 1977, he appointed a priest to serve as pastor of a church in the diocese. The priest remained at this church until his retirement in 1986. He passed away in 1996. In the 1970s, he appointed two nine-year-old boys (the “plaintiffs”) as altar servers. The boys served for several years. While they were altar servers, the priest took them on numerous trips, primarily to see sporting events in Boston and around the country. The out-of-state trips included yearly two-week trips to Florida, yearly trips to New Hampshire, an extended trip to the west coast, and trips to Canada, Wisconsin, New York, Kansas City, and Hartford. The priest and the plaintiffs would stay at hotels overnight. The plaintiffs claimed that as a matter of routine each morning during these trips the priest would sexually molest them. During this period, the plaintiffs also spent a significant amount of time at the rectory where the priest and another priest resided, and they claimed to have been sexually abused during overnight visits.

The plaintiffs later sued the bishop and diocese, claiming they were responsible for the priest’s misconduct on the basis of negligent hiring, retention, and supervision, and breach of a fiduciary duty. The bishop insisted that he was unaware that the plaintiffs were spending the night in the rectory, or that the priest was taking the plaintiffs on extended overnight road trips. The bishop later testified that if he had known the priest was molesting the plaintiffs he would have taken steps to remove him.

Negligent hiring

The plaintiffs’ lawsuit claimed that the bishop negligently hired, supervised, and retained the priest. The court dismissed the negligent hiring claim, noting that “no evidence has been presented that the bishop knew or should have known about the priest’s propensity to molest children at the time he appointed him as pastor of the church in 1977.”

The court relied on its prior ruling in Petrell v. Shaw, 902 N.E.2d 401 (Mass. 2009). In the prior case, the court rejected an allegation of negligent hiring in a child abuse case. At the time of a pastor’s employment, a regional church, pursuant to its internal policies, arranged for the Oxford Document Management Company to conduct a background investigation, which was accomplished by sending detailed questionnaires to all employers, schools, and church agencies with which the pastor had any prior contact. This investigation did not result in any responses suggesting that he had engaged in any inappropriate sexual conduct. In rejecting a negligent hiring claim against the regional church, the court noted that it was the local church, and not the regional church, that hired the pastor and entered into an employment contract with him. The court concluded:

Even assuming that the regional church’s role in commissioning or conducting a background check on the pastor was sufficient to show that it ‘hired’ him, no rational jury could conclude that it overlooked or ignored any evidence suggesting that he would engage in a sexual relationship with an adult parishioner. The background check, conducted as required by church policy, revealed no such facts. Also in accordance with church policy, the regional church confirmed that the pastor had attended training designed to prevent sexual misconduct, provided by his previous employer. In short, the plaintiff presented no facts even suggesting that, at the time he was hired by the parish, the pastor had a history of sexual misconduct that the regional church could have discovered through reasonable investigation.

Negligent retention and supervision

The court noted that the negligent retention and supervision clams were “a much closer call.” It observed:

Negligent retention [and/or supervision] occurs when, during the course of employment, the employer becomes aware or should have become aware of problems with an employee that indicated his unfitness, and the employer fails to take further action such as investigating, discharge or reassignment. In evaluating a claim for negligent . . . retention or supervision, the court must examine the totality of the circumstances in determining whether it was reasonably foreseeable that an employee would cause harm to a plaintiff.

Applying these principles to the circumstances present here, the critical inquiry is thus whether the bishop, in the absence of notice, “should have known” about the priest’s activities, and, if armed with that knowledge, would have reasonably foreseen that he would cause harm to a plaintiff. Viewing the facts in the light most favorable to the plaintiffs . . . the court answers that question in the affirmative.

The court continued:

An issue remains about whether the bishop . . . should have known that one of his priests spent significant time away from the parish, including being gone for weeks at a time throughout the year on extended road-trips with adolescent boys. If [he] should have known about those absences, a genuine issue also exists about whether sexual misconduct would have been reasonably foreseeable so as to trigger some inquiry or investigation. . . . The relevant inquiry is whether if the bishop had known about the time the priest was spending with the plaintiffs, further investigation would have been appropriate given the reasonable foreseeability of sexual misconduct under those circumstances.

Fiduciary duty

The plaintiffs claimed that the bishop breached his fiduciary duty to them. The court noted that “a fiduciary duty arises out of a unique or intimate one-to-one relationship, where the person owing the duty has reason to know that another is relying on his guidance and/or advice.” In concluding that no fiduciary duty existed between the plaintiffs and bishop, the court concluded:

While a sensitive situation involving children and sexual abuse, the record here discloses no knowing, special, personal, or intimate relationship of confidence or trust between the bishop and the plaintiffs, despite the plaintiffs’ status as altar servers. Rather . . . the only relationship that existed was in a shared, religious affiliation, rooted in religious doctrine inappropriate for the court’s scrutiny.

Public revulsion

The public revulsion at stories of child abuse in churches and other charities has reached a new and increasingly palpable level based on the following three developments among others:

1. Grand Jury Report on Child Abuse by Catholic Priests in Pennsylvania

In 2016, the Pennsylvania Attorney General initiated confidential grand jury proceedings to investigate:

allegations of child sexual abuse by individuals associated with six of the eight Pennsylvania dioceses of the Roman Catholic Church,
failure of church officials to make mandatory reports of child abuse,
acts by Catholic priests endangering the welfare of children, and
obstruction of justice by church officials, community leaders, and public officials.

In August 2018, just prior to the expiration of its term, the grand jury submitted a 900-page report of its investigation. The report states:

We were given the job of investigating child sex abuse in six dioceses. . . . We heard the testimony of dozens of witnesses concerning clergy sex abuse. We subpoenaed, and reviewed, half a million pages of internal diocesan documents. They contained credible allegations against over three hundred predator priests. Over one thousand child victims were identifiable, from the church’s own records. We believe that the real number—of children whose records were lost, or who were afraid ever to come forward—is in the thousands.

On the heels of grand jury report’s release, the US Department of Justice in October 2018 opened its own investigation into the Pennsylvania dioceses. Separately, as numerous state attorneys general continue opening abuse investigations into Catholic dioceses nationwide, The New York Times reported at least 6,100 Catholic theologians, educators, and lay leaders have signed a petition “calling for all the American bishops to offer the pope their resignations” due to years of inaction and cover-up.

