Background. As a church treasurer, you probably are aware that the minimum wage and overtime pay requirements of the federal Fair Labor Standards Act (FLSA) do not apply to “exempt employees.” However, you may have found it difficult to decide if a particular employee is exempt. This is very important question because it will determine whether or not your church must pay minimum wage or overtime compensation to that employee. If you conclude that an employee is exempt, your church may be liable for substantial damages if the Department of Labor later determines that the employee is a non-exempt worker.
Unfortunately, the definition of an exempt employee is complex. Basically, an exempt employee is someone who meets the FLSA definition of an executive, administrative, or professional employee. To be exempt, employees must meet certain tests related to their primary job duties and be paid on a salary basis at not less than a specified minimum amount. The basic “duties'” tests were last modified in 1949 and have remained unchanged since that time. The salary levels required for exemption were last updated in 1975, and the amounts adopted at that time were intended as an interim adjustment.
The Department of Labor (DOL) recently issued proposed changes to the definitions of exempt employees. It is important for church treasurers to understand the new definitions, because they will have the effect of treating many previously exempt employees as non-exempt. This means that many church employees who in the past have been exempt from the minimum wage and overtime pay requirements will now be covered, whether they are paid a salary or an hourly wage.
The new definitions. Under current rules, an employee earning only $155 a week ($8,060 per year) can qualify as an exempt administrative or executive employee, and an employee earning only $170 a week ($8,840 per year) can qualify as an exempt professional employee. These amounts have not been increased in nearly 30 years, and today represent amounts less than the minimum wage! The proposed definitions for exempt employees would raise this minimum salary to $425 a week ($22,100 per year) for all three categories—the largest increase since the FLSA was passed by Congress in 1938. However, employees earning at least $22,100 per year would still have to satisfy a revised “duties” test in order to be exempt. Here is a summary of the proposed definitions for each of the three exempt classifications:
(1) Executive employees. Paid an annual salary of at least $22,100; their primary duty is the management of the enterprise in which the employee is employed; the employee regularly directs the work of two or more other employees; and, the employee has the authority to hire or fire other employees (or his or her recommendations are given special weight).
(2) Administrative employees. Paid an annual salary of at least $22,100; their primary duty is the performance of office or non-manual work related to the management or general business operations of the employer. In addition, the employee must hold a “position of responsibility” with the employer. “Position of responsibility” refers to the importance to the employer of the work performed or the high level of competence required by the work performed. To meet this requirement, an employee must either customarily and regularly perform work of substantial importance or perform work requiring a high level of skill or training.
(3) Professional employees. Paid an annual salary of at least $22,100; their primary duty “is performing office or non-manual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, but which also may be acquired by alternative means such as an equivalent combination of intellectual instruction and work experience.”
Key point. A church cannot make a non-exempt employee exempt by paying him or her a salary.
Key point. The proposed definitions eliminate the old rule restricting exempt employees from devoting more than 20% of their time in a workweek to performing non-exempt duties.
The proposed definitions would allow deductions from the salary of exempt employees for full-day absences taken for disciplinary reasons, such as sexual harassment or workplace violence. Currently, only hourly workers’ wages are subject to such deductions.
The DOL predicts that the new salary level ($22,100) will “automatically guarantee overtime to 1.3 million additional low-wage workers,” and “will make entitlement to overtime more certain for 10.7 million workers.”
The proposed definitions of exempt employees are not yet effective. The DOL has sought input from the public, and will issue final definitions later this year. The final definitions probably will be substantially similar to the proposed definitions described in this article. Also, note that many states have their own minimum wage and overtime laws, and if these laws are more restrictive than the federal rules, the state laws will apply.
The FLSA’s minimum wage and overtime pay requirements apply to non-exempt church employees who are engaged in interstate commerce. The definition of interstate commerce is very broad, and would include many church employees. In addition, FLSA may apply to some church employees because their church meets the definition of an “enterprise” engaged in commerce. Non-exempt employees of church-operated preschools, primary and secondary schools, and colleges, are also covered.
Resource. For more information on the application of the FLSA minimum wage and overtime pay requirements to church employees, see Richard Hammar’s special report entitled, “Must Churches Pay the Minimum Wage and Overtime Compensation?” This report is available from Christian Ministry Resources by calling 1-800-222-1840.
Parsonages. The proposed DOL regulations defining exempt employees specify that the value of lodging provided by an employer to an employee at no cost is not included in determining the employee’s salary. Therefore, the annual rental value of a church-provided parsonage is not included in the salary of a pastor who lives in the parsonage at no cost.
Relevance to church treasurers. The relevance of the proposed new definitions of “exempt employees” is illustrated by the following examples.
Example. 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 the custodian an annual salary of $15,000 instead of an hourly wage. This common technique will not work, under either the current or proposed definitions of “exempt employee.” Under the current definitions, the custodian is exempt only if he is paid an annual salary of at least $8,060, and performs administrative duties (the professional and executive exemptions would not apply). The current administrative duties test requires the performance of office or non-manual work directly related to the management policies or general business operations of the employer (or the employer’s customers); the regular exercise of discretion and judgment; assisting an executive, performing specialized or technical work, or executing special assignments; and devoting not more than 20% of their time to work other than that described above. Most church custodians would not satisfy this test, and so they would be non-exempt even if paid a salary in excess of $8,060.
Example. Same facts as the previous example. Would the answer be different under the DOL proposed definition of an administrative employee? The answer is no, for two reasons. First, the custodian earns less than $22,100 per year; and second, the custodian does not satisfy the new “duties” test since his primary duty is not the performance of office or non-manual work related to the management or general business operations of the employer and he does not hold a “position of responsibility” with the employer. The phrase ”position of responsibility” refers to the importance to the employer of the work performed or the high level of competence required by the work performed. To meet this requirement, an employee must either customarily and regularly perform work of substantial importance or perform work requiring a high level of skill or training. It is unlikely that a church custodian will meet this test.
Example. Same facts as the previous example, except that the church increases the custodian’s salary to $23,000 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 example.
Key point. A bank was recently ordered to pay $4.1 million to settle a claim that it failed to pay overtime compensation to several of its “salaried” employees. This case illustrates an important point—an employer cannot convert non-exempt employees into exempt employees simply by paying them a salary. To be exempt, employees’ duties must meet the definition of administrative, executive, or professional.
Example. A church treasurer has heard about the new DOL definitions of exempt employees. She would like the church secretary to be an exempt employee because she works so many hours of overtime. She tells the senior pastor that if the secretary is paid a salary of at least $22,100, then the church can avoid having to pay overtime. This advice is probably incorrect under both the current and proposed definitions of an exempt employee. It is possible in some cases that a secretary will meet the proposed definition of an administrative employee, or even an executive employee, but this will not be true in most cases.
Example. A church pays its ordained youth pastor an annual salary of $20,000, and lets him live in the church-owned parsonage at no cost (assume that the annual rental value of the parsonage is $10,000). The youth pastor often works more than 40 hours in a week. Must the church pay overtime compensation to the youth pastor under the proposed definitions of exempt employees? The answer is unclear. Technically, “professional employees” such as clergy would be exempt under the proposed definition if they earn at least $22,100 per year and their primary duty is performing office or non-manual work “requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, but which also may be acquired by alternative means such as an equivalent combination of intellectual instruction and work experience.” Most ordained youth pastors would meet the professional duties requirement, and so they would be exempt from the overtime pay requirement so long as their annual income is at least $22,100. If they are paid an annual income of less than $22,100 they would be non-exempt employees entitled to overtime pay. However, it is unclear whether the Department of Labor or the courts will require churches to comply with the overtime pay rules with respect to clergy who are paid less than $22,100 per year. Compelling compliance with the new rules may be seen as violating the first amendment guaranties of religious freedom and nonentanglement between church and state. Any developments will be reported in future issues of this newsletter. A few points are clear. First, any ambiguity regarding the exempt or non-exempt status of an ordained youth pastor earning less than $22,100 per year can be eliminated by increasing the pastor’s salary to at least $22,100. The DOL proposed regulations state, “An employer could simply raise the salary level for currently exempt salaried workers earning less than $22,100 to at least the new proposed salary level or more and have them remain exempt salaried workers.” Second, the proposed DOL regulations specify that the value of lodging provided by an employer to an employee at no cost is not included in determining the employee’s salary. In this case, the annual rental value of the parsonage ($10,000) would not be added to the youth pastor’s salary to come up with a “salary” of $30,000.
This article first appeared in Church Treasurer Alert, August 2003.