Strengthening Internal Controls for Churches: Key Steps and Risks

Explore key internal controls for churches to reduce risks, prevent fraud, and protect staff and ministry resources.

Last Reviewed: January 25, 2025

Many church leaders may not want to admit—and certainly not under their watchful eyes—there could be weaknesses or vulnerabilities in their ministries. As a career auditor and consultant, I hear many stories that begin with “Hypothetically speaking . . .” or “I know someone who . . .”

Many ministries have questions about internal controls and how to effectively address or prevent vulnerabilities. Being willing to consider these issues is an important first step in addressing any weaknesses. Some churches operate with a vulnerability without realizing what the consequences could be. They are surprised when something goes wrong, but they probably should have known the risk the entire time.

Common weaknesses and accompanying risks

Let’s take a look at some of the specific internal control weaknesses that can exist in a church and why they are a concern.

Weakness: Individuals can access uncounted funds in the safe by themselves.
Risk: Even if it is not standard procedure for one person to access the safe by themselves, if someone can do it, a problem exists. Consider all the people with keys or combinations to your safe. For example, one church discovered the janitor had an extra key to the safe and the spare key to the room it was in.

Weakness: Signed checks are given back to the individual who prepared them.
Risk: That individual could change the payee. Since he or she has the documentation, the individual could create another check to pay the vendor later.

Weakness: The same person has access to both the deposit and donor systems.
Risk: That person could take contributions and post a fictitious entry to the donor system to credit the donor.

Weakness: An individual with access to accounts payable and the general ledger is also a check signer.
Risk: This person could make a payment and sign it without anyone else knowing.

Weakness: Blank checks are signed because it is hard to find signers.
Risk:If a person with access to the general ledger also has access to the signed blank checks, the checks could be written to anyone and for any amount.

Weakness: An individual with access to the general ledger has online banking access .
Risk: The individual could transfer funds to another bank account or process and record a wire transfer without approval.

Weakness: Individual ministries have separate bank accounts that are not recorded in the general ledger.
Risk: The activity is not reviewed or approved by others, leaving the church at risk for embezzlement and the individual(s) in charge at risk of an accusation of wrongdoing.

Weakness: Payroll is processed by one individual, and it is not reviewed.
Risk: The individual could make unapproved pay rate changes or add “ghost” employees to the payroll.

Weakness: Timecards are not signed by a supervisor.
Risk: The hours reported, and the compensation given, may be inaccurate, whether intentionally or accidentally.

Weakness: The ministry lacks adequately trained or knowledgeable staff.
Risk: Employees can make mistakes, leading to poor information, or intentional errors (fraud) could occur but go undetected because of consistent mistakes or sloppiness.

Weakness: Financial information and reconciliations are prepared months after the fact.
Risk: Errors will not be detected in a timely manner, and decisions may be based on incorrect financial information.

Weakness: A single corporate credit card is available for multiple people to use, and the transactions are not appropriately reviewed by a supervisor (someone other than the person on the account).
Risk: Someone could make charges that are not related to church business, and determining the responsible party for any purchase becomes difficult with multiple users.

This list is provided to help you understand how easy it is to overlook some key weaknesses in internal controls. Even if none of these situations exist in your church, it is always good to keep them in mind as financial procedures, records, and personnel often change over time.

Key controls to protect church and staff

The following controls don’t require extraordinary effort, but they can provide at least a baseline defense for your church and the individuals processing cash receipts, cash disbursements, and payroll:

  • Always have more than one person handle uncounted funds.
  • Provide deposit information to someone in accounting as well as the person processing donor information. The deposit and donor system report should be independently verified to ensure they are in agreement.
  • Send detailed donor statements at least annually.
  • Use the same controls for checks received as you do for cash. Checks should be stamped “For Deposit Only” as soon in the process as is practical.
  • Reconcile the donor system to the general ledger at least annually.
  • Ensure that access to the check stock, the ability to post in the general ledger, and check-signing authority involve at least two unrelated individuals.
  • Eliminate or carefully control signature stamps.
  • Keep petty cash to minimal amounts and reconcile it periodically.
  • Have someone with access to the general ledger review the bank reconciliation and canceled checks on a monthly basis.
  • If payroll is processed by one person, ensure it is reviewed and approved by a second, unrelated person.
  • Implement a monthly closing process that details:
    – The steps that need to be performed, along with due dates
    – Who should prepare the information
    – Who should review the information
  • Have journal entries prepared by one person and approved by a second, unrelated person, or have a second person print an entire journal report each month and review and approve it.

The items above are a good starting point. Once these policies and procedures are in place, the next step is to make sure they are documented adequately.

Consider the benefits of an outside review

Your church may benefit from having an outside person review your processes to determine where weaknesses may exist. If you encounter any pushback from individuals, remind them these practices are in place as a stewardship principle as well as serving to protect the individuals involved. Framing these tasks that way can change everyone’s perspective on the importance of these matters.

Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.

Are Donations Given for a New Minister of Music Tax Deductible?

Understand the tax implications of donations for individual ministers and how to ensure compliance with IRS rules for deductibility.

Last Reviewed: January 24, 2025

Q: Our church would like to hire a new minister of music, but tithes and offerings will not cover it. Members are making special contributions to the budget for the purpose of providing a salary for a future minister of music. Are these contributions tax-deductible for donors?


Yes, these contributions can be tax-deductible as long as they follow IRS rules. Donations cannot be specified for an individual, but they can be designated for a ministry purpose such as funding the position of a minister of music.

IRS Guidelines for Tax-Deductible Donations

The IRS distinguishes between donations intended for an individual and those intended for a church’s ministry or mission. To ensure contributions for a new minister of music are tax-deductible:

  • Donations must not be earmarked for an individual: Contributors cannot specify their gifts for a particular person, such as a specific candidate for the minister of music position.
  • Funds must serve the church’s mission: The church should use the donations for the purpose of creating and funding a minister of music position, with the funds fully under church control.
  • Complete control of funds: The church must retain full discretion and control over the allocation of the donated funds.

Best Practices for Churches

To comply with IRS rules and maintain donor confidence, churches should follow these best practices:

1. Clear Communication

Inform donors that their contributions will support the creation and funding of a new minister of music position. Avoid language that suggests the funds are for a specific individual.

2. Proper Documentation

Provide each donor with a written acknowledgment of their gift, including:

  • The amount contributed.
  • A statement that no goods or services were provided in exchange for the donation, if applicable.

3. Retain Control of Funds

The church must have full discretion over how the funds are used. If funds exceed the amount needed for the minister of music position, the excess should be allocated to other church purposes.

Key Considerations for Donors

While donors may wish to support a specific individual, it is important to structure contributions in a way that aligns with IRS rules. Donations intended for the church’s mission, not for an individual, will remain tax-deductible.

For more information, review the IRS guidelines on charitable contributions or consult resources from the Evangelical Council for Financial Accountability.

FAQ: Taxes on Donations to Individual Ministers

  • Can donations be designated for a specific individual?
    No, contributions specified for an individual, such as a particular minister, are not tax-deductible.
  • Are donations for a new ministry position tax-deductible?
    Yes, as long as the donations support a ministry purpose and are fully under the church’s control.
  • What documentation do donors need for deductions?
    Donors must receive a written acknowledgment from the church, stating the amount and confirming no goods or services were received in return.
  • What happens if donations exceed the intended purpose?
    Excess funds must be allocated to other church purposes to maintain their tax-deductible status.
Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.

Strengthening Church Financial Management: 7 Key Practices

Discover seven key practices to improve church financial management and support ministry success.

Last Reviewed: January 25, 2025

Romans 12:4 notes that the body is made up of many parts, and they all have different functions. We use this analogy in many contexts, and it is appropriate when considering the workings of a church. Your church needs ministries such as preaching, discipleship, and worship, but you also need support ministries. These can include IT, facilities, administrative . . . and financial operations.

A church’s finance department is one of the most significant of its support ministries, as well as being one of the most misunderstood and overlooked. Yet church leaders rely on the information their finance departments provide, and if that information is inaccurate, significant—or even catastrophic—results can occur.

In the work I have done for churches and ministries as a certified public accountant, I’ve seen personnel layoffs, ministry reductions or discontinuations, and lack of debt compliance as results of improper financial management.

Even if a church finds itself in a difficult economic position, options are available through access to accurate and timely information. But the longer the problem continues without proper attention, the worse the consequences will be.

If you’ve lapsed in one or more of the following seven areas, it’s important to recognize why any lapses need to be remedied for the good of your ministry.

1. Proper internal controls

As a career auditor and consultant, I would be remiss if I didn’t note the most common mistake I see affecting ministries of all sizes. Weak internal controls not only leave the church vulnerable to financial losses, weak controls also leave individual staff and volunteers vulnerable to allegations that they may not be able to defend. To provide basic protection for the church’s financial assets, it’s critical to have segregation of duties over cash receipts. It’s also vital for disbursements to involve at least two people in the custody of the asset, record keeping, and authority of transactions.

2. Competent staffing

It is not uncommon to “settle” for someone when filling a paid or volunteer position, but the resulting lack of competence can be frustrating for both the individual and the ministry and can certainly diminish the capacity of the role. Management of the church’s finances provides the foundation on which the rest of ministry happens. Allowing someone to serve in a role for which he or she is not qualified is not helpful, even if you are doing it to help an individual in need of a job or a relative of another employee. Having the right people in the right positions is crucial.

3. Adequate training

Try to name something a person can be successful at without training. Whether it is a hobby or a career, everyone needs to have the proper training in order to do his or her best. Training, however, is often overlooked or cut from budgets as a “perk.” That mindset needs to change, because a well-trained, proactive finance team will make better decisions, provide better information, and become a crucial element in the ministry’s success.

4. Financial reporting

There are two aspects of financial reporting: preparation of the reports and understanding the information reported. Financial managers need to help with both. You should consider the information and format of the report to be certain it is accurate, timely, relevant, and succinct. You should also help the individuals who use the information to understand what the report means and how to apply the information. Just as the finance department needs training, church leadership and the board will need training, as well. The finance department can provide this training or help find others who can.

5. Documented processes and procedures

Documenting processes and procedures is not something that should be done once and checked off a list forever. Every church needs to have a processes and procedures manual in place and review and update it at least annually. People, processes, and software change, and information can quickly become outdated when that happens. Churches should also have a record retention and document destruction policy in place. This will notify individuals of the requirements necessary to maintain and destroy financial information.

6. Succession planning

More ministries are becoming aware of the need for succession planning for the senior pastor. If your church has not done this, or you feel you have several years before your leader retires, please consider the importance of taking this step now. Things can change unexpectedly, and a well-considered and thorough plan takes time. Considering succession planning for other roles within the church—both paid and volunteer positions—is also important. You should always be considering the next person in line for any key position.

7. Staying updated

It’s a true saying that “The one thing you can count on in life is change.” If you are reading this, you likely have some responsibility for or interest in the finances of your church. It’s an environment that is constantly changing. It is critical that someone in your ministry be tasked with understanding the implications of changes in state legislation, accounting standards, and the regulatory environment (such as tax laws and employment regulations).

Providing support, serving the kingdom

This list of areas covered in this article is not comprehensive, but it certainly provides key areas to consider as you conduct your various financial operations. Your church is most likely better at some of these items than others. I encourage you to go back to the links offered in this article for additional information on areas that may not be as strong. And keep turning to Church Law & Tax for other practical articles and books and downloadable resources on finance-related topics that will help you do your job well as you seek to support your church and serve God’s kingdom purposes.

Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.

7 Traits of Churches with Increasing Per Member Giving

Explore seven key traits of churches that successfully increase average giving per member through engagement, transparency, and clear goals.

Last Reviewed: January 24, 2025

One of the key financial metrics for churches is average church giving per member. This measure provides insight into the generosity and engagement of a congregation, beyond fluctuations in attendance or membership. Calculating per member giving allows churches to identify trends and implement strategies for growth.

Churches experiencing increased per member giving often share seven dominant traits. These characteristics are especially important as Millennials and younger generations engage more actively in church communities.

1. Increased Emphasis on Belonging to a Group

Members who participate in groups, such as small groups or Sunday school classes, give significantly more—up to six times more—than those who only attend worship services. Fostering group participation strengthens a sense of belonging and encourages generosity.

2. Offering Multiple Giving Venues

Per member giving rises when churches provide diverse and convenient giving options. At a minimum, churches should offer these four venues:

  • Offertory giving during worship services.
  • Online giving through a secure platform.
  • Mailed offering envelopes for all members and givers.
  • Automatic bank deductions.

Additional options, such as giving kiosks and group-specific offertories, can further enhance convenience and participation.

3. Setting Meaningful and Motivating Goals

Church members are more likely to give when the goals are meaningful and impactful. For example, a goal like “increasing total gifts by 10 percent” may lack emotional resonance. In contrast, “raising 10 percent more to expand the gospel in the 37201 zip code” connects giving to a clear and tangible mission.

4. Teaching Biblical Giving in New Member Classes

New member classes should set clear expectations for biblical church membership, including financial stewardship. Churches that discuss biblical giving unapologetically in these sessions lay a strong foundation for generosity among new members.

5. Leadership Willingness to Discuss Finances

Some leaders avoid discussing money due to misconceptions that financial topics deter attendance. However, silence about financial stewardship can hinder giving. Church leaders should approach this topic with clarity and purpose, emphasizing the spiritual importance of generosity.

6. Providing Meaningful Financial Reports

Financial reports should be easy for members to understand. Avoid overly complex reports that only financial professionals can decipher. Instead, provide clear, accessible summaries that show how funds are used and how they impact the church’s mission.

7. Ensuring Transparency in Financial Reporting

Transparency builds trust. When members sense financial information is being withheld, they may withhold their giving. While financial statements do not need excessive detail, they should provide a clear overview of how funds are received and allocated.

Many churches are experiencing growth in both total giving and per member giving. By adopting these seven traits, churches can strengthen their financial health and further their mission with the support of engaged and generous members.

For more tips on increasing giving, visit the Evangelical Council for Financial Accountability or explore the IRS Charitable Contributions page.

FAQ: Average Church Giving Per Member

  • How is average church giving per member calculated?
    Divide the total annual giving by the number of active members to determine the average contribution per member.
  • Why do small group participants give more?
    Small groups foster a sense of belonging and accountability, encouraging greater engagement and generosity.
  • What are effective ways to increase per member giving?
    Provide diverse giving options, communicate clear financial goals, and ensure transparency in financial reporting.
  • How can financial reports improve giving?
    Simple, clear reports build trust by showing members how their contributions make an impact.

Check out the downloadable resource Increase Giving at Church and the article “How Ratios Can Strengthen This Year’s Finances” by Vonna Laue.

5 Common Church Security Questions

Understand your church’s security needs in light of local laws and site specific requirements.

Last Reviewed: February 10, 2025

1. Should we arm our security team?

This is really up to each church. Evaluate your risks and the make-up of your team.

You also need to understand the laws in your community. We primarily operate in three states (California, Arizona, and Nevada), and all three states are very different.

If your church is in California and has a school during the week (or is within 1,000 feet of another school), Governor Brown’s ‘Gun Free Zone’ extends to churches all times of the day, all year-round. Nuances in the law could result in some concealed weapons permit holders being charged with a felony if the board doesn’t take a few simple steps.

In Nevada, some insurance companies will cancel your insurance if anyone on your staff is armed.

Arizona is still like the Wild West. In some churches half of the people in the pews will be armed on a Sunday morning, which could open up a whole other bag of worms!

2. Does our church need an organized safety and security team?

I really encourage it. This is a great opportunity for a church to get involvement from people that may not be inclined to volunteer in other areas of ministry. In fact, many church members would like to combine their career experience with ministry.

In the case of an emergency, you can expect a certain level of chaos, and a church with an organized team in place, a safety and security plan, and the time to practice that plan will help improve a church’s response to a crisis—thereby reducing the overall risk should one occur.

3. We know that some law enforcement officials attend our church and they’ll respond. Isn’t that enough?

I know that most people don’t read their insurance policies, so understand this: In order for the insurance policy to fully respond (and defend your security volunteers), your security team needs to be acting within their ‘delegated authority.’ What does this mean? Formalize your security team, train them, and give them appropriate authority. This allows your insurance company to protect your security team when they are acting on behalf of the ministry.

4. How should our church respond to emergencies?

Start with a series of questions that ask “What if …” Some examples might be: “What if there is an earthquake?” “What if someone suffers a heart attack?” or “What if someone brings a weapon to the sanctuary and/or causes a disturbance?” Prioritize these ‘What ifs’ and ask your insurance agent for tools on how to prepare for these situations.

5. Will our church’s security and safety team members need a background check?

No question about it … yes!

Charlie Cutler is Managing Partner of ChurchWest, an independent agency that serves nearly 3,000 ministries in California, Arizona, and Nevada.

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Is My Housing Allowance Considered “Earned” Income?

Discover if your housing allowance qualifies as earned income and its implications for Social Security taxes.

Last Reviewed: January 18, 2025

Q: The Church & Clergy Tax Guide says that a pastoral housing allowance is not subject to Social Security tax if the minister receiving it is retired. I am retired, but I am paid a housing allowance while serving part-time as an associate pastor in my church. Do I qualify for not paying Social Security taxes?


When Is a Housing Allowance Considered “Earned” Income?

Social Security taxes apply to earned income, regardless of the age of the worker. In your case, since you are currently working to earn the housing allowance by serving as an associate pastor, the housing allowance is considered earned income and is subject to Social Security (self-employment) taxes.

Join Church Law & Tax Today!

When Is a Housing Allowance Not Considered “Earned” Income?

If a minister is performing no services—meaning zero services—and receives a payment from a retirement plan operated by a church, amounts designated as a housing allowance are not considered “earned” income. In these situations, the housing allowance is not subject to Social Security taxes.

Key Takeaways

  • Housing allowances are subject to Social Security taxes if the minister is actively performing services.
  • Retired ministers receiving a housing allowance without performing any services are not subject to Social Security taxes.
  • The distinction depends on whether the income is earned through current ministerial services.

FAQs About Housing Allowance and Earned Income

What is considered “earned” income?

Earned income includes wages or other compensation received in exchange for actively performed work or services.

Are housing allowances for retired ministers subject to Social Security taxes?

No, if the minister is fully retired and performing no services, housing allowances from a retirement plan are not subject to Social Security taxes.

Does part-time work affect the tax status of a housing allowance?

Yes, if a minister is working part-time and receiving a housing allowance, it is considered earned income and is subject to Social Security taxes.

How does the IRS define “no services” for housing allowances?

The IRS defines “no services” as the complete absence of any work or ministerial duties performed by the minister receiving the housing allowance.

Conclusion

The tax status of a housing allowance depends on whether the minister is actively performing services. Retired ministers who perform no services are exempt from Social Security taxes on housing allowances, while those working—even part-time—must pay Social Security taxes on the allowance. For detailed guidance, consult resources like the Church & Clergy Tax Guide.

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

Understanding the 5 C’s of Church Mortgage Financing

Explore the 5 C’s of church mortgage financing for informed financial planning and debt management.

Last Reviewed: January 27, 2025

Lending institutions often refer to “the Four Cs of Credit.” Interestingly, while there is some commonality among those who cite the Four Cs, different institutions cite different Cs, and some refer to five rather than four. The Cs most commonly cited are: Character, Capacity, and Collateral.


This information is pulled from “Church Finance – Second Edition” now available in the Church Law & Tax Store.


Based on professional experience and communications with numerous church lenders over the years, here is how I would state the 5 C’s of Church Mortgage Financing:

Character
The integrity and acumen of the church’s leaders, and the quality of the church’s accounting books and records. Character also includes the quality of the church’s governing body (board) and the manner in which the governing body exercises oversight with respect to the church’s activities.

Cash flow
A stable history of positive cash flow which clearly supports, in a well-documented manner, the church’s ability to honor the proposed debt obligations.

Cash reserves
Cash and investment balances sufficiently significant to provide the church with flexibility and time to adapt in the event that the church experiences unexpected difficulty in servicing the debt from regular operating cash flows.

Collateral
Assets underlying the debt which have a market value significantly in excess of the debt amount and which are pledged to satisfy the debt in the event that the church is unable to repay.

Contingency plan
A plan that church leaders develop in advance addressing how it will adapt to ensure the church’s ability to honor its debt obligations in the event of a sudden or unexpected downturn in revenue or other financial challenge.

Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.
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Holiday Church Safety: Keeping Members and Visitors Safe

Beautiful decorations can be hazards if you’re not careful.

Last Reviewed: February 10, 2025

The holiday season brings special services, decorations, and events—but also potential safety hazards. Here’s how to keep everyone safe during holiday celebrations.

🚗 Parking Lots and Walkways

  • Ensure adequate lighting in parking areas and around the building, especially for evening events.
  • For snowy and icy locations, have a solid plan for clearing lots and walkways.

🚪 Steps and Entryways

  • Keep steps and entryways clean and dry to prevent slips.
  • Place salt and shovels at entrances with designated individuals responsible for clearing snow and ice.
  • Use entrance mats, hazard signs, or cones to warn visitors of slippery conditions.
  • Keep a mop and bucket handy for wet entry areas.

🎄 Decorations and Fire Safety

  • Inspect all ladders and equipment before decorating.
  • Ensure only capable individuals handle heavy lifting or climbing.
  • Check all electrical decorations before use.
  • Use caution with candles—these are common causes of holiday fires.

🎭 Special Services and Live Events

  • Plan for safety when incorporating live animals, elevated risers, or large props.
  • Designate a staff member to oversee safety measures.
  • Conduct a walk-through with a checklist before every event.
  • Involve security or safety team members in holiday planning.

📢 Awareness, Training, and Communication

  • Raise awareness about seasonal safety risks among leaders and members.
  • Add safety reminders to bulletins, signs, and announcements.
  • Encourage open communication about hazards and best practices.

By planning ahead and staying vigilant, churches can create a joyful and safe holiday experience for all.

Simplify Your Church’s Year-End Financial Closing with These 10 Steps

Learn how to simplify your church’s year-end financial closing with these 10 actionable tips for accuracy and efficiency.

Last Reviewed: January 25, 2025

Right now is a great time to think about how to use your time most efficiently. Procedures like those provided below spread the workload out over a period of time. Performing these simple steps throughout the year will result in your year-end financial closing being similar to any other month-end, rather than a stressful and time-consuming event.

Here are the top 10 things you can do to make the end of the year easier.

1. Prepare a monthly closing checklist

This list should include items such as bank reconciliations, investment reconciliations, and items 2 through 5 below. It should also include the name and initials of the preparer and reviewer. Set a realistic time frame for completing the checklist each month and monitor it for compliance.

2. Perform monthly donor reconciliation

Reconcile the donor system with the contribution accounts in the general ledger on a monthly basis. This will allow you to detect any errors or unusual reconciling items, such as recognition of pledges, and will make the year-end reconciliation quicker. Even if you use an integrated church management system, posted journal entries could result in differences.

3. Track temporarily restricted net assets

When donors give amounts for specific purposes, you need to track the amounts received and when and how they were spent. Doing this monthly will save you significant time and effort at year-end.

4. Track employee benefit hours

Your annual financial statements must include the value of any benefit hours (such as vacation time) paid out, times the pay rate. That will be easier to do if you calculate the amounts earned and used on a monthly basis.

5. Compare budget to actual numbers with department heads

Management should receive information on budgets and the actual amount of income and expenses each month. Department heads will inquire if they believe something was inaccurately charged to their budgets, creating an internal control to make sure transactions are properly recorded.

6. Reconcile 941 forms to payroll expense accounts

When the 941 is prepared each quarter, make sure the reported amounts agree with the general ledger.

7. Maintain a fixed asset folder

To easily identify and record fixed assets purchased during the year, keep a separate folder with copies of invoices related to the purchase. Many organizations leave the purchases expensed during the year to help with departmental budget reporting. At the end of the year, a reclassification entry is necessary to remove the amounts from expense and capitalize them as assets. This folder will make that process faster and provide documentation if your accountants or auditors want more information.

8. Monitor debt covenants

With the credit market so restrictive in recent years, monitoring debt covenants has become even more important. It’s crucial to start by understanding the covenants included in your loan documents. Then monitor them consistently so you can address any concerns with the lender upfront, rather than after a breech occurs.

9. Monitor any accounts outside your church’s direct control

Sometimes groups within an organization, such as a parent/teacher group or mother’s group, establish bank accounts with the organization’s tax identification number. Ask the groups within your church if they have a bank account and if so, which tax identification number was used. If the church’s identification number was used, you need to make sure the funds are used appropriately. Consistently obtain bank statements and information on income and expenses related to these accounts.

10. Contact your accountant with new issues or questions

Don’t be afraid to contact your accountant throughout the year. He or she would love to help make sure your financial reporting is accurate during the fiscal year, not just after the year ends and adjustments are made.

Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.
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Can the Church Borrow from a Restricted Fund?

Understand the legal and ethical considerations of borrowing from restricted funds and learn best practices for church financial management.

Last Reviewed: January 24, 2025

Q: If a church has a restricted fund, such as a building fund, can it borrow from the fund for an unrelated purpose as long as it is made clear that the money will be repaid?


1. State Laws and Criminal Liability

In many states, borrowing from a donor-restricted account is considered theft, even if the church plans to repay the amount with a formal promissory note. Such actions can result in criminal charges against those responsible for approving the loan.

2. Breach of Fiduciary Duty

Borrowing from restricted funds may also constitute a breach of fiduciary duty. Church leaders who approve such actions could face legal consequences, including personal liability for damages.

3. Violations of Deceptive Trade Practices

In some states, using restricted funds for unrelated purposes may violate deceptive trade practices statutes. These laws allow donors or the attorney general to sue for damages, punitive damages, and attorneys’ fees. Such lawsuits can have significant financial and reputational impacts on the church.

Exceptions for Board-Created Restricted Funds

If the restricted account was created by the church board and contains funds transferred from the general fund, the board may have the authority to remove the restriction and transfer the funds back to the general fund. However, this option should be exercised cautiously and transparently to avoid confusion or mistrust among church members and donors.

Why Borrowing from Restricted Funds Is a Bad Idea

Even when legally permissible, borrowing from restricted funds is generally discouraged. It undermines donor trust and can lead to long-term financial instability. Additionally, pledging restricted funds as collateral for a third-party loan is equally problematic and should be avoided.

Best Practices for Managing Restricted Funds

To maintain financial integrity and comply with legal requirements, churches should follow these best practices:

  • Understand State Laws: Consult a qualified attorney to ensure compliance with state-specific regulations regarding restricted funds.
  • Maintain Transparency: Clearly communicate the purpose and usage of restricted funds to donors and stakeholders.
  • Plan for Emergencies: Establish an unrestricted reserve fund for unexpected financial needs, reducing the temptation to use restricted funds inappropriately.
  • Seek Expert Advice: Before taking any action involving restricted funds, consult a financial advisor or nonprofit attorney.

For more guidance on managing restricted funds, visit the IRS Charitable Contributions page or consult resources from the Evangelical Council for Financial Accountability.

FAQ: Restricted Funds

  • What are restricted funds?
    Restricted funds are donations designated by donors for specific purposes, such as building projects or mission programs.
  • Can a church borrow from restricted funds?
    In most states, borrowing from restricted funds is illegal and can lead to criminal or civil penalties.
  • What are the consequences of misusing restricted funds?
    Churches may face legal actions, financial penalties, and damage to their reputation if restricted funds are mismanaged.
  • How can churches avoid issues with restricted funds?
    By understanding legal requirements, maintaining transparency, and consulting experts before making decisions about fund usage.
Frank Sommerville is both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

16 Tips for Writing Effective Charitable Contribution Statements

Learn 16 ways to make your charitable contribution statements more impactful and engaging for your donors.

Last Reviewed: January 24, 2025

The charitable contribution statement is one of the most underutilized tools in church communication. While it’s often viewed as a legal obligation, it can be much more—an opportunity to build trust, connect impact with giving, and inspire further generosity.

Nonprofits excel at leveraging contribution statements, and churches can too. The key is intentionality. Here are 16 actionable tips to help you create meaningful and impactful charitable contribution statements.

1. Use High-Quality Materials

The quality of your paper, ink, and envelopes matters. Avoid using the cheapest materials available. These details reflect how your church values its donors and its mission.

2. Personalize the Message

Address donors by name instead of using generic salutations like “Dear Friend.” Use variable data to create a more personal connection.

3. Focus on Storytelling

Include a letter that highlights measurable ministry accomplishments, shares current progress, and outlines future goals. Stories help donors see the tangible impact of their giving.

4. Don’t Fear Length

Compelling direct mail can be longer than one page. People don’t avoid reading—they avoid reading uninteresting content. Ensure your message is engaging and relevant.

5. Make It Readable

Use bullets, subheadings, and short paragraphs to make your content scannable. Cater to both skimmers and detailed readers.

6. Avoid Insider Language

Use clear, relatable language instead of church jargon. Stories and statistics can help bridge the gap and resonate with all readers.

7. Highlight Progress Toward Goals

Demonstrate measurable progress toward meaningful objectives. This builds trust and motivates donors to continue supporting your mission.

8. Include a Clear Call to Action

Don’t assume readers know what you want them to do. Clearly state how they can continue supporting the church or make an additional gift.

9. Utilize the P.S. Line

Many readers will skip directly to the P.S. Use it to summarize your message and include essential information for those who scan.

10. Provide Year-to-Date Comparisons

Show donors how their giving compares to previous years. This can encourage additional gifts from those who want to “catch up” or surpass last year’s contributions.

11. Include a Postage-Paid Envelope

Make giving easy and immediate by including a postage-paid envelope. This small step can significantly boost response rates.

12. Send Quarterly Statements

Frequency matters. Send contribution statements at least quarterly to keep donors informed and engaged. Consistent communication reinforces trust.

13. Re-Engage Past Donors

Include donors from the current and previous year. This is an opportunity to reconnect with individuals who may have lapsed in their giving.

14. Offer a Point of Contact

Provide a staff member’s name, email, and phone number for questions. Few will use it, but it demonstrates your commitment to donor relationships.

15. Provide a Digital Option

Include a link to an online giving platform. Nearly one-third of online donations originate from direct mail letters, making this an essential component.

16. Coordinate Across Channels

Ensure your messaging about ministry impact and donor engagement is consistent across all communication channels. This reinforces your mission and message.

Why Contribution Statements Matter

Contribution statements connect donors with the difference their giving makes. These documents aren’t just about finances—they honor the relationship and trust donors place in your church. By making statements personal, impactful, and frequent, you can strengthen donor engagement and inspire future giving.

For additional insights on charitable giving, visit the IRS Charitable Contributions page or consult resources from the Evangelical Council for Financial Accountability.

FAQ: Charitable Contribution Statements

  • What is a charitable contribution statement?
    It is a document that acknowledges a donor’s gifts to an organization, often used for tax purposes and donor engagement.
  • How often should contribution statements be sent?
    Quarterly statements are recommended to keep donors informed and engaged.
  • What should be included in a contribution statement?
    Personalized details, year-to-date comparisons, and clear messaging about how contributions are used.
  • Why is storytelling important in contribution statements?
    Stories connect donors to the impact of their giving, making the statements more engaging and meaningful.

This post is adapted from 16 Things I’ve Learned Writing Countless Contribution Statements for Churches and first appeared on Ben Stroup’s blog, BenStroupWriter.com. Used with permission.

Enhancing Church Reference Forms: Key Questions for Volunteer Screening

Discover the critical questions every church reference form should include to assess volunteer suitability, spiritual commitment, and safety.

Last Reviewed: January 28, 2025

Reference forms that an employee or volunteer applicant fills out are a vital part of the background check process for new ministry volunteers, especially children’s ministry volunteers. But often, reference forms don’t get to the nitty-gritty of what you truly need to know in order to keep your ministry and your church safe. Find out how thorough your church’s reference form is by getting a copy of it, taking a few minutes to look it over, and then seeing if it asks the following:

What is it like to work with the applicant?

Hopefully, this reference is someone who’s worked with the applicant in some capacity in the past. No matter how desperate your ministry might be for children’s ministry volunteers, it won’t be worth it if this volunteer will be difficult to work with. On the flip side, if this applicant has excellent leadership capabilities and is deeply gifted for the position they’ve applied to work in, you’ll want to know in advance so you can watch for or consider future leadership positions for them.

How is the applicant’s spiritual commitment?

If the applicant is new to your church, or simply new to your ministry area, it’s important to get a read on the spiritual health and faith of the individual. The answer to this question will affect every other piece of the reference check. Don’t assume that every applicant has a deep and faithful commitment to Jesus Christ. Churches have a history of being targeted by predators simply looking for a trusting environment to enter into.

What is the relationship between the reference and the applicant?

A reference who barely knows the applicant is not a useful reference, so make sure you understand the depth and the breadth of the relationship between the reference and the applicant. Don’t glean information from someone who’s only worked with the applicant once or twice. If this is the reference you’ve been connected with, it could be a red flag.

Are there any reasons why the applicant should not volunteer in this capacity (or be given restricted access)?

If the reference knows of any reason, such as a history of abuse or even something as seemingly small as a past accusation of inappropriate behavior, this is the place where the reference can speak freely and openly. Although this might seem like an obvious piece of information for the reference to inform you of, it’s the church’s responsibility to ask outright if there has ever been any inappropriate behavior. Don’t leave that up to the discretion of the person giving the reference. Especially in ministry settings, if a pastor or former leader is giving a reference, their desire will be, in most cases, to put the applicant in the best light possible. If the question isn’t asked outright, they might not feel comfortable disclosing information unsolicited.

Is this position a good fit for the applicant? 

Regardless of the trustworthiness of your applicant, sometimes a position simply isn’t a good fit, and your reference might know this better than you do. Keep in mind—and let the reference know on the form—that not being suited for a particular role is no character flaw by itself. But the needs of the ministry to have gifted people in roles is a must. This is a simple question, but it will save both your church and the applicant a huge headache later on. If the reference suggests that this position is not a good fit, be sure to include space for an explanation of why and a suggestion, if any, of what other position(s) the applicant might be suited for.

Are there any additional comments about the applicant? 

Providing space for extra information is important to the reference check process.

Don’t skimp on the questions you add to a reference check. When asked, Willow Creek Church’s Protection Ministry Staff Representative put it this way:

References are just one piece of the process, but taken in the context of the other pieces (application, background check, etc.), the information can be incredibly helpful to us. Some of the most helpful data that references can provide is information that contradicts information provided by the applicant.

Next Steps

It’s important to keep in mind the limits of reference forms and reference checks. Though a vital part of screening, they’re insufficient when used as the only means of vetting an employee or volunteer applicant, says Richard Hammar. Professional references are much more reliable, and personal references can leave gaps about the applicant for an organization. Make sure other measures help provide a comprehensive screening program for your ministry.

Related articles:

    Understanding FLSA Compliance for Churches: Key Guidelines and Common Mistakes

    Discover essential steps and tips to ensure FLSA compliance in your church and avoid costly wage and hour audits.

    Last Reviewed: January 25, 2025

    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’

    “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:


    Administrative

    “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.”


    Executive

    “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.


    Professional

    “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:


    Volunteers

    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.


    Sleeping

    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.

    Reviewing Your Church’s Employment Policies and Practices

    An annual human resources audit can reduce any church’s legal liabilities. Here’s how.

    Update from the Editors: An earlier version of this article stated that the ADA applies to churches with 25 employees or more. A correction has been made to note the ADA’s actual threshold, which is 15 employees or more.

    As an attorney working with churches of all shapes and sizes—from newly formed “baby churches” meeting in living rooms to “giga-churches” with weekly attendance levels matching the population of a small city—I am reminded every day that the church is all about people. That includes not only congregants, but many others—clergy, nonministerial employees, volunteers, and independent contractors. It is their jobs to open the doors, maintain the steeples, and shepherd the people.

    Those in charge of the church’s business must recognize how to properly manage all of the people in its workforce. One critical component of this important job is to systematically review a church’s employment policies and procedures by way of a Human Resources Compliance Audit (the “HR audit”). It helps ensure general compliance with employment law. This article provides a broad overview of what a HR audit should look like for a church; however, it is not intended to address the detailed application of all employment laws and regulations applicable to churches. Specific guidance should be sought through additional resources and qualified legal counsel that cover, among other things:

    • Distinctions between an employee and a self-employed worker;
    • Sources of taxable income;
    • Fringe benefits;
    • Business expenses;
    • Retirement plans;
    • Payroll tax reporting;
    • Unemployment benefits;
    • Negligent hiring, negligent supervision, and negligent retention; and,
    • The “ministerial exception” to employment laws.

    To stay on track with the above topics, I urge you to look at the many resources regarding these and other important legal topics offered by Christianity Today’s Church Law & Tax Team.

    The Church is a Business

    I use the words “church” and “business” together in the same sentence. Some people are bothered by this, so let’s briefly discuss it. Like it or not, the modern-day church functions like a business. Like all businesses, churches are subject to increasing legal and regulatory scrutiny.

    If you don’t like thinking of a church as a business, then consider this example: Assume a local church embarks upon a needed expansion of its children’s ministry facilities. During a typical week, besides conducting regularly scheduled religious services, the church’s “business activities” related to the construction project might include meeting with an architect or contractor, conducting real estate negotiations with help from the church’s attorney, meeting with bankers, and meeting with community or government leaders about environmental laws or zoning issues. During the same week, unrelated to the construction project, other church “business activities” might include deploying computer technologies, training church volunteers, and hiring, disciplining, or releasing staff members.

    During his earthly ministry, Jesus repeatedly taught his followers to be good stewards. To succeed over time, a church must operate under good “business practices” (good stewardship) to ensure it is prepared to do its important “spiritual” business. Using the word “business” to label a vitally important aspect of every church shouldn’t be viewed negatively, as it is descriptive of the operational activities of the church. Being good at church business—Jesus’ ownership, your stewardship—makes for a strong and healthy church.

    The Church is an Employer

    Church is all about people. The church’s ministry, missions, and programs don’t simply occur; they require the work of people. It is very rare for a church to rely on an all-volunteer workforce. At a minimum, a church usually employs a minister, a secretary, a bookkeeper, and a janitor. As the size of the congregation grows, the number of people employed by the church correspondingly grows.

    The church where my wife and I are members recently celebrated its 15th anniversary. During those 15 years, it went from 1 employee and meeting in our pastor’s living room to employing over 700 people who work at multiple campuses. Interestingly, no matter the size of the church—with one employee or hundreds—often the largest single area of expense for a church is the costs associated with compensating its workforce. Therefore, besides the church being a business, the church is also an employer.

    Employment Laws Apply to Churches

    “We never thought those employment laws applied to us because we’re a church! Isn’t this a violation of our religious freedoms contained in the Constitution?”

    Church leaders frequently make this kind of statement when a current or former employee files an employment-related lawsuit or claim. Such frustration reflects the confusion many have about whether a church employer falls under the same laws and regulations as a for-profit employer.

    There are important employment-related protections afforded to churches and religious employers through the guaranty of religious freedom in the First Amendment, most notably the right to discriminate in hiring decisions on the basis of religion. However, most employment laws apply to churches and religious nonprofit organizations.

    Given that the church is about people, as an employer, the church has an obligation to ensure its policies and procedures comply with local, state, and federal employment laws. Compliance with the law is not only consistent with Christian values and the right thing to do, but it has the added benefit of reducing the church’s risk of employment-related litigation.

    The risk of such litigation can be substantial. As Senior Editor Richard Hammar frequently notes, employment-related matters often contribute to the top reasons churches and religious organizations end up in court each year. If you are responsible for, play a role in, or want to ensure hiring, training, reviews, and the departure of employees is all performed to reflect the values of your church and comply with the law, then read on!

    What is a Human Resources Compliance Audit?

    Church leaders often consider “audit” to be a scary word, likely because of the anxiety associated with an Internal Revenue Service audit or the considerable time and effort involved with an annual external accounting audit. Whatever the reason, don’t get nervous. The word audit is derived from the Latin word auditus, which means the sense or act of hearing (e.g. auditory). In this context, audit means the act of reviewing and considering an existing process.

    An HR audit:

    • Formally reviews the church’s current employment policies and practices to ensure compliance with current local, state, and federal employment laws and regulations;

    • Identifies legal risks that could lead to costly non-compliance penalties or litigation; and,

    • Establishes best practices and identifies opportunities for improvement.

    The scope of an audit varies depending on the type and size of the church. An HR audit comprises reviewing the organization’s “employment lifecycle” from start to finish, beginning with the hiring process and ending with the conclusion of the employment relationship.

    In the for-profit world, particularly in larger corporations, human resources professionals are responsible for the employment lifecycle, including recruiting, screening, hiring, training, performance and compensation reviews, benefits, and the releasing of employees. It’s the human resources department’s responsibility to ensure this all occurs in compliance with applicable local, state, and federal employment laws.

    In the church world, few churches have the resources to employ a full-time human resources director, much less an entire department devoted to the lifecycle of its workforce of clergy, employees, volunteers, interns, and independent contractors. Despite limited resources, though, the church is still responsible for the proper management of every staff member’s employment lifecycle and to ensure compliance with all local, state, and federal employment laws. That is why every church should designate an individual (or individuals), either on a full- or part-time basis, to oversee the management of human resources (“Manager”). To succeed, the Manager must possess a firm understanding of all employment law about recruiting, screening, hiring, training, performance and compensation reviews, benefits, and the releasing of employees. If the Manager is not well-educated on employment law and best practices, then the church must allocate adequate financial resources for professional training.

    Besides “knowing the law,” other responsibilities of the Manager include (but are not limited to):

    • Monitoring how job interviews are conducted;

    • Knowing what language should (and should not) be included in an offer letter or in an employee agreement;

    • Ensuring new hire reporting occurs;

    • Ensuring the church complies with immigration laws;

    • Ensuring workers are properly classified as exempt or non-exempt from overtime pay;

    • Knowing what information to include (and not to include) in an employee handbook;

    • Creating and updating job descriptions; and,

    • Overseeing the conclusion of the employment relationship.

    The Manager also must prepare to address other legal issues unique to a church’s workforce, including overseeing the selection, training, and supervision of church volunteers, and, if the church has an internship program, ensuring it complies with labor regulations to avoid overtime wage and hour claims (see the article, “Payroll Audits: What Every Church Should Know” in this issue).

    In addition, the role of the Manager must provide clarity regarding the reporting structure of supervisors and subordinates, and to make certain someone knows who manages and supervises every employee, volunteer, intern, and independent contractor.

    For Smaller Churches

    Many young ministers and ministers of new churches ask whether it’s worth investing the time learning employment laws applicable to larger, more established churches. The answer is yes. Our family’s home church grew from 1 employee to over 700 in a remarkably short amount of time. Admittedly, those are some unusual numbers, but it is common for a young church to quickly employ 15 (an important threshold number in employment law discussed later in the article), 50 (another important threshold number), or 100 or more employees. I’ve had countless conversations with young ministers beginning their careers. Not once has one said there were no plans to grow the size of the church. Never. Some we met with now lead many of the largest churches in the country. If you plan on growing your church, then you’ll soon be hiring employees—and you will need to know about employment law.

    The Benefits of an HR Audit

    Among the many benefits of conducting an HR audit is that it affords a church a focused and objective examination of its current employment policies, practices, and procedures to assess compliance with local, state, and federal employment laws and regulations, to discover legal risks that could lead to costly penalties or litigation, to establish best practices, and to identify opportunities for improvement. The costs associated with conducting an HR audit are minor compared to the potential financial and reputational damage that can be inflicted upon a church employer for non-compliance. A best practice would be to conduct an HR audit every year.

    Getting Started

    An annual HR audit should include a detailed look at employment laws, hiring practices, employment policies, procedures, and documents, and other employment-related aspects of the church. The remainder of this article will walk through the issues an HR audit should cover.

    Reviewing Federal Laws

    There are several federal employment laws the Manager must know. The Manager should review whether any of these laws apply to the church and whether the church is operating under each applicable law. These laws are regulated and enforced by the US Department of Labor (DOL), particularly through the Wage and Hour Division, or the US Equal Employment Opportunity Commission (EEOC). The laws most likely to directly affect a church include:

    Title VII of the Civil Rights Act of 1964 (“Title VII”): Prohibits discrimination based upon: sex; race; color; national origin; and religion. Title VII applies to churches with 15 employees or more. Religious organizations are exempt from the ban on religious discrimination pursuant to Title VII, Section 702, but not from the other prohibited forms of discrimination.