2. Brooklyn settlement

In September 2018, the Brooklyn, New York, diocese of the Roman Catholic Church reached a $28.5 million settlement with four adult males who had been repeatedly abused by a priest in a parochial school. This settlement represents one of the highest “per victim” awards in any child abuse case.

3. Protecting Young Victims from Sexual Abuse Act of 2017

During the past year the public was stunned by revelations of sexual molestation of young athletes by coaches, trainers, and others associated with USA Gymnastics, USA Swimming, and USA Taekwondo. As public scrutiny focused on this scandal, it was soon learned that over the past 20 years, hundreds of young athletes were subjected to sexual abuse by coaches, doctors, or other adults affiliated with youth sports programs. Victims claimed that youth sports organizations did nothing in response to their cries for help. These and other revelations of the sexual molestation of minors engaged in athletic training and performance led to the near-unanimous enactment by Congress, in February 2018, of the Protecting Young Victims from Sexual Abuse Act of 2017.

Passage of this historic legislation was preceded by days of heart-wrenching testimony by current and former victims, and public statements by members of Congress. This testimony reflects the universal public abhorrence at child abuse, and any attempt by charitable organizations to “cover up” or not vigorously pursue allegations of abuse. Church leaders should keep this in mind when making decisions regarding the selection and supervision of children’s and youth workers, and when making a decision regarding whether to report child abuse to civil authorities.

The public (your potential “jury pool”) is increasingly intolerant of the inadequate response by churches and other youth-serving charities to incidents of child sexual abuse. Church leaders need to review current policies and be prepared to take additional steps to protect minors.

A 14-step plan to reduce risk

There are many steps that churches can take to reduce the risk of child molestation on church premises and during church activities. Here are 14 of them based on a comprehensive examination of all relevant court rulings:

Key Point. Look at these steps as ways to protect children rather than as a risk management tool. If your goal is risk reduction, compliance is more likely to be less vigilant and inconsistent. Compliance is higher and of longer duration when leaders are motivated primarily by a desire to protect children.

1. Interview. Interview all applicants for youth and children’s ministry positions. This applies to both paid employee and unpaid volunteer positions. Interviews provide the church with an opportunity to inquire into each applicant’s background and assess each applicant’s suitability for the position under consideration.

2. A written application. Every applicant for youth and children’s ministry positions (volunteer or compensated) should complete an application. At a minimum, the application should ask for the applicant’s name and address, the names of other youth-serving organizations in which the applicant has worked as an employee or volunteer, a full explanation of any prior criminal convictions, and the names of two or more personal references.

3. Institutional references. The best reference is an institutional reference. This is a reference from another institution where the applicant has worked with minors either as a paid employee or an unpaid volunteer. The key question to ask is whether the institution is aware of any information indicating that the applicant poses a risk of harm to minors or is in any other respect not suitable for youth or children’s ministry. Obviously, obtaining a positive reference from one or more other institutions that have actually observed the applicant interact with minors is the gold standard in screening prospective youth and children’s workers. Some applicants have not worked with other youth-serving institutions in the past, and so no institutional reference is available. In such cases, a church’s only option is to obtain personal references. However, risk can be reduced by limiting personal references to members of the church, or to members of other churches that are well known to church leadership.

For pastoral applicants, the best reference will be from a denominational office with which the church is affiliated. If the church is not affiliated with a denomination, then the best reference will be from board members in other churches in which the applicant has served.

For nonministerial employees and volunteers, the best references will be from other churches or charities in which the applicant has worked with minors. Examples include Boy Scouts of America, Girl Scouts of the United States of America, Big Brothers Big Sisters of America, Boys & Girls Clubs of America, YMCA of the USA, youth sports organizations (such as Little League Baseball and Softball), Catholic Charities USA, public or private schools, youth sports, or other churches or religious organizations. Seek a reference from every such organization in which the applicant has served. Your application form should ask applicants to list all such organizations, including contact information.

For persons seeking a position as a youth or children’s pastor, institutional references include other churches in which the applicant has worked in youth or children’s ministry, and the denominational office through which the applicant is credentialed.

Often, a church will not receive a response to a request for a written reference. In such a case, contact the reference by phone and prepare a written memorandum noting the reference’s identity, the date and method of contact, the person making the contact, the questions asked, and a summary of the reference’s remarks. Ideally, have a second person litening in on the conversation who can sign the memorandum as a witness. Such forms, when completed, should be kept with an applicant’s original application. They should be kept permanently.

Caution. Be sure you are aware of any additional legal requirements that apply in your state. For example, a number of states have enacted laws requiring childcare facilities to check with the state before hiring any applicant for employment to ensure that each applicant does not have a criminal record involving certain types of crimes. You will need to check with an attorney for guidance.

4. A six-month rule. Churches can reduce the risk of sexual molestation of minors by adopting a policy restricting eligibility for any volunteer position involving the custody or supervision of minors to those persons who have been members in good standing of the church for a minimum period of time, such as six months. Such a policy gives the church a better opportunity to evaluate applicants, and will help to repel persons seeking immediate access to potential victims.

5. “Benchmark” church policies by comparing them with the policies of other charities and the public schools. Check with other churches and youth-serving charities (i.e., the American Red Cross, YMCA, Boy Scouts and Girl Scouts, Big Brothers Big Sisters) to see how your procedures compare. Most importantly, check with your public school district. Public schools are agencies of the state, and therefore by aligning your procedures to those of public schools you are going a long way toward demonstrating that your procedures are reasonable and not negligent.

6. Periodic review of your policies by legal counsel. Like benchmarking, having an attorney periodically review your worker selection procedures will help to establish the exercise of reasonable care, which will reduce the risk of both harm and a finding of negligence.

7. Adopt a two-adult policy prohibiting a child from being alone with an unrelated adult. Such a policy simply says that no minor is ever allowed to be alone with an unrelated adult during any church activity. This policy reduces the risk of child molestation, and also reduces the risk of false accusations of molestation.

Key point. Some churches make an exception to the two-adult policy for on-site teaching activities conducted during regular church hours, allowing multiple children to be in a classroom with only one adult. Such churches often use the public schools as their comparators. It is common for public school teachers to be alone in a classrom with several children, but this arrangement has not led to any known legal liability on the basis of negligence for public schools, probably because of the implausibility that a teacher could molest a child in a classroom with several students present without being detected and reported. As noted above, public schools are agencies of the state, and therefore, by aligning your church’s procedures to those of public schools, your church is demonstrating that its procedures are reasonable and not negligent.

Example. A church sponsors a campout for young boys. Some of the boys are accompanied by their fathers, but several are not. One tent is occupied by an adult volunteer worker and three boys. This arrangement violates the two-adult rule.

Example. A youth pastor takes home a group of five teenagers following an activity at church. After taking four of the teenagers to their homes, he is left in his car with a 15-year-old female. This arrangement violates the two-adult rule.

8. A criminal background check consisting of a nationwide search of sex offender registries, and a national criminal file search. Criminal records checks are inexpensive and convenient, and they are an essential component of risk management. Preferential pricing often is available from your insurance company or a denominational office.

Never hire anyone in a youth or children’s ministry position, as either an employee or volunteer, who was or is on a sex offender registry in any state. Other crimes are disqualifying as well if they suggest that a person poses a risk of harm to minors.

Key point. If in doubt about the relevance of a particular crime, a good practice is to bar persons from youth or children’s ministry who would not be eligible to work as a public school employee. Your local public school district offices should be able to provide you with a list of disqualifying crimes.

9. Prompt reporting of child abuse (known and suspected). It is imperative for church leaders to comply with their state’s child abuse reporting law. Promptly report all known and reasonably suspected cases of child sexual abuse to the designated state agency. In some states, a report must be filed within 24 hours. Know the reporting requirement in your state. Be sure to make a telephone memorandum of your call, and ideally have a second person listening in on the conversation who can sign the memorandum as a witness. Resolve any and all doubts in favor of reporting. Prompt reporting has several advantages:

It is required by law (for mandatory reporters).
You avoid misdemeanor liability for failure to report.
You avoid civil liability in many states for not reporting.
Reporters are given immunity from liability in every state (except for malicious behavior).
You protect the current victim from further harm.
You are placing the abuser’s identity in the criminal justice system, making it more likely that this information will be flagged to other churches and youth-serving charities evaluating an applicant for youth or children’s ministry.
You minimize the risk of public outrage that can be unleashed if your church failed to report abuse to the state and the offender later molests other minors.

Key point. Child abuse reporting laws do not require churches to conduct investigations into allegations or suspicions of abuse. The only requirement for church leaders is to determine if reasonable cause exists that child abuse has occurred.

10. Promptly address and halt high-risk behaviors. Often, those who molest minors in churches or church activities have openly engaged in high-risk behaviors, including:

Minors spending time in the home of a youth or children’s ministry leader.
Minors spending the night in a leader’s home.
An adult leader drives a vehicle with one or more unrelated minors on board, and no other adults.
An adult goes on day trips with an unrelated minor.
An adult goes on overnight trips with an unrelated minor.
A leader spends the night in a hotel with one or more unrelated minors.
A leader meets one or more minors in malls or other places where minors congregate.
An adult leader sleeps in a tent with an unrelated minor during a camp out.
An adult provides unrelated minors with gifts.

These and similar “grooming” behaviors are associated with many incidents of sexual abuse involving youth and children’s ministry leaders in churches. It is imperative that they be promptly confronted and stopped.

11. Social media. As a “best practice,” churches should prohibit any private messaging on any social media platform by a youth or children’s pastor or lay volunteer with unrelated minors. For support, contact your local public school district and find out what if any restrictions they place on communications between teachers and students. Often, such communications are prohibited.

12. Video technology. The installation of video cameras in strategic locations can serve as a powerful deterrent to child molesters, and can reduce a church’s risk of negligent supervision. Video technology has become affordable for most churches, and should be considered by all churches as both a powerful deterrent and as a means of proving or disproving alleged misconduct. Consider the following uses:

Video cameras are especially helpful in a church’s nursery since infants and very young children are present who are incapable of explaining symptoms of abuse. In such cases, innocent nursery workers may be suspected who lack the ability to conclusively prove their innocence. Video cameras can be helpful in documenting how symptoms of abuse may have occurred, and in proving the innocence or guilt of nursery workers.
Church restrooms present a unique risk of molestation for both infants and older children. After all, they are frequented by children, they are easily accessible, and they often are in remote locations or are not adequately supervised. A video camera installed in a hallway outside a restroom frequented by minors can be a powerful deterrent to child molesters. It also will provide church leaders and local authorities with evidence in the event that a minor is molested in a church restroom.

13. Training. Churches should conduct periodic training of employees and volunteers on recognizing and reporting child abuse, the identification of abused minors, and the importance of becoming familiar with the 14 recommendations summarized in this article. It is a “best practice” to incorporate employees of your child abuse hotline office, and employees of your prosecuting attorney’s office, in your training.

14. Negligent supervision. Churches can use reasonable care in selecting workers, but still be liable for injuries sustained during church activities on the basis of negligent supervision. The term negligence means carelessness or a failure to exercise reasonable care. Negligent supervision, then, refers to a failure to exercise reasonable care in the supervision of church workers and church activities. Churches have been sued on the basis of negligent supervision in a variety of contexts, but most often in child abuse cases. Adequate supervision involves a number of safeguards, including:

Lock rooms and hallways that are not being used;
Use video technology (see above);
Have an adequate number of adults present during youth and children’s activities to monitor workers and activities;
Enforce a two-adult policy prohibiting one adult worker from being alone with one minor;
No “early releases” of minors;
Only release minors to the parent or other adult who brought them;
Be especially vigilant with off-site activities such as field trips and camping since they present potential opportunities for sexual abuse due to the difficulty of adequate supervision.
Exclude known or registered sex offenders from any youth or children’s activity;
In formulating polices, “benchmark” by examining the policies of other charities and the public schools.

Key point. Look at these 14 steps as ways to protect minors rather than as a risk management tool. If your goal is risk reduction, compliance is likely to suffer. Compliance is higher and of longer duration when leaders are motivated primarily by a desire to protect minors.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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Q&A: Are Items Sold in Our Church’s Welcome Center Considered Unrelated Business Income?

What to know before stocking up on T-shirts and coffee mugs with your church logo.

Frank Sommerville, Attorney, CPA

Bio

Q: We are considering selling T-shirts, coffee cups, water bottles, and other items in our church’s welcome center. These items have our church logo on them. Does the logo make them “related” to our nonprofit status, or does this create unrelated business income?

Does it make a difference if the proceeds go to, say, “youth missions” versus church revenue? And lastly, do you have any insights on paying sales tax on such items?

First off, it doesn’t matter if your proceeds go toward youth missions or your general revenue budget. What matters is whether or not the items being sold are substantially related to your exempt purposes. Something does not become “related” just because you put your church logo on it.

Determining whether or not an item creates unrelated business income must be determined through an item-by-item analysis. For example, let’s say you sell a T-shirt with a scripture verse or a Christian symbol—like a cross—on it and the shirt comes with a gospel tract or instructions on how to become a Christian. The sale of a T-shirt in this manner is more likely substantially related to the exempt purposes of spreading the gospel.

Finally, sales tax is determined on a state-by-state basis. Many churches confuse the exemption from paying sales tax with an exemption from collecting sales tax. Most states do not exempt churches from collecting sales tax on taxable transactions.

If the church is required to collect sales tax, then these items will likely create a sales tax obligation. As a result, a church that conducts taxable transactions is required to have a sales tax permit. You should check with your state revenue department for the applicability of sales tax to a specific type of sale.

I advise my own church clients to get me involved early on in the process of idea development, so I can help them avoid unrelated business income. I must give you similar advice: Don’t proceed before receiving expert advice from a tax attorney who has experience with churches.

Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

How to Reduce EPLI Costs and Claims

Best practices for preventing lawsuits.

Bobby Ross Jr.

Whether you’re considering adding employment practices liability insurance (EPLI) to your church’s coverage or thinking of comparing pricing, the experts agree: There are ways to save money on such a policy as well as lower the risk of claims that might involve it.

“The best way to prevent these claims is to manage employees well,” said GuideOne’s Brian Gleason. “This policy is intended to be a backstop if everything should go wrong.”

Gleason recommends preventive steps starting before hiring, with a thorough application process that includes background screenings. After hiring, he recommends regular performance appraisals that allow communication about an employee’s performance and include expectations for the future.

“Clear lines of supervision are important,” Gleason said. “Sometimes in churches that can be challenging, but it helps to have a defined understanding of expectations of the employee and for the supervisor to make sure those are communicated.”

Attorney Thomas Bentz said having employment policies in place and written in a handbook format are essential, as is having someone designated to handle issues that arise. “If you can demonstrate you have these to your underwriter, they’ll be much more willing to give you a better rate,” said Bentz, who specializes in insurance law.

Attorney Nathan Adams, whose practices include labor, employment, and benefits law, said it’s important for churches to consider whether their employment practices are good and whether they’re followed consistently.

“Sometimes we’ll get calls from a client after they’ve released an employee, and you wish they would have contacted a lawyer beforehand,” Adams said. “Had they taken two or three different steps than they actually took, they might have minimized the claim or prevented it altogether. If you’ve consulted with a professional on the front end before taking adverse action, that’s usually better than waiting until afterward.”

Attorney Tiffany Releford, with expertise in labor and employment law, said prevention is the best means for keeping EPLI premium costs low because this will result in fewer claims filed.

Releford advocates updating employee handbooks, including written measures, such as policies that prevent discrimination and harassment as well as those that address theft, fraud, and embezzlement.

“You have to think of EPLI as any other insurance,” she said. “The day you don’t have it is the day you’re going to have an issue. But you’re best served by making sure you have the correct policies in place, not just to reduce your liability but to provide you with a defense in case there is some sort of occurrence that arises.”

Brotherhood Mutual’s Steve Case agrees.

“Reducing the cost of the insurance and reducing the risk of a claim go hand in hand,” Case said. “One of the best things that ministries can do on the front end is make sure that, through their employee handbook and through their interview and hiring process, that they’re clearly communicating their sincerely held beliefs, their standards of conduct, and their behavioral expectations for their staff. They also must clearly communicate their harassment policy and their discipline policy, and reaffirm that the employment is at-will employment, that you can be terminated for any reason that’s not illegal.”

Understanding state and federal employment laws is critical for churches, said Attorney Frank Sommerville, specifically because churches aren’t the typical employers in the sense that for-profit businesses may be.

“Churches cannot assume just because they’re a church that none of the employment laws apply,” he said. “That’s just not true; all of these employment laws apply in one shape or another.”

See also:

“Employee Lawsuits Against Churches Are on the Rise”
“What You Need in an EPLI Policy”

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What You Need in an Employment Practices Liability Insurance Policy

Twelve considerations when purchasing or reviewing this type of insurance policy.

Richard R. Hammar, Attorney, CPA

Bio

Employment disputes are one of the most common sources of church litigation. However, many churches are not insured against this risk. If you are looking at getting employment practices liability insurance (EPLI), these 12 considerations will help you evalute it.

Check to see who is covered under the policy

Generally, the employer and its officers, directors, and employees are covered. But, some policies exclude part-time employees and self-employed workers. Ask the church’s insurance agent about covering these persons if they are excluded.

Check the amount of coverage to be sure it is adequate

Also, note that under most employment practices liability insurance (EPLI) policies the costs of providing a legal defense for the employer come out of the policy limits. To illustrate, assume that a church has an EPLI policy with coverage of up to $300,000. If defense costs come out of the coverage limit, and the insurer incurs defense costs of $75,000, this reduces the coverage limit to $225,000.

Carefully examine the exclusions under the policy

Common exclusions include claims made under the Fair Labor Standards Act (for overtime pay, or the minimum wage), claims resulting from layoffs, claims under the Consolidated Omnibus Budget Reconciliation Act (COBRA), and claims under the Employee Retirement Income Security Act (ERISA). Some EPLI policies exclude punitive damages, while others do not. However, note that several states prohibit insurance policies from insuring against punitive damages.

Determine the amount of the deductible, or any “self-insured retention,” under the policy

A self-insured retention is the amount the employer is required to pay in defense costs or settlement amounts before coverage under the policy is triggered. To illustrate, if a church’s EPLI policy has a $20,000 retention, the church must pay the first $20,000 in attorneys’ fees and any settlement amount. Only after the church pays this amount will the insurer be obligated to pay additional amounts under the policy, up to the coverage limit.

Pay special attention to those persons who can bring claims that will be covered under the policy

Some policies limit coverage to claims made by current full-time employees. Others broaden the coverage to include claims made by part-time employees and self-employed workers, and former employees.

Most EPLI policies are “claims made” policies

A claims made policy covers injuries for which a claim is made during the policy period if the insured has continuously been insured with the same insurer since the injury occurred. Some insurers who offer claims made policies may agree to cover claims made during the current policy period for injuries occurring in the past when the insured church carried insurance with another insurer. This is often referred to as “prior acts coverage.”

EPLI policies will define how and when a claim must be made under the policy

It is essential for church leaders to be familiar with these provisions, since a failure to comply with the policy’s claims or notice requirements may lead to a loss of coverage.

Most EPLI applications require the church to identify any facts or incidents that may result in an employment-related claim

This includes wrongful dismissal, sexual harassment, or various forms of discrimination. It is important for the church to provide accurate and complete information in response to such questions. This should not be done by one person. A better practice would be for the board and staff to collectively provide input.

The need for EPLI insurance increases with the number of church employees

More employees means additional exposure to employment-related claims.

Most EPLI policies cover a wide variety of employment-related claims

This includes some or all of the following: sexual harassment, discrimination, wrongful dismissal, breach of employment contract, wrongful discipline, emotional distress, negligent selection and supervision, invasion of privacy, and defamation. Be sure to note whether an EPLI policy covers claims of discrimination filed with the Equal Employment Opportunity Commission (EEOC) or state human rights agencies are covered.

Many EPLI policies contain a “hammer clause”

Such a clause gives the insurer the authority to recommend the settlement of a pending claim for a specified amount. If the employer disagrees, and the case proceeds, the insurer’s liability under the policy cannot be more than the settlement amount it recommended. It is important for church leaders to be aware of the existence of such a provision in an existing EPLI policy, or an EPLI policy that is being considered.

Note whether an EPLI policy covers arbitration awards

Many churches have inserted arbitration clauses in employee handbooks or employment applications that require employment-related disputes to be resolved through binding arbitration. Churches that have adopted arbitration policies to resolve employment-related disputes should ensure that their EPLI policy will cover arbitration awards.

Related Articles:

“Employee Lawsuits Against Churches Are on the Rise”
“How to Reduce EPLI Costs and Claims”

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Employee Lawsuits Against Churches Are on the Rise

Why you need to consider employment practices liability insurance.

Bobby Ross Jr.

Twenty years ago, employment practices liability insurance (EPLI) policies were scarce in the United States. Even a decade ago, most employers didn’t purchase that type of coverage. That has changed.

In 2018, it’s estimated that half of all firms with 1,000 or more workers have in place some version of EPLI coverage, which protects employers against employee claims for discrimination, wrongful termination, harassment, and other employment-related issues. Many smaller businesses now are following suit as insurance companies make such policies more available and accessible.

Should churches take notice of this trend in the public and private sector? Yes, according to the experts we interviewed.

“Churches have this belief that they don’t have these type of issues and that they would never have an employee sue them,” said Cori Cable, associate corporate counsel with Brotherhood Mutual Insurance Company. “But the fact is, it does happen. There might have been a time a few decades ago where churches were rarely sued by employees, but that is no longer the case. Employment practice claims are some of the fastest-growing claims against churches, and it’s because of allegations of discrimination, harassment, retaliation, and other wrongful termination acts.”

The damages awarded through settlement and judgment are increasing, too.

“Employment practices lawsuits are returning very large damages and judgments,” said Frank Sommerville, CPA, nonprofit attorney, and editorial advisor for Church Finance Today. “If you look at statistics from the courts, you’ll see these coming in the hundreds of thousands of dollars each. Churches underestimate this.”

Churches are “behind the curve”

Many churches don’t see themselves as employers in the traditional sense, said Brian Gleason, senior risk manager for GuideOne Insurance. Therefore, they don’t consider the risks and potential negative outcomes like a for-profit business might.

“In some ways, churches are probably more at risk than many businesses in that both the board and the supervisor, who likely is the pastor, do not have significant experience in human resources issues,” Gleason said. “So they’re more likely to make mistakes in the process than the average business owner.”

Additionally, corporate insurance is a widely known and accepted part of business ownership, whereas churches typically are behind the curve in some areas, Gleason added.

Most businesses and churches carry insurance policies, such as comprehensive general liability (CGL), which protect against liability claims for bodily injury, property damage, and personal injury. Other types of insurance that are commonly carried by businesses and churches are classified as personal liability or malpractice insurance and may be known as Directors and Officers Insurance (D&O) and Errors and Omissions Insurance (E&O). These protect employers, and often the managers who work for them, by providing coverage for negligent acts, omissions, or misleading statements that result in lawsuits being filed against the company.

However, Cable said, typically none of these types of insurance address employment claims, which deal specifically with perceived wrongful acts involving employees or applicants and generally are specifically excluded under standard general liability coverage.

Yes, this also includes perceived wrongful acts against prospective employees. An employer—including a church—is exposed to the risk of such lawsuits even before hiring for a position, according to data provided by the Equal Employment Opportunity Commission. A prospective employee may file suit against a church by alleging discrimination after an interview, for example.

Churches also mistakenly think such claims will be covered under another type of policy they already have.

“I would say that those in ministry don’t realize there’s pretty much an industry-standard exclusion for claims that arise in the employment context,” said Steve Case, assistant vice president and senior corporate counsel at Brotherhood Mutual. “So if an employee sues a ministry for bodily injury, emotional injury, harassment, or anything like that, there are exclusions in the general liability forms specifically for those types of claims. That’s why ministries have to pick up other coverage, such as workers’ compensation, to cover employee bodily injury claims and EPLI to cover any other employment-related claims brought by employees.”

What else should be covered?

Most EPLI policies specifically address up to 20 acts that precipitate employment-related claims, said Thomas Bentz, a partner with Holland & Knight who specializes in insurance law.

“Anything that can hurt an employee of a church could be converted into a claim,” Bentz said. “Inequities in pay, failure to promote, or inadequate supervision are examples, as are failure to institute or enforce a policy. Denial of tenure is another. Obviously, the threat is going to be very different if you have five employees versus 500 employees, but you can see what a variation of the types of claims you might get.”

Sommerville said churches also should consider their part-time employees when mulling EPLI among insurance coverage needs, as this category of employee is eligible to file such claims. “The ability of the church to be held liable is very high,” he stressed. “And the risk of the church being exposed to a large liability, even by a part-time employee, can be devastating to a church.”

The cost of coverage

Cost for such protection varies and depends on a variety of factors, such as the number of employees and whether the coverage is written as a line item or a separate policy.

Pricing takes into consideration the size of the church and total number of employees as well as whether risk management procedures are in place (employee handbooks, for instance). Underwriting also considers the types of claims that might arise and the desired limits of protection.

A reasonable point of reference is $10 to $20 per employee, per $100,000 in coverage, said Ed Hancock, vice president and chief underwriting officer with Church Mutual Insurance Company.

Of course, as you weigh the cost of coverage, you also must way to cost of a lawsuit. “If the church gets sued, the church must make sure it has the resources to pay the legal fees to defend the church,” Sommerville said.

The importance of transparency

Transparency in the application process for EPLI coverage is essential as well—as it is in any type of application for insurance coverage, Sommerville said.

“Going back, the application for the coverage is very important, too, because if a church makes a misrepresentation, that could void its coverage if an incident occurs.”

“Ministries should be aware that if they knowingly place or retain an employee that has had issues with sexual harassment previously, that decision could affect employment practices coverage relative to that individual,” Cable said. “If the ministry decides to retain the employee, this could possibly result in a negligent retention claim.”

Understand your state law

Another factor in pricing and policy provisions is state employment law, which varies significantly and is in addition to federal law, Case said. For this reason, the church treasurer or administrator should be up-to-date on those laws or work closely with professionals in the tax, law, and insurance fields who are up to date when it comes to matters involving employee relations, especially termination.

“Many federal and state employment laws don’t apply to small employers, usually less than 15 employees,” Case said. “However, some states have passed legislation that apply those laws even if you have one employee.”

Being aware of your state’s employment laws and working with those who can best help with a church’s tax, legal, and insurance needs is the best strategy to avoid a judgment that devastates the church financially, Hancock said. And while a church treasurer or administrator may not be able to foresee every potential risk, this allows a church to be in a position to weather many difficult scenarios.

Protection makes good business sense

Hancock said that protecting against the possibility of claims is good business sense, and then he added, “I continue to be surprised by this every day, even after 40 years in the business. Maybe the biggest surprise is the willingness of people to sue their employer.”

See also:

“What You Need in an Employment Practices Liability Insurance Policy”
“How to Reduce EPLI Costs and Claims”

Board Monitoring of Church Finances: What to Do—and When

A step-by-step guide for meetings.

Rob Faulk

Below is a summary of financial actions your board finance/audit committee should complete during their meetings throughout the year. It outlines a minimum of three meetings that a combined church finance/audit committee should have, and the tasks that should be completed in each meeting. Due to the amount of agenda items covered in each meeting, the board may decide to separate these into multiple meetings to shorten the agenda for each.

Tasks that should be completed by the audit committee are marked with an (A). Note that some states have laws prohibiting the combination of these two committees. If so, the duties below should be separated by committee.

It’s important to emphasize that this model assumes the committee has skilled members with a financial background. The frequency of meetings and the tasks covered in each meeting may be more or less than outlined below, depending on the number of meetings and whether the committee is combined or split out into separate audit and finance committees.

Standing agenda listing for finance/audit committee with a fiscal year-end of December 31

Reminder: Minutes should be maintained for all meetings

MEETING 1: FALL MEETING MINUTES

Budget approval
Approval of audit firm services, if any (A)
Review and approval of miscellaneous auditor services, if any (A)
Review of progress on auditor comment letter items (A)
Financial reporting risk evaluation
External auditor engagement scope and audit plan review, if any (A)
Discussion and approval of estimates and judgments
Review of internal audit report, if available (A)
Review of fraud risk
Review of unique transaction report
Review of agreements report
Review of service organization controls, if any [AICPA, Professional Standards, AU sec. 324]
Review of annual conflict of interest questionnaire completed by each board member and senior managers of the church
Review/approval of housing allowances for the next year (the IRS requires housing allowances to be approved by the board on a prospective basis)
Review of policies and procedures in effect for determining executive compensation and benefits. (This committee would not set or suggest compensation and benefits, just monitor the system in place to review them.)
Review of unrelated business income (UBI)
Review of internal control cycles (including documentation) and inquiry about any significant changes
Executive sessions or a session where only the board members (no management) and specific outside parties are present.
- Financial Secretary
- Treasurer
  Note: If any issues of concerns are raised to the committee, within its scope of responsibility the committee should cause an investigation to be made and report such to the board.
MEETING 2: SPRING MEETING MINUTES
1. Review of whistleblower activity, if any (A)
2. Review of code of conduct for continued adequacy
3. Review of internal control cycles (including documentation) and inquiry about any significant changes
4. Review of override of controls
5. Audit and accounting update
6. Review of conflict of interest transactions
7. Review of the internal audit function, if applicable (A)
8. Review of master vendor report
9. Executive sessions
  - Executive Pastor
  - Auditor’s communication with those charged with governance auditor meeting [AICPA, Professional Standards, AU sec. 380]. This occurs between assessment and final fieldwork; determine the extent of reliance on internal auditor’s work, if applicable (A).
    Note: If any issues of concern are raised to the committee within its scope of responsibility, the committee should cause an investigation to be made and report such to the board.
10. MEETING 3: SUMMER MEETING MINUTES
  1. Review and acceptance of external auditor reports, if any (A)
  2. Evaluation of external auditor performance, if applicable (A)
  3. Review and adjustment of agenda for the next 12 months
  4. Review of the findings of any examinations by regulatory agencies (including taxing authorities, local, state, and national), if any (A)
  5. Reaffirm finance/audit committee charter
    
    Appropriate membership?
    
    Appropriate work cycle?
    
    Self-evaluation by both committees
    
    Assessment/self-evaluation by finance staff
    
    Review of loan agreements and debt covenants
    
    Review of internal control cycles (including documentation) and inquiry about any significant changes
    
    Executive sessions:
    
    CIO
    
    Senior/Lead Pastor
    
    General Counsel
    
    External Auditor (A)
    Note: If any issues of concern are raised to the committee within its scope of responsibility, the committee should cause an investigation to be made and report such to the board.
    
    Cycles control reviews
    
    Consider ways to improve these controls and whether the accounting and financial policies are adequate.
    
    Discuss during Meeting 1
    
    Assets
    Liabilities
    Net assets
    Override of controls
    
    Discuss during Meeting 2
    
    Support/Online giving
    Revenue
    
    Discuss during Meeting 3
    
    Compliance
    Unique transactions
    Fraud
    Expenses/Electronic payments
    
    Rob Faulk is partner and church and denomination services director at the accounting firm CapinCrouse LLP, which offers the Church Financial Health Index. Rob has more than 40 years of financial leadership experience in serving both for-profit and nonprofit entities, as well as more than eight years of direct ministry experience as executive pastor and CFO of large churches. He previously served with a Big Six accounting firm, where he was the lead manager on the project that developed the COSO Internal Control framework. Rob holds an MA in ministry management from Azusa Pacific University Graduate School of Theology.

Image: Westend61 | Getty

The Role of Your Church Board in Providing Financial Oversight

Consider the value of strong finance and audit subcommittees with specific responsibilities.

Rob Faulk

Many church boards have two main areas of focus: the faith-based aspect of governance and the business and stewardship aspect. It’s important for your church to balance the two, because a weakness in either can cause serious issues in overall governance.

Too often, we see church boards that are strong in one area but challenged in the other. Some churches are dominated by mission but lack proper fiscal management. Others are strong operationally, but lack leadership support for the “why” that drives the church’s vision and mission.

Although I’ve served as an executive pastor, a role in which I was concerned with both the spiritual and business sides of the church, the observations in this article focus on the business and stewardship aspects church boards must monitor.

Who is monitoring your church’s finances?

When talking with a new church client through my work with the accounting firm CapinCrouse, I want to find out who is monitoring the church’s finances. Sometimes it’s an elder. Sometimes it’s a subset of the full board. All too often, it’s no one.

I have seen churches rely heavily on the bookkeeper or executive pastor to monitor finances, but when that individual produces or receives the financial information, they lack either the time or expertise to use it strategically.

Unfortunately, this means boards don’t always have useful financial information on which to base their decisions. The challenge in these situations is that the internal reporting structure provides neither accurate nor necessary information to paint a true picture of the church’s financial health. Without that, the board can’t take appropriate action.

Your church should invest in hiring competent accounting personnel to ensure the basic records are well-maintained and accurate. It is also key to train the accounting staff on what information the board needs and how to prepare it accurately and on a timely basis.

What financial information should your board monitor?

No matter who the hands-on designee is, however, ultimately it’s the board’s duty to monitor the church’s financial situation because it holds the fiduciary responsibility for oversight.

So what financial areas should your board monitor? While this isn’t an all-inclusive list, the board should be responsible for:

Protecting the overall health of the church by continuously analyzing financial condition and trends
Maintaining adequate levels of reserves
Safeguarding investments
Ensuring internal controls are in place to prevent fraud and protect assets

The board should also pay careful attention to various financial ratios and measurements (see “Additional Reading” below), seeking to answer questions like these:

Are we using our financial resources as efficiently as possible?
How does our church compare with similar churches?
What financial indicators should we monitor, and how?
Are we financially healthy?

Structuring your church board subcommittees to ensure adequate financial oversight

Certain denominations have distinct board structures outlined by their denominational guidelines. But for others, the structures can vary significantly.

Regardless of requirements, the effectiveness of a church board is not determined by the number of committees or positions assigned to members. Rather, it is determined by the composition of the board members and having members with the proper financial expertise in key positions. This could mean members who are business owners, chief financial officers, accountants, or controllers, for example. Experience and familiarity with not-for-profit financial statements or key internal control systems is also important.

Many churches form one finance/audit committee, but the functions of these two groups are very different. Also, some states have laws that prohibit the combination of these two committees, so make sure you understand your state law.

A finance committee should be responsible for overseeing the setup of appropriate financial practices, including ensuring that:

An annual budget is created
Financial statements are prepared on a regular basis
Policies are in place to ensure appropriate reserves are maintained

In contrast, an audit committee should be responsible for making sure the policies and procedures set by the finance committee are functioning as intended and are adequate to ensure operations are following policy, with acceptable controls in place. Audit committee members:

Ensure that:
- Management prepares and approves budgets before the start of the fiscal year
- Financial statements are prepared, distributed, and reviewed on a regular basis
- Reserves are kept at levels in accordance with the policies in place
Provide oversight of the church’s policies and procedures
Work with external auditors to interpret and implement the auditors’ recommendations

Many boards believe that one committee can successfully perform both functions, if state law allows. However, combining the two places a lot of responsibility and time on volunteer members. This makes serving on this combined committee a more time-consuming and less-appealing volunteer role that can be difficult to fill.

It may not be feasible for your church to have separate committees comprised of different members with the appropriate financial expertise. But if it is, splitting these functions results in fewer responsibilities and increases the number of board members overseeing the church’s financial functions.

In practice, I have observed that churches sometimes make the audit committee a subset of the finance committee. Two or three members of the finance committee are appointed to the audit committee. They report back to the finance committee which, in turn, reports back to the full board.

While not ideal, members of the finance committee can be good candidates for this role because they are involved with the duties of the finance committee. Note, however, that the executive pastor and members of church management shouldn’t serve as members of the audit committee. Because these individuals perform managerial functions and implement the system of internal controls that is being audited, serving in this capacity would involve conflicting duties. However, they will likely attend meetings to respond to process and procedural questions and obtain information requested by the committee.

Information and insight

It’s important to consider how to best plan for and establish the duties for gathering financial information and ensuring proper oversight. Keep in mind that in most medium-sized churches it can take a subset of elders or the finance committee a significant amount of time to be trained on how to properly monitor the church’s finances.

It’s vital to put in the time and effort, however. When your church board is receiving the specific information it needs to monitor the church’s finances and reserve levels throughout the year, it can make informed strategic decisions to help maximize your ministry.

Additional Reading

For specific help monitoring and measuring key financial ratios, see these articles by CPA and Church Law & Tax editorial advisor Vonna Laue:

“How to Monitor Your Church’s Financial Health,”
“5 Cash Flow Ratios and Measures Your Church Must Monitor,”
“How Ratios Can Strengthen This Year’s Finances”
“4 Expense Ratios and Measurements Your Church Should Monitor,”
“6 Debt Ratios and Measurements Your Church Should Monitor.”

The ratios and measurements in Laue’s article are based on metrics developed for CapinCrouse’s Church Financial Health Index.

For a summary of financial actions the board finance/audit committee should complete during meetings throughout the year, see “Board Monitoring of Church Finances: What to Do—and When.”

Rob Faulk is partner and church and denomination services director at the accounting firm CapinCrouse LLP, which offers the Church Financial Health Index. Rob has more than 40 years of financial leadership experience in serving both for-profit and nonprofit entities, as well as more than eight years of direct ministry experience as executive pastor and CFO of large churches. He previously served with a Big Six accounting firm, where he was the lead manager on the project that developed the COSO Internal Control framework. Rob holds an MA in ministry management from Azusa Pacific University Graduate School of Theology.

Image: baona | Getty

Helping Your Pastor Build Home Equity

If your pastor lives in a parsonage or rent it, then consider this option.

Richard R. Hammar

Ministers who live in church-owned parsonages are denied one very important benefit of home ownership: the opportunity to accumulate equity in a home over the course of many years.

Many ministers who have lived in parsonages during much of their active ministry often face retirement without housing. Their fellow ministers who purchased a home early in their ministries can often look forward to retirement with a home that is either substantially or completely debt free.

To avoid the potential hardship often suffered by a minister who lives in a parsonage, some churches increase their minister’s compensation by an amount that is sometimes referred to as an equity allowance. This would provide the minister with the equivalent of equity in a home. This is an excellent idea that should be considered by any church having one or more ministers living in church-provided housing.

Of course, for the concept to work properly, the equity allowance should not be accessible by the minister until retirement. Therefore, some churches choose to place the allowance directly in a minister’s tax-sheltered retirement account.

Recommendation. Equity allowances should also be considered by a church whose minister rents a home.

A word of caution

For More Information
For comprehensive tax information about equity allowances, see the “Equity Allowances” section in chapter 6 of the Church & Clergy Tax Guide.

Some churches attempt to rectify the lack of home equity by giving the parsonage to the minister upon retirement. This solution may provide a home for the pastor, but it creates a significant tax burden, since the value of the home must be included in the pastor’s income at the time of the transfer. The transaction may also create unreasonable compensation and result in intermediate sanctions to the minister and the church’s decision-makers.

Hey, Fletch: Can My Church Force Me to Retire at Age 65?

The legal and ministry considerations of an age-based retirement policy.

David Fletcher

In this regular column, longtime executive pastor and XPastor.org founder David Fletcher takes on readers’ questions about finances, staffing, communications, and more. Submit your questions using the subject line “Hey, Fletch” to editor@churchlawandtax.com.

I just got out of a meeting with my executive pastor. He told me that the church has a policy that pastors have to retire at age 65. I don’t get it. I’m effective in my role, love it, and have a good five to ten years of ministry left in me. What should I do?

Ouch. I’m so sorry to hear this. I strongly disagree with such a policy. You have great ministry ahead of you … somewhere!

When it comes to non-pastors, there are many rules about age discrimination. When it comes to pastors, the rules are different.

Attorney Richard Hammar, senior editor of Church Law & Tax, cites an age discrimination case from a federal appeals court. The ruling said: “We believe that the free exercise of religion clause of the First Amendment also prohibits the courts from deciding cases such as this one. Personnel decisions by church-affiliated institutions affecting clergy are per se religious matters and cannot be reviewed by civil courts.” Separately, Richard covers other cases that show a more mixed position on this issue.

Going deeper, the United States Supreme Court’s 2012 ruling in Hosanna-Tabor Evangelical Lutheran Church and School v. Equal Employment Opportunity Commission reaffirmed the constitutional protection churches receive when it comes to the selection and dismissal of their ministers. Writing for the Court in its unanimous decision, Chief Justice John Roberts noted:

Seeking to escape the control of the national church, the Puritans fled to New England, where they hoped to elect their own ministers and establish their own modes of worship …. It was against this background that the First Amendment was adopted. Familiar with life under the established Church of England, the founding generation sought to foreclose the possibility of a national church. By forbidding the “establishment of religion” and guaranteeing the “free exercise thereof,” the Religion Clauses ensured that the new Federal Government—unlike the English Crown—would have no role in filling ecclesiastical offices. The Establishment Clause prevents the Government from appointing ministers, and the Free Exercise Clause prevents it from interfering with the freedom of religious groups to select their own.

From a legal perspective, it appears it will be difficult for you to challenge your church’s forced-retirement policy. Consulting with qualified legal counsel is still wise. But even if the legal grounds for a challenge don’t exist, you still can appeal the policy to your church’s governing board. Ultimately, they are responsible for all policies in the church.

On a broader level, I strongly recommend against age-based retirement policies for pastors. Older pastors have enormous wisdom and experience. They are vital to mentoring younger pastors and to doing effective ministry in the church.

For more help with employment issues in churches, including selection and screening, dispute resolution, terminations, and discrimination, check out Richard Hammar’s Essential Guide to Employment Issues for Church Boards .