A Closer Look at New Overtime Rules Taking Effect in 2020

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.

The US Department of Labor (DOL) is proposing to update and revise the regulations issued under the Fair Labor Standards Act (FLSA) implementing the “white collar” exemption from minimum wage and overtime pay requirements for executive, administrative, professional, and computer employees.

This new proposal, set to take effect on Jan. 1, 2020, affects churches because the FLSA does not exempt churches from overtime pay and minimum wage requirements. The DOL proposal will raise the minimum salary threshold to $35,308 per year, or $679 per week—a nearly 50 percent increase from the current threshold.

Any church 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. Such a shift will directly—and potentially significantly—affect church budgets. Church leaders will need to review how their employees are categorized while carefully considering what the rules do and do not mean for clergy.

Since 1940, the DOL’s regulations have generally required each of three tests to be met for one of the FLSA’s exemptions to apply:

The DOL proposes to update both the minimum weekly standard salary level and the total annual compensation requirement for “highly compensated employees” to reflect growth in wages and salaries. The DOL believes that the proposed update to the standard salary level will maintain the traditional purposes of the salary level test and will help employers more readily identify exempt employees.

Key point. The DOL is not proposing any change to the duties test.

If finalized as proposed, the DOL estimates that 1.3 million employees who are currently exempt would, without some intervening action by their employers, become nonexempt. The agency accepted public comments about the proposed rule’s language through June 12 and will finalize the rule’s language before the end of 2019.

Key point. The Department estimates that its rule will become final, and changes will be effective, on or by January 1, 2020.

The proposed rule focuses primarily on updating the salary and compensation levels needed for these workers to be exempt. Specifically, the DOL’s includes:

In developing the proposal, the DOL received extensive public input from several “listening sessions” held around the nation and more than 200,000 comments that were received as part of a 2017 Request for Information (RFI). Commenters who participated in the RFI or at a listening session overwhelmingly agreed that the currently enforced salary and compensation levels need to be updated.

In 2016, the DOL issued a final rule increasing the standard salary level to $913 per week ($47,476 annually). That rule was declared invalid by the United States District Court for the Eastern District of Texas, and an appeal of that decision to the United States Court of Appeals for the Fifth Circuit is being held in abeyance pending the finalization of the Labor Department’s proposed rule. In the meantime, the DOL is enforcing the regulations in effect on November 30, 2016, including the $455 per week salary level set in 2004.

Note that while the FLSA does not exempt churches from the overtime pay and minimum wage requirements, it is often a difficult task to determine if non-clergy staff are exempt as administrative, executive, or professional employees because the so-called “duties test” is so ambiguous. Any questions concerning exempt employees should be referred to legal counsel.

Caution. “Many states have already set higher thresholds, which supersede the federal standard,” reported The Kiplinger Letter . Church leaders should research their state laws to make certain they do not need to comply with a higher threshold.

The FLSA does not explicitly exempt ministers from the overtime pay and minimum wage protections, but note that “professional employees” are exempt from the FLSA, and this would include ministers so long as they meet the minimum salary test (currently $455/week, or $679/week proposed) and are paid on a salary basis.

Ministers who earn less than the minimum salary test, or who are not paid on a salary basis, do not meet the definition of an exempt professional employee; however, can churches be compelled to pay these ministers overtime pay consistently with the First Amendment guaranty of religious freedom? This is an unresolved question.

Note that the official “economic report” accompanying the final DOL overtime regulations contains the following statements:

In addition, Table 3-1 in the final regulations lists “clergy and religious workers” as one of six categories of “Occupations Exempt from FLSA’s Overtime Provisions.” This same conclusion is repeated in this same report. This language suggests that the official position of the DOL is that clergy are not subject to the minimum wage and overtime pay requirements of the FLSA no matter how little they earn.

At least two federal court cases have resulted in decisions stating the FLSA does not apply to ministers due to the ministerial exception doctrine. Ministerial exception is a judicially recognized bar that prevents civil courts from reviewing employment disputes between churches and ministers (in 2012, the United States Supreme Court unanimously affirmed the doctrine).

The two federal cases—Alcazar v. Corporation of Catholic Archbishop of Seattle, 2006 WL 3791370 (W.D. Wash. 2006) and Shaliehsabou v. Hebrew Home of Greater Washington, 363 F.3d 299 (4th Cir. 2004)—are binding precedent only in the states of Maryland, North Carolina, South Carolina, Virginia, Washington, and West Virginia. They are persuasive, but not binding, precedent in other states.

Therefore, in other states this issue has not definitely been resolved by the courts. However, the final DOL regulations (quoted above) provide some basis for concluding that the FLSA minimum wage and overtime pay requirements do not apply to ministers. Church leaders wanting a definitive answer in a particular case should consult with an attorney.

The following case studies illustrate the application of the proposed rule to ministers and lay church employees if and when it becomes effective.

A pastor is employed full-time by a church, is paid an annual salary of $30,000, and in addition is permitted to live in the church parsonage without having to pay rent. The annual rental value of the parsonage is $12,000. Is the annual rental value of the parsonage taken into account in deciding if the pastor is paid on a salary basis of at least $679 per week ($35,308 per year)? The answer is no. The final regulations specify:

Same facts as the previous case study. Since the pastor is paid an annual salary of less than $35,308, is he entitled to overtime pay?

The final regulations specify that “there are some workers, such as . . . clergy, who are statutorily exempt or whose exempt status is not affected by the increased salary requirement in the final rule,” and that “clergy and religious workers are not covered by the FLSA.”

This language from the regulations indicates that the official position of the DOL is that clergy are not subject to the minimum wage and overtime pay requirements of the FLSA, regardless of the amount of their compensation.

Further, two federal courts have ruled that the so-called ministerial exception prohibits the DOL from applying the FLSA to ministers. These cases are binding only in states comprising the US Court of Appeals for the Fourth Circuit (Maryland, North Carolina, South Carolina, Virginia, and West Virginia), and a portion of Washington, D.C. They are persuasive, but not binding, precedent in other states.

Therefore, this issue has not definitely been resolved by courts in other jurisdictions. However, even in other jurisdictions the DOL regulations provide a basis for concluding that the FLSA minimum wage and overtime pay requirements do not apply to ministers.

A pastor is employed full-time by a church in Virginia, and is paid an annual salary of $30,000. Additionally, the pastor is paid an annual housing allowance of $12,000 that he uses to rent a home for his family. Is a housing allowance considered in deciding if the pastor is paid on a salary basis of at least $679 per week ($35,308 per year)?

The final regulations do not address this issue directly, but they do state that the value of “board” and “housing furnished for dwelling purposes” are not included. These terms may be interpreted broadly to include compensation that is provided to a minister to provide housing in lieu of a parsonage, meaning that the pastor in this case study would not meet the $35,308 threshold for exempt status.

This conclusion seems to be consistent with the purpose of the law to make the minimum wage and overtime pay protections of the FSLA available to as many employees as possible. However, even if the salary requirement for exempt professional status is met, it is unlikely that the pastor would be entitled to overtime pay, for the same reasons mentioned in the previous case studies.

A church pays its pastor on an hourly basis of $25 per hour. Is the pastor entitled to overtime pay?

In general, persons paid on an hourly basis cannot be exempt employees under the FLSA, and must receive overtime pay for hours worked in excess of 40 hours in any week. However, as noted above, the final DOL regulations state the ministers “are not covered by the FLSA.” Further, two federal courts have ruled that the ministerial exception prohibits the DOL from applying the FLSA to ministers.

A church pays its pastor an annual salary of $45,000. The pastor frequently works 60 hours or more per week, and asks the church treasurer if she is entitled to overtime pay. The answer is no.

Even if the FLSA applies to ministers (which according to the DOL it does not), the pastor would satisfy the “professional employee” exemption under the FLSA since she performs professional duties and is compensated at a rate in excess of $35,308 per year.

A church wants to avoid the FLSA overtime pay requirements for its custodian (who often works more than 40 hours per week) and so it pays her an annual salary of $30,000 instead of an hourly wage. This common technique will not work under either prior law or the proposed new rule.

First, the custodian receives a salary of less than $35,308 per year. With few exceptions, no employee who is paid a salary of less than $35,308 can be treated as exempt from the FLSA overtime pay requirement.

Second, the custodian does not meet the current definition of an exempt “administrative” employee since her primary duty is not the performance of office or nonmanual work related to the management or general business operations of the employer and her primary duty does not include the exercise of discretion and independent judgment with respect to matters of significance. The DOL regulations state:

The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources. The exercise of discretion and independent judgment also does not include clerical or secretarial work, recording or tabulating data, or performing other mechanical, repetitive, recurrent or routine work. An employee who simply tabulates data is not exempt, even if labeled as a “statistician.”

Same facts as the previous case study, except that the church increases the custodian’s salary to $36,000 in order to avoid the overtime pay requirement. This will not work. While the salary test is met, the custodian still does not meet the “duties” requirement summarized in the previous case study.

A church treasurer would like the church secretary to be an exempt employee because she works so many hours of overtime. He tells the senior pastor that if the secretary is paid a salary of at least $35,308, the church can treat the secretary as an exempt administrative employee and avoid having to pay overtime. This advice is probably incorrect.

It is possible in some cases that a secretary will meet the definition of an administrative employee, or even an executive employee, but this will not be true in most cases.

DOL regulations specify that an administrative employee is one whose primary duty is performing “office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers,” and whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

The regulations state:

Most secretaries will not meet this test and so they would be nonexempt workers. This means that they are legally entitled to overtime pay for all hours worked in excess of 40 during the same week.

The senior pastor of a large church has an administrative assistant who, without instructions or prescribed procedures, has been delegated the authority to arrange meetings, handle callers, and answer correspondence. The assistant is paid an annual salary of $45,000. The assistant would qualify as an exempt administrative employee under the regulations.

The regulations give the following example of an exempt administrative employee:

An executive or administrative assistant to a chief executive of a business if such employee, without specific instructions or prescribed procedures, has been delegated authority to arrange meetings, handle callers and answer correspondence.

Tim is a church business administrator who typically works 60 hours per week, and is paid a salary of $961.54 per week ($50,000 per year). Tim qualifies for the administrative exemption from the overtime rules since:

Caution. Determining whether a church employee is exempt under the FLSA from the overtime pay and minimum wage requirements is often a challenging task. Consult with an attorney if there is any doubt.

Tip. The definitions of administrative, executive, and professional employees are complex, and are explained in the DOL website and in Richard Hammar’s book, Pastor, Church & Law (5th ed. 2019).

The FLSA initially covered only those employees “engaged in commerce or in the production of goods for commerce.” Congress greatly expanded the Act’s coverage in 1961 by amending the Act to cover “enterprises” as well as individual employees.

The Act now provides that employers must pay the minimum wage and overtime compensation not only to employees actually engaged in commerce or in the production of goods for commerce, but also to any employee “employed in an enterprise engaged in commerce or in the production of goods for commerce.”

In summary, for the minimum wage and overtime compensation requirements to apply to a particular worker, the following two requirements must be satisfied: