Payroll Audits: What Every Church Should Know

Preparation can prevent an audit—or handle one if it arises.

Years ago, a panicked client called after the Department of Labor provided notice that it was preparing to audit the ministry’s payroll. A disgruntled warehouse worker filed a complaint about unpaid overtime pay, initiating the audit.

The DOL informed me the audit was set for Good Friday—only 72 hours away. I politely informed the federal employee that the ministry was closed on Good Friday. She replied “just a moment.” After hearing loud typing on the other end, she continued: “That is not a federal holiday. We will be there Friday.”

After an extensive auditing process, we received good news. The DOL determined the disgruntled employee had been paid in accordance with DOL standards.

But there was bad news, too. When the DOL audits an employee’s wage and hour claims, it reviews the complainant’s file as well as EVERY SINGLE EMPLOYEE file for the past two years, including those recently separated from the employer. In its investigation, the DOL also concluded that the ministry owed thousands of dollars in overtime wages to other employees. No other employee had ever previously complained, and many didn’t even want the money. It didn’t matter. Lesson learned—and an expensive one at that. Only one complaint can trigger time-consuming and expensive audits placing the entire ministry under the microscope.

The possibility of a DOL audit may cause uneasiness. But with a few practical steps and knowledge of the Fair Labor Standards Act, a church will know the right questions to ask before one emerges, plus the right steps to take to mitigate potential problems.

Those questions, asked during a regularly scheduled human resources audit, include:

• What is the basis for wage and hour claims?

• How do we properly classify employees and are we following the right set of guidelines?

• Which of our current employees should be exempt?

• Are we counting our employees’ work hours correctly?

Fair Labor Standards Act

The FLSA affects almost every employer in the United States, including nonprofits and religious nonprofits. Churches are often surprised by these requirements; many leaders expect automatic exemptions from many federal and state laws.

The act classifies all employees as nonexempt unless proven otherwise; it states that workers must be paid for the number of hours worked in a week; and it requires, at the very least, that workers must be paid minimum wage. Remember, it is the hours worked, not approved. Any time an employee works over 40 hours in a one-week period, the employee must be paid at the hourly rate of one-and-one-half times the normal wage.

However, if the employee can be classified as an exempt employee in one of the six exemptions provided by the FLSA, the employee may receive a base salary regardless of the hours they work.

An organization usually has far more nonexempt employees than exempt ones. If your church finds itself with far more exempt employees than nonexempt employees, take this as a sign that it may be time to perform an internal audit, with the help of legal counsel, to ensure that your employees are classified properly. Remember, one disgruntled employee can cause a lot of financial pain for an organization if its classification of employees is not in compliance with the FLSA.

Employee or Not?

To be classified as exempt, a worker first must be classified as an employee and then that employee must meet a three-part test:

The DOL looks at the following six factors to determine whether a worker is an employee:

1) “The extent to which the work performed is an integral part of the employer’s business.” The more important the worker’s value, skill, and work are to the employer, the more likely the position will be considered an employed position, rather than a contracted one.

2) “Whether the worker’s managerial skills affect his or her opportunity for profit and loss.” The managerial duties and skills of a worker indicate an employment relationship. Rarely, if ever, would there be a scenario where an independent contractor would exercise managerial control of the organization, employees, or capital.

3) “The relative investments in facilities and equipment by the worker and the employer.” Under this factor, the DOL looks at whether the worker owns his or her equipment and facilities in which the work is performed. While an independent contractor may use the facilities of the employer organization, often, the contractor will bring his or her own equipment and maintain it.

4) “The worker’s skill and initiative.” While employees may have specialized skills, independent contractors possess skills that allow them to operate separate businesses and command market value for their services from other customers.

5) “The permanency of the worker’s relationship with the employer.” Typically, employees have either a long employment term or no term at all.

6) “The nature and degree of control by the employer.” This factor focuses on the control of the employee’s schedule and the employee’s method of work.

The DOL analyzes each factor individually and in each given case determines whether employee benefits or overtime should be extended to those workers the employer improperly classified as independent contractors.

Key Point. Churches should take care when classifying weekly paid musicians as independent contractors. The IRS has given private letter rulings that indicate weekly paid musicians are more likely to be employees than independent contractors. Contact legal counsel for more help on this topic.

Exempt or Not?

Once the worker is determined to be an employee, they must meet the following three-point test to be exempt from overtime pay:

1) Paid at least $455 per week (when this article was submitted, the Department of Labor had proposed regulations to change this amount to $970 per week. Public comments were due in early September 2015, with the regulations scheduled to take effect soon after. Watch future issues of Church Law & Tax Report for an update on the final adopted amount);

2) Paid on a salary basis; and,

3) The job duties must comply with one of the six (6) exemptions (explained further below).

Just because an employee is regularly paid each week, he or she is not automatically exempt. Many employers believe that as long as an employee falls into one of the exemptions, the amount of pay doesn’t matter. This isn’t true. In fact, the first part of the test is determining whether the employee is paid AT LEAST $455 per week on a salary basis.

“Salary basis” may seem like a funny term, but it means that payment is a regular, predetermined amount. The frequency of payment is usually irrelevant if it is reasonable. The DOL has stated that the “predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.” Payment should not be reduced. There are several reasons the DOL will allow wage reduction, but any reduction should be reviewed by legal counsel prior to implementing the change. It’s also important to note that a reduction in salary could be considered constructive termination, creating another potential legal liability.

For an exemption to apply, the employee’s duties must also align with one of the available exemptions in light of the employee’s actual duties (not just the duties contained in the job description). Thus, you should not solely rely on your job descriptions to classify employee positions. Actual duties, not just written descriptions, are more important. If your church faces a DOL audit, current and former employees will be interviewed and questioned about their actual duties.

Under the FLSA, there are six exemptions your employees may fall under, possibly qualifying them to be exempt from overtime wages. These exempt job duties include:

1) Administrative

2) Executive

3) Professional

4) Computer Employee

5) Outside Sales

6) Highly Compensated

While outside sales are not covered in this article, we will cover the remaining five exemptions. Exempt employee must still be paid at least $455 per week on a salary basis.

The DOL has stated that to be exempt, the duties of an employee must include one the following:


“Performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.”


“The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; the employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and the employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.”

Key Point. An executive employee must direct at least two or more full-time employees or their equivalent (e.g. four part-time employees). Two part-time employees and volunteers would not count.


“The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; the advanced knowledge must be in a field of science or learning; and the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.”

Some professional employees are creative in description. The DOL has stated that creative professionals have a separate requirement: “The employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.”

Computer Employees

“The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below;

The employee’s primary duty must consist of:

1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;

2) The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;

3) The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or,

4) A combination of the aforementioned duties, the performance of which requires the same level of skills.”

Highly Compensated

“Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000.” (Note: The Labor Department’s proposed overtime changes also includes changing this amount to $122,148 annually.)

Avoiding Overtime

Unless one of the exemptions applies, an employee is entitled to overtime pay for hours worked in excess of 40 hours per week, which can be very costly for employers. Managing nonexempt employees can be difficult because all of the employee’s time worked must be paid. It is not uncommon for us to review employee handbooks for churches that state, “Any unapproved hours for hourly employees will not be paid.” This policy clearly violates the FLSA and opens your organization up to wage and hour claims. However, discipline or termination of an employee who violates requests not to work over a certain amount of hours may be allowed. If you need to discipline or terminate an employee for unauthorized hours worked, contact your attorney. This is a complicated area of employment law and should be handled by competent counsel.

With the technological advances of the past 10 years, it is easy for employees of all job duties to be constantly connected to co-workers and supervisors. To combat unauthorized work from home, some employers require employees to leave employer-owned mobile devices at the office before leaving for the day. It is critically important for churches to also set clear policies about work conducted after hours, including the handling of work-related calls, texts, and email.

Counting Hours

Let’s look at how you count hours for nonexempt employees.

First, work doesn’t have to be requested or even authorized. The definition of “employ” is “to suffer or permit to work.” Permitting someone to work is broad, and doesn’t always require someone to request working hours. If your employees have access to the employer’s facilities, email, smartphones, voicemail, and electronic texts with other co-workers, then you are likely permitting them to work. If you permit an employee to work, any time spent working is considered hours worked and you must pay the employee for that time.

The following issues must be reviewed when it comes to counting hours:


For nonprofits, it is important to remember that employees cannot volunteer for positions similar to their paid positions. Having a childcare worker volunteer his or her Wednesday nights to provide childcare opens you up to the possibility of being liable for the hours worked on those Wednesday nights. Even well-meaning employees who desire to volunteer work related to their jobs are still legally owed those wages. Do not assume that an employee who happily volunteers today will remain that way, especially if he or she someday is let go from the church.

Paid to wait

Sometimes employees have been engaged to wait. Whether you know or it or not, you probably have employees who do not work for eight straight hours and may be “engaged to wait,” as the DOL calls it. Employees, such as administrative assistants, are often engaged to wait, according to the DOL. These employees spend their day waiting for tasks to be assigned to them while they are at the office. Down time must be paid and is considered time worked.

On call

If employees are “on call,” they may be considered working. The determination is made on a case-by-case basis (like all wage and hour cases) and depends on the amount of control the employer exercises over the employee during their on-call time. If the employee can go home during the on-call time, he or she is not considered to be working.

Meal times

If your employees take short breaks (less than 20 minutes), which are common for their jobs, the short breaks are generally paid. Sometimes employees may even eat during these times, and the time is still paid. If the employees are taking true meal breaks and are relieved of their duties for 30 minutes or more, the employer does not have to pay wages during those times. But, if you require your employee to stay and eat at his or her workstation, you will more than likely have to pay that employee during the mealtime.

The DOL does not require employers to provide break or meal times. However, check with legal counsel as local and state laws may differ.


Often, churches have camps or other summer activities that require workers to be on call around the clock. Whether time spent sleeping is considered hours worked is a big question, especially for churches sending groups to camps and retreats.

The DOL has given specific guidance that if an employee must work for 24 hours or more, has a regular sleep schedule of at least 5 and not over 8 hours of uninterrupted sleep (per 24-hour period), and sleeping accommodations, then the employee and employer can agree on unpaid sleeping times. However, if these requirements are not met, the employer must pay for hours slept. This requirement can be difficult for camp counselors who rarely, if ever, get “uninterrupted sleep” or a “regular” sleep schedule.

Editor’s note:
Keep in mind that state labor laws may not only differ from DOL guidelines but may be more stringent. Prior to making any decisions based on federal requirements, check with your state’s labor office. If you remain unclear regarding your state’s labor laws, seek out legal counsel.

Travel time

Travel time to and from work is not considered time worked and is not compensated. However, travel that is out of the ordinary, such as an irregular, distant work location, is considered time worked. Irregular travel time, whether by plane, car, or bus, must be paid, even if it is not during an employee’s normal work hours.

Youth Workers and Ministers

Churches also need to review the following areas:

Youth workers

Minimum wage for workers under 20 years of age is confusing for some employers. The DOL has a provision allowing a $4.25 minimum wage for employees under the age of 20. However, the sub-minimum wage can only be paid for the employee’s first 90 days, or until the employee turns 20, whichever comes first. Once the 90 days mark has been hit, or the employee turns 20, the standard minimum wage must be paid.

Ministerial exception

Several courts have ruled that the ministerial exception, which prohibits ministers from suing based on certain federal laws (most notably discrimination laws, such as the Americans with Disabilities Act or Title VII of the Civil Rights Act, as amended), also extends to FLSA. Accordingly, churches are not required to pay ministers overtime.

However, ministers exempt from FLSA must have ministerial duties. Several courts, such as the Fourth Circuit Court of Appeals in Dole v. Shenandoah Baptist Church, ruled that employees must have actual sacerdotal duties to be exempt from the FLSA. If you believe your pastoral staff qualifies for this exemption, contact legal counsel for help.

Common Mistakes

So what areas do you need to look out for when determining whether your employee classifications comply with the FLSA? Here are a few risk areas we see in many of our clients’ practices:

1) Failure to record hours worked. Often, this is not intentional, and when it occurs, it is out of ignorance of the law. Maintaining a record of the hours worked is the employer’s responsibility. However, it is easy for employers to trust an employee’s records and not verify the records. Most times, trusting the employee goes well until they become disgruntled or must be let go. Remember, wage and hour audits can cover recently separated employees and current employees.

2) Paying a flat fee, regardless of the hours. For simplicity’s sake, employers often lean toward automatic systems that may not consider occasions when employees must show up to special events, or stay late (such as for an overnight youth event). It is important that each week or pay period be carefully looked at by management and each hour is paid. If an employee is working beyond approved hours, that employee may be disciplined or terminated, but you must pay them for the hours worked.

3) Improperly deducting pay. Be careful not to deduct pay for items used for employment purposes. While some items, such as uniforms, MAY be deductible, this is not always the case. Check with legal counsel before making any irregular deductions from your employee’s paycheck.

4) Improperly paying overtime. Often, when pay periods are longer than a week, such as two weeks, employers may accidently pay overtime after 80 hours instead of 40. Overtime is due after 40 hours in a one-week period.

Common Myths

Lastly, here are some common myths we hear that need to be addressed:

1) An employee waives his or her right to a wage and hour claim if they receive severance. The Fifth Circuit Court of Appeals decided on June 1, 2015, that there must have been a “bona fide dispute” regarding wages paid before a severance agreement was valid in stopping a wage and hour claim.

2) An employee can work too many hours to be paid. The DOL has stated there is no limit to the number of hours an employee can work.

3) Paid time off is required. The FLSA does not require paid time off. Many states do not consider PTO to be wages and may be withheld. Generally, PTO is an agreement between the employee and employer.

4) Employers must give a meal break to their employees. The FLSA does not require meal breaks, but some states do.

5) Employers must pay double-time to employees on holidays. The FLSA does not require employers to pay double-time under any circumstances. However, this may be agreed upon between the employer and employee.

Update: Editor’s note added to “Sleeping” section.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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