Update: On September 24, 2019, the US Department of Labor announced the final version of a new overtime 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 (increased from $455 per week, or $23,660 annually). This is slightly higher than the original rule proposed in March.
Many church leaders propose that the Fair Labor Standards Act (FLSA) does not apply to churches. That may have once been true, but the church of today is not the church of yesterday. Advanced activities easily make the law applicable to most churches, either on an organizational level (meaning the FLSA applies to the church operations as a whole) or on an individual level (based on an employee’s duties).
Furthermore, every state maintains its own version of the FLSA, either layering additional rules on top of federal rules or applying similar rules where the federal rules don’t apply. The law most favorable to an employee, whether at the state or federal level, always applies.
Key point. The FLSA establishes a minimum wage of $7.25 an hour, maintains a 40-hour work week, and sets a salary test for exempt positions at $455 per week. The Wage and Hour Division of the US Department of Labor (DOL) is responsible for enforcing this law.
Under the FLSA and DOL rules, there are three primary classifications for church employees:
- Employees meeting the “ministerial exception”
- Exempt employees
- Nonexempt employees
Vital information about each classification is offered in this article.
The ministerial exception
Established more through judicial application than through any statute, employment law embraces a concept known as the “ministerial exception.” The concept revolves around the idea that the government does not have authority to intervene in the relationship between a church and its ministers. As ruled in McClure v. Salvation Army, 460 F.2d 553 (5th Cir. 1972), matters between a church and its ministers, including salary, are of ecclesiastical concern only, and any governmental intervention violates the First Amendment protections guaranteeing separation of church and state.
Who qualifies as a “minister” for this exception is different from who qualifies as a “minister” for other payroll tax rules enforced by the Internal Revenue Service. According to employment law, a minister is an employee who performs essential religious duties as a required element of the employee’s job.
Unlike the concept of “minister” for the Internal Revenue Code, the employee is not required to have ministerial credentials. Without this requirement, the group of employees eligible for the ministerial exception is wider for FLSA/DOL classification purposes.
Key point. Job descriptions for all employees are important, but especially for those whose work qualifies for the ministerial exception. Employee classifications, and the wage implications related to them, may be won or lost based on job descriptions.
A position qualifying an employee for the ministerial exception may include:
- a requirement of previous religious training or ongoing religious training, such as continuing education requirements;
- a title reflecting spiritual or religious duties or a spiritual position;
- duties supporting and/or conveying the core beliefs of the church;
- duties of conveying the message and teachings of the church;
- selecting or creating the religious content for a program; and/or
- leading others to grow or mature in their faith.
EXAMPLE Suzy is the director of children’s ministry at First Church. She selects the curriculum and leads all the children’s ministry workers in learning the curriculum and preparing for their teaching duties. She also leads children’s church each Sunday morning and Wednesday evening. Suzy is not a licensed or ordained minister and does not qualify to be treated as a minister for federal tax purposes. A review of Suzy’s duties and position indicates she performs essential religious duties and qualifies for the ministerial exception. Suzy is not subject to the FLSA wage and hour rules.
After reviewing the duties of employees and identifying those who qualify for the ministerial exception, the next step is to categorize the remaining employees either as exempt or nonexempt. Start by determining which employees are exempt before evaluating which ones are nonexempt. There are two tests that help you decide:
1. Salary test. An exempt employee’s compensation must be at least $455 per week and paid on a salaried basis. This is a minimum salary amount. It is not prorated for employees working part time. An employee who does not receive the minimum salary amount cannot be an exempt employee. A “salaried basis” means the salary is the same rate if paid every week, regardless of the number of hours worked. The employer may not dock the employee’s pay in less than one-day increments for disciplinary reasons. The employer may track paid time off in any time increment, but in most instances, an employee’s wages may not be docked in less than one-day increments.
WORK WEEK DEFINED
A work week is defined by the FLSA as any 7-day period selected by the employer. For federal purposes, a nonexempt employee who actually works more than 40 hours during this 7-day period must be paid overtime for all hours worked beyond 40 hours at the rate of time and one-half the employee’s regular pay rate. Stated another way, hours paid for nonwork time, such as paid vacation time, do not count toward the 40 hours worked to determine overtime hours.
CAUTION Overtime is paid in increments of 6 minutes per federal statute. Overtime is also due to an employee whether or not the overtime has been authorized by the appropriate supervisor. Churches should be aware of potential overtime causes in order to appropriately budget for the additional payroll costs.
EXAMPLE George is a church business administrator. His duties include extensive authority over the business administration of the church, and he directly supervises 10 employees. George’s compensation is $400 per week. At his compensation rate, George cannot be classified as an exempt employee. George is a nonexempt employee and is subject to the FLSA wage and hour rules. Even though George’s duties may meet one of the duties’ tests for exempt employees (see below), his duties are never evaluated because he receives less than the $455 per week minimum to qualify as an exempt employee.
Key point. “Exempt employee” and “salaried employee” are not synonymous terms. The existence of an equalized and consistent pay arrangement does not determine if an employee is an exempt employee or a nonexempt employee. A salaried employee is paid a consistent amount each pay period, but the employee still may be classified as a nonexempt employee if the weekly pay is under $455.
TIP The salary test is more complicated than can be covered in this article. For more details, go see this PDF on the DOL website.
2. Duties test. If an employee passes the salary test, then the employee is evaluated based on his or her duties. To be considered exempt, an employee’s duties must be described in one of four major classifications set by the DOL. Employees become classified as exempt when at least 80 percent of their time is spent on one of these classification’s duties and responsibilities. The four classifications are:
- Executive exemption. Manages the organization, or a distinct department, supervising at least two full-time employees (these individuals cannot be volunteers) and possessing the authority to hire and fire employees.
- Administrative exemption. Office work or nonmanual labor relating to the management of the organization, exercising significant discretion and independent judgement on matters of significance. These employees may have significant leadership roles, but do not have staff reporting to them to meet the executive exemption. Leadership roles also may be fulfilled by administering an area where volunteer labor is a significant factor in carrying out the programs. Employees should have significant abilities to operate in a manner of authority over an area or a program.
- Professional exemption. Employees with a high level of training and a special skill set. Examples include attorneys, teachers (but not daycare workers), engineers, and accountants/CPAs.
- Computer professional. Includes systems analysts, programmers, and software engineers. This group does not include network administrators or other general IT employees.
Key point. Administrative assistants rarely have the discretion and the authority in the church to meet this exemption qualification. As such, most administrative assistants do not qualify as exempt employees. This also includes the senior pastor’s assistant.
With both the “ministerial exception” and exempt classifications addressed, the final step is to classify all remaining church employees as nonexempt employees. Nonexempt employees usually constitute the majority of a church’s workforce. This group is subject to minimum wage requirements and overtime pay for all hours worked exceeding 40 hours in the work week.
CAUTION Some states reduce the required number of hours an employee needs to work before receiving overtime pay. Some states may even apply overtime based on the number of hours an employee works per day. These examples underscore why churches must become familiar with state laws. Remember, the law most favorable to an employee applies.
TIP For a detailed explanation of what constitutes exempt and nonexempt employees, go to flsa.com/coverage.html.
Elaine Sommerville is a CPA and editorial advisor for Church Law & Tax. This article is adapted from her book Church Compensation: From Strategic Plan to Compliance.