    The Pregnancy Discrimination Act (“PDA”): Applies to churches with at least 15 employees. The PDA extends Title VII and—according to the EEOC—prohibits discrimination on “the basis of pregnancy, childbirth, or related medical conditions; and women affected by pregnancy, childbirth, or related medical conditions shall be treated the same for all employment-related purposes, including receipt of benefits under fringe benefit programs, as other persons not so affected but similar in their ability or inability to work … “

    The Occupational Safety and Health Administration Act (“OSHA”): Applies to churches with at least 15 employees. OSHA sets forth a plurality of safety- and health-related regulations.

    Age Discrimination in Employ-ment Law (“ADEA”): The ADEA prohibits age discrimination against people ages 40 or older. It applies to churches with 20 employees or more.

    Americans with Disabilities Act (“ADA”): The ADA prohibits discrimination based upon disability. It applies to churches with 15 employees or more.

    Family and Medical Leave Act of 1993 (“FMLA”): The Family and Medical Leave Act (FMLA) entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons. FMLA applies to churches with 50 employees or more. Private employers with fewer than 50 employees are not covered by the FMLA, but may be covered by state family and medical leave laws.

    The Patient Protection and Affordable Care Act (“ACA”): Also known as “Healthcare Reform” and “Obamacare,” this law applies to churches with at least 50 “Full Time Equivalents.” For the ACA, a “Full Time Equivalent” is an employee reasonably expected to work, on average, at least 30 hours per week. The ACA also established new requirements for employers with certain numbers of employees to provide healthcare benefits to its employees on a nondiscriminatory basis.

    Fair Labor Standards Act (“FLSA”): The FLSA establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting both full- and part-time workers. The FLSA applies to all employees of covered “enterprises”—known as enterprise coverage—and to employees individually engaged in interstate commerce—known as individual coverage.

    The FLSA may apply to some churches but not to others, depending on whether the church is a covered “enterprise.” Enterprise coverage, as defined in section 3(r) of the FLSA, applies only to activities performed for a business purpose. Enterprise coverage does not apply to a private, nonprofit enterprise where the eleemosynary, religious, or educational activities of the nonprofit enterprise are not in substantial competition with other businesses, unless it is operated in conjunction with a hospital, a residential care facility, a school, or a commercial enterprise operated for a business purpose. The Wage and Hour Division has stated that a church receiving no financial support from commercial activity and that does not have employees engaged in interstate commerce is not an FLSA-covered enterprise.

    However, even if a church is not a “covered enterprise” for purposes of FLSA, employees of the church may still be individually covered by the FLSA in any workweek in which they are engaged in interstate commerce, the production of goods for commerce, or activities closely related and directly essential to the production of goods for commerce. Examples of such interstate commerce activities include making/receiving interstate telephone calls, shipping materials to another state, and transporting persons or property to another state. As a practical matter, the Wage and Hour Division will not assert that an employee who, on isolated occasions, spends an insubstantial amount of time performing individually covered work is individually covered by the FLSA. Individual coverage will not be asserted for employees who occasionally devote insubstantial amounts of time to interstate phone calls, interstate mail or electronic communications, or bookkeeping entries made in relation to interstate commerce.

    Determining whether a church is a “covered enterprise” for purposes of FLSA is a fact-specific inquiry that should be made with the advice of competent legal counsel.

    Counting Employees

    As illustrated above, many federal employment laws apply only to employers with a sufficient number of employees. The Manager must know how to count the number of church employees to determine which employment laws apply.

    Generally, an employee is a person hired to provide services for compensation and who does not provide these services as part of an independent business. All employees, including full-time, part-time, and temporary workers, are counted for determining whether an employer has a sufficient number of employees to trigger application of federal employment laws. In addition, employees of unincorporated subsidiary ministries of a church are counted. The employees of incorporated subsidiary ministries may be counted if the church exercises sufficient control over the subsidiary.

    Independent contractors are not counted as employees because the work they perform is based on an independent contractual relationship, not an employment relationship. Volunteer workers are not counted as employees because their services are not provided in exchange for compensation.

    The proper classification of workers is discussed in further detail below.

    Reviewing the Pre-Employment Process

    The Manager should review the following pre-employment matters as a part of an HR audit:


    Employment applications

    A church should use an employment application for all potential hires. The Manager should take a careful look at the employment application during the HR audit. The employment application must include non-discrimination language stating that, under Title VII of the Federal Civil Rights Act of 1964, the church does not discriminate on the basis of sex, race, color, or national origin. The church’s employment application should state that the church discriminates on the basis of religion. Churches often try to save money by using an employment application found on the Internet and the form states that the church does not discriminate on the basis of religion! How unfortunate to not emphasize such a valuable legal right afforded to churches at the outset of the hiring process.

    The employment application should contain language about reasonable accommodations based on the ADA. Title I of the ADA requires an employer to provide reasonable accommodation to qualified individuals with disabilities who are employees or applicants for employment, unless to do so would cause undue hardship. A reasonable accommodation enables an applicant with a disability to have an equal opportunity to participate in the application process and to be considered for a job.

    The employment application should also state that a prior conviction of a crime is not an automatic disqualification for employment.

    Lastly, the Manager should verify that the employment application requires the applicant’s signature.


    Interviews and pre-employment inquiries

    During the HR audit, the Manager must review the questions asked of applicants during the interview process to determine if the questions are permissible. All interview questions should be job-related and aimed at determining whether the applicant possesses the proper qualifications for the position. Questions cannot be used to discriminate against applicants on the basis of Title VII qualifications, including, sex, race, color, national origin; or, on the basis of age, disability, marital status, or citizenship. Questions regarding dates of graduation from high school, requests for family pictures, and questions regarding personal challenges, such as past or current alcohol or drug use all could create discrimination issues. Questions about an applicant’s arrest record can be asked; however, as discussed in further detail below, a church cannot take adverse action based on the disclosure of an arrest.


    Background checks and the Fair Credit Reporting Act

    Background checks are standard practice for churches while screening potential employees for hire. Any time a church uses an applicant’s or employee’s background information to make a hiring decision, the church must comply with federal employment laws that protect applicants and employees from discrimination.

    Most churches outsource the background check and do not conduct them in-house. If the church obtains a background check through a third-party company, the church must comply with the Fair Credit Reporting Act (FCRA). Under the FCRA, the church must obtain the applicant’s consent and disclosure to conduct the background check through a stand-alone document that is not part of the employment application.

    If the church uses information obtained through the background check report to either deny the applicant the job, rescind a job offer, or take other “adverse action,” then the church must notify the applicant prior to taking such adverse action and provide the applicant with a copy of the report and a “Summary of Your Rights” form.

    During the HR audit, the Manager should also review how the church treats applicants whose background checks reveal prior criminal history. Remember that a conviction record does not automatically bar individuals from all employment. Although the church may use conviction records to make employment decisions, it cannot use the information in a discriminatory manner. The church may not treat applicants or employees with the same criminal records differently because of their race, gender, or other protected characteristic. The church may not use criminal history in hiring decisions if doing so significantly disadvantages individuals of a particular race, gender, or other protected characteristic and does not accurately predict who will be a responsible, reliable, or safe employee. To exclude an applicant on the basis of a prior criminal conviction, the employer must demonstrate that the exclusion is job-related and consistent with business necessity by considering the nature of the offense, and the time since the criminal conduct and the conviction occurred. The church also must give the applicant the opportunity to explain why he or she should not be excluded from employment.

    The Manager must mindfully review the church’s hiring procedures related to criminal convictions because the EEOC is taking an aggressive stance in light of potential discrimination issues.

    Another question church leaders often raise is whether they can ask applicants about prior arrests as opposed to prior convictions. While a church can ask about prior arrests, the church cannot take adverse action based on the disclosure of an arrest. Adverse action would include a decision not to hire the applicant because of the prior arrest. The EEOC restricts use of arrest records because an arrest record does not establish that a person engaged in criminal conduct. However, an applicant’s disclosure of an arrest may trigger a question from the church into whether the applicant’s conduct underlying the arrest justifies an adverse employment action. If the conduct underlying the arrest makes the individual unfit for that position, then the conduct, not the arrest, is relevant for employment and may be considered by the church.

    The topic of arrests versus convictions can be confusing. The EEOC has provided a hypothetical scenario that may be a helpful example for churches:

    Andrew, a Latino man, worked as an assistant principal in Elementary School for several years. Several ten- and eleven-year-old girls attending the school accused him of touching them inappropriately on the chest and he was arrested and charged with several counts of endangering the welfare of children and sexual abuse. Elementary School has a policy that requires suspension or termination of any employee who the school believes engaged in conduct that impacts the health or safety of the students. After learning of the accusations, the school immediately places Andrew on unpaid administrative leave pending an investigation. In its investigation, the school provides Andrew a chance to explain the events and circumstances that led to his arrest. Andrew denies the allegations, saying he may have brushed up against the girls in the crowded hallways or lunchroom, but that he doesn’t really remember the incidents and does not have regular contact with any of the girls. The school also talks with the girls and several recount touching in crowded situations. The school does not find Andrew’s explanation credible. Based on Andrew’s conduct, the school terminates his employment under its policy.

    Andrew challenges the policy as discriminatory under Title VII. He asserts the policy has a disparate impact based on national origin and that his employer may not suspend or terminate him based solely on an arrest without a conviction because he is innocent until proven guilty. After confirming that an arrest policy would have a disparate impact based on national origin, the EEOC concludes that no discrimination occurred. The school’s policy is linked to conduct that relates to the particular jobs and the exclusion is made based on descriptions of the underlying conduct, not the fact of the arrest. The EEOC finds no reasonable cause to believe Title VII was violated. (http://www.eeoc.gov/laws/guidance/arrest_conviction.cfm)

    Evaluation of the conduct leading to the arrest is an important step to take when vetting applicants, particularly when the candidate will work with minors.


    Reference checks

    Churches often fail to take the time to contact references. However, a church must contact references on an applicant’s employment application and document what it learns because doing so demonstrates the church is exercising reasonable care in its hiring decisions. During the audit, the Manager should review how the church checks references and documents what is learned through those checks.

    References can provide the church with a useful evaluation of the applicant’s experience, ability, skills, spiritual maturity, and so on. When contacting references, a key question to ask the reference is whether he or she knows of any reason the application would not be suitable for the position the applicant is seeking. This may include a specific inquiry of whether the applicant is not suitable to interact with minors. (Senior Editor Richard Hammar strongly urges church leaders to pursue institutional references, rather than personal references, and to specifically ask institutional representatives about the conduct and performance of the applicant in relation to the role the church is trying to fill.

    Church leaders often think references only need to be checked for a senior pastor position or for an applicant who will work with minors. However, churches should contact references for every position, paid or volunteer. While this may be time-consuming, it can help protect the church from a subsequent claim of negligent selection, should the person later engage in bad conduct that allegedly should have been discovered during the hiring process. Employers, including churches, have a duty not to hire or retain employees or volunteers that it knew, or should have known, posed an unreasonable risk of harm to others. A failure to vet the applicant—such as a failure to contact an applicant’s references—will unnecessarily expose the church to claims of negligence if the applicant subsequently engages in misconduct.


    Offer letters

    An offer letter should be informative about employment. Church employers should be mindful of the language used in an offer letter or else the letter could be viewed as an employment contract. The offer letter should include basic terms for the position, such as the FLSA exemption status (exempt vs. non-exempt), a start date, who the individual will report to, the job title, and whether the job is part- or full-time. The offer letter should also state that employment is at-will and conditioned upon the applicant’s completion of a satisfactory background check, pre-employment drug screening, and completion of Form I-9.


    Form I-9

    The Manager should make sure applicants correctly complete the Form I-9. Form I-9 is used for verifying the identity and employment authorization of individuals. All employers must ensure proper completion of Form I-9 for each individual they hire for employment in the United States. Both employees and employers must complete the form and an employee must attest to his or her employment authorization. The employee must also present his or her employer with acceptable documents proving his or her identity and employment authorization. Both at the time of hire and again during the HR audit, the Manager must examine the employment eligibility and identity document(s) of employees to determine whether the document(s) reasonably appear to be genuine and related to the employees. The Manager should also verify annually that a completed I-9 Form is on file for each person on the church’s payroll.

    Reviewing the Hiring Process

    The Manager should review the following hiring matters as a part of an HR audit:


    Job descriptions

    Does the church have legally compliant job descriptions for each position? The job title and description for each employment position must accurately reflect the actual duties of each individual’s jobs.

    (a) Compliance with the FLSA.
    A job title and description that accurately reflect the employee’s duties can have tremendous influence on whether someone is properly classified as exempt or non-exempt for compliance with the FLSA. Both exempt and non-exempt positions should be accurately described in the job descriptions.

    (b) Compliance with the ADA.
    Job descriptions should also be examined to determine if they comply with the ADA. Although the ADA does not require an employer to maintain job descriptions, those descriptions should set forth the “essential functions” for positions. Essential functions are the basic job duties that an employee must be able to perform, with or without reasonable accommodation. The Manager should carefully examine each job to determine which functions or tasks are essential to performance. (This is important before taking an employment action, such as recruiting, advertising, hiring, promoting, or firing).

    Including essential functions in the job description will help the church identify whether an individual can perform the tasks associated with the particular position. This is important because, with respect to permissible interview questions, the church may not ask an individual whether he or she has a disability that would prevent him or her from performing certain job tasks. If the individual cannot perform an essential job function because of a disability, the employer must evaluate whether it can provide a reasonable accommodation to the individual without imposing an undue hardship on the operation of the church.

    (c) Proof job duties relate to past criminal convictions.
    Past criminal convictions are not an automatic disqualification to employment, however a church can exclude an applicant if the exclusion is “job related and consistent with business necessity.” This is important and directly relates to the position and job duties as described in a job description. During the HR audit, the Manager should make sure job descriptions are drafted so the duties for a particular position are reasonably related to an applicant’s exclusion based on their past criminal conviction.

    At-Will Employment and Avoiding Implied Contracts

    Employment relationships are presumed to be at-will in almost every state. At-will employment means that, absent a contract with a specified term and conditions, an employer can terminate an employee at any time for any reason, except an illegal reason, without incurring legal liability. Similarly, an employee may leave a job for any reason or no reason without legal consequences.

    The implied contract doctrine is an exception to the at-will doctrine that some states recognize. This doctrine can be triggered when written or oral representations have been made regarding the employer’s procedures for hiring, firing, or other compensation.

    During the HR audit, the Manager must review whether the church may inadvertently create an implied contract with applicants through both verbal and written communications provided to the applicant. There are certain “trigger” words that could invoke an implied contract, including terms such as “always,” “permanent employment,” and “termination for-cause,” among others. To avoid creating an implied contract, the church should use a disclaimer in its employment documents stating that the employment is at-will and that documents (such as an employee handbook) provided to applicants and/or employees do not create a contract. Likewise, the Manager must train any individuals conducting interviews not to use the “trigger” words referenced above.

    Employee or Independent Contractor?

    The HR audit also must carefully evaluate whether a worker is properly classified as an employee or as an independent contractor. This is critical for churches. The church must withhold income tax, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. The church rarely must withhold or pay any taxes on payments to independent contractors.

    (a) Risks associated with misclassification

    Employee misclassification results in significant revenue loss for the federal and state governments. Both the DOL and the IRS have launched initiatives to combat such misclassification (learn more in the June 2014 issue of Church Finance Today and the May/June 2013 issue of Church Law & Tax Report). Lawsuits alleging employee misclassification are on the rise, causing employers to spend significant time and resources defending these types of lawsuits. Some insurance policies are specifically drafted to exclude worker misclassification from coverage, leaving a gap in a church’s insurance coverage—and exposing a church’s financial resources to a plaintiff’s attorney or government investigator.

    What are some of the penalties that can be brought to bear against a church if it fails to properly classify its employees? If the Wage and Hour Division investigates and concludes a church has misclassified an employee, or if misclassified workers (including volunteers, unpaid interns, or independent contractors), make a successful court claim, the financial consequences for a church can be substantial. The penalties for misclassifying employees include tax liability for failure to properly withhold taxes from the affected employee’s wages, failure to remit the employer’s contributions for Social Security, federal unemployment taxes, back wages with interest (including overtime), liquidated or punitive damages, attorneys’ fees, unpaid taxes, and unemployment insurance contributions due (if any). In extreme cases, damages can be tripled and willful violators may be prosecuted criminally and fined up to $10,000—with a second conviction potentially resulting in imprisonment. And, the most surprising development to employers facing a DOL investigation is that one individual’s complaint can trigger a comprehensive payroll audit of the employer’s entire employee pool, which can expose the employer to additional liability.

    If those consequences weren’t alarming enough, additional federal and state agencies also may investigate organizations for possible employee misclassification. The Church Audit Procedures Act protections that apply to churches being audited by the IRS do not apply to payroll audits.

    (b) Employee or independent contractor?

    The IRS uses the following tests to determine whether a worker is an employee or an independent contractor:

    1. Behavior: Do you control how and what the person does during their job?

    2. Finances: Do you pay the person as an employee? Do you provide the equipment?

    3. Relationship: Do you have a written contract and/or provide benefits to this person? Is the relationship long-term and is the employee’s job key to your organization?

    If the answer to these questions is “Yes,” than the person being compensated by your organization is likely an employee.

    The DOL has established its own test for determining whether a worker is an employee or an independent contractor. The DOL’s test include the following factors:

    1. The extent to which the work performed is an integral part of the employer’s business.

    2. Whether the worker’s managerial skills affect his or her opportunity for profit and loss.

    3. The relative investments in facilities and equipment by the worker and the employer.

    4. The worker’s skill and initiative.

    5. The permanency of the worker’s relationship with the employer.

    6. The nature and degree of control by the employer.

    If a church has questions about these tests, then it should contact an attorney experienced in employment law for help in determining whether workers are employees or independent contractors.

    (c) Are any of your “volunteers” actually employees?

    Volunteers are a critical part of the life of any church. Diligence in classifying volunteers correctly is essential to both reduce a church’s potential liability and protect its volunteers.

    The Wage and Hour Division recognizes that employment relationships are generally not formed when people volunteer their services to religious, charitable, and nonprofit organizations and schools. The FLSA defines a volunteer as someone who provides services to a charitable organization without coercion, or the promise, expectation, or receipt of compensation for services rendered. Minimum wage and overtime requirements do not apply to volunteers if the volunteers, freely and without coercion, give their time and efforts with no expectation of compensation in cash or in-kind benefits.

    Remember, however, that an individual’s status as a volunteer can easily change to an employee, depending on several factors:

    1. The volunteer cannot receive anything more than a de minimis gift for their services.

    2. The volunteer cannot perform essentially the same activities as a paid employee.

    3. The volunteer cannot work a full-time schedule.

    4. The volunteer cannot work under any obligation or coercion.

    5. Is the worker motivated by a personal, charitable, or religious motive?

    6. How much control does the nonprofit exert over the volunteer?

    7. Does the volunteer arrange his or her schedule at times convenient to him or her?

    If a worker is misclassified as a volunteer, a church could be required to pay minimum wage, overtime, and withholding for work performed. Payments to volunteers could cause a loss of legal protection for the volunteer under the Volunteer Protection Act (“VPA”). The VPA provides liability protection for volunteers in certain situations, so long as the volunteer does not receive: (a) compensation (other than reasonable reimbursement or allowance for expenses incurred); or (b) any other thing of value in lieu of compensation, over $500 per year.

    The loss of protection under the VPA may easily occur. For example, if a church provides its volunteer women’s ministry coordinator a $50 gift card each month as a “token of appreciation of her service,” she is no longer protected as a volunteer under the VPA since the total amount received exceeds $500 per year. Losing legal protection for volunteers under the VPA is primarily a concern of the individual volunteer, but because volunteers are the lifeblood of the church, it should also concern the church.

    (d) Can employees volunteer for their employer?

    Churches often ask whether a church employee can also volunteer for their church employer. The short answer is yes. It is entirely permissible for employees to volunteer, however, it cannot be in the same job or in a capacity similar to their job. Although a worship pastor can volunteer to take care of children in the church’s nursery, she cannot volunteer to lead worship at a special children’s event.

    As part of the HR audit, the Manager should review employees’ volunteer records. Employees who volunteer in the same or similar position as they are employed may inadvertently cause the church to violate federal labor laws.

    Proper Classification of Employees: Exempt vs. Non-Exempt

    During the HR audit, the Manager must review whether the church’s employees are properly classified as exempt or non-exempt. For the FLSA to apply, there must be an employment relationship between an “employer” and an “employee.” Non-exempt workers covered by the FLSA must be paid overtime pay at a rate of not less than one-and-one-half times their regular rate of pay after 40 hours of work in a workweek.

    The FLSA also contains exemptions from these basic rules. Exemptions are narrowly construed against the employer asserting them. The church should carefully review the exact terms and conditions of the exemption compared to the employee’s actual duties during the HR audit to determine whether the exemption applies to the employee. Under the FLSA, the church has the ultimate burden to support the application of the exemption to the employee.

    Numerous exemptions may apply, however, the executive, administrative, professional, and computer exemptions are the most typical exemptions to apply in a church context. In determining whether an exemption applies, a three-part test must be met:

    (1) The employee’s salary is not less than $455 per week (note that the DOL recently proposed increasing this threshold to $970 per week (or $50,440 per year);

    (2) The employee is paid on a salary basis; and,

    (3) The employee’s actual job duties align with the exemption.

    One of the most common misconceptions is that if an employee is paid on a salary basis, then they are automatically an “exempt employee.” However, this is just one factor of the three-part test. The most commonly overlooked part of this test is the employee’s actual job duties. For the executive exemption to apply, the employee must be compensated on a salary, at a rate not less than the current $455 per week, and their primary duty must be to manage the church (or a division of the church), regularly direct the work of at least two or more full-time employees, and have the authority to hire and fire employees. Each exemption has responsibilities an employee must be responsible for in their actual job duties.

    (a) After-hours work for non-exempt employees

    Once an employee’s proper classification has been determined, the Manager should carefully analyze the church’s policies and procedures for approving overtime work. It is common for supervisors to send emails or texts to employees, day and night. Nonexempt employees can easily perform job functions by sending and receiving messages during their “off-hours.” This is a growing area of risk for employers because this will be considered “time-worked” and could inadvertently expose a church to a wage and hour violation if the non-exempt employee is conducting work and is not being compensated for it. One way to help avoid this is for the church to adopt a policy explicitly stating that non-exempt employees may not review or take action on a work email unless they are officially “on-the-clock,” even if the work-related email is received after-hours.

    Reviewing Current Employment Processes

    The Manager should review the following current employment matters as a part of an HR audit:


    Employee handbook

    Does your church have an employee handbook that accurately documents its policies, procedures, and practices? A well-written employee handbook addresses a broad range of topics, including legal compliance information, and also will address the church’s beliefs, vision and values, benefits, leave policies, and general rules for employment. An employee handbook is a great way to organize and bring clarity to the church’s employment policies, communicate with new employees, and familiarize employees with the church’s culture, rules, and staff expectations.

    During the HR audit, the manager should carefully review the church’s employee handbook. If the church has no handbook or it is outdated, then hire an attorney experienced in employment law who can provide guidance in preparing a legally compliant handbook. A few key, but often overlooked, provisions that should be included in the handbook are listed below:

    Statement that the employee handbook is not a contract

    The employee handbook is not an employment contract and should state “THIS HANDBOOK IS NOT A CONTRACT.” It is important to carefully review the employee handbook during the HR audit to ensure no representations or promises are made within the handbook that could be construed as an employment contract. Also, since the handbook is not a contract, make certain other contractual provisions, such as an intellectual property agreement or an agreement to submit to Christian mediation or arbitration, are included in a separate employment contract signed by the employee.

    Christian Standard of Living

    A church’s employee handbook should also include a provision requiring employees to adhere to biblical standards of living in their professional and personal lives. This provision, commonly referred to as a “Christian Standard of Living” policy, puts employees on notice that to be employed with the church, a certain lifestyle is expected and required. The Christian Standard of Living policy should be stated in the employee handbook and should specify any major points of behavior a church believes are required as conditions for employment. Often this policy addresses requirements regarding marriage, sexuality, or alcohol and drug use. The handbook also should explain a church’s standards for interacting with other staff members and congregants. For instance, a church could include a rule stating married staff members may not go to lunch alone with an opposite-sex individual who is not their spouse.


    Sexual harassment policies and practices

    The ever-increasing number of sexual harassment claims filed against employers is a concern for all organizations. Although many churches assume that their commitment to biblical principles would preclude harassing behavior in the workplace, churches unfortunately are no less prone to sexual harassment claims than secular organizations. The Manager should review whether the church’s sexual harassment policy and the church’s procedure for investigation of workplace harassment complaints is legally compliant.

    A sexual harassment policy should include an overview of the basic types of sexual harassment, which may occur regardless of the alleged victim’s gender, and include:

    a) Quid pro quo: Exists when there are unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature and: (i) Submission to such conduct is made either explicitly or implicitly a term or condition of an individual’s employment; or (ii) Submission to or rejection of such conduct by an individual is used as the basis for employment decisions affecting such individual.

    b) Hostile work environment: Exists when there are unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature and: (i) Such conduct has the purpose or effect of unreasonably interfering with an individual’s work performance; or (ii) Creating an intimidating, hostile, or offensive working environment.

    In reviewing the church’s sexual harassment policy, the Manager should evaluate whether the church has preserved its right to assert an affirmative defense if a sexual harassment claim arises. The US Supreme Court established an affirmative defense for employers facing a sexual harassment claim. It insulates employers from liability or damages when sexual harassment occurred, but no tangible negative employment action was taken against the alleged victim, such as discharge, demotion, or reassignment. To qualify for protection under the affirmative defense, employers must show: (1) they took reasonable care to prevent harassing behavior prior to the sexual harassment claim; (2) once aware of the claim, they acted promptly to correct the alleged behavior; and (3) the employee (alleged victim of harassment) unreasonably failed to take advantage of any preventive or corrective opportunities provided by the employers.

    Whether a church will qualify for an affirmative defense partly depends on the degree to which the church has established an anti-harassment policy before the claim arises and whether the church administered (and documented) sexual harassment training on a regular schedule. When implementing an anti-harassment policy, churches should adopt a “zero tolerance” policy that applies to all employees, co-workers, managers, supervisors and non-employees, including vendors and church members. The policy should:

    • Disavow any harassing behavior;

    • Contain easily understood illustrations of harassing behavior;

    • Include a procedure for the anti-harassment policy to be explained and distributed to all employees;

    • Provide training to enable supervisors to recognize and report wrongful conduct;

    • Require mandatory monitoring of supervisors by top management; and,

    • Include a plan for prompt corrective action if an allegation occurs.

    The Manager should also review the sexual harassment policy to make sure it creates an understandable complaint procedure for a harassed employee to use. This reporting procedure should include the employee’s direct supervisor, a member of human resources, and the director of human resources. The policy should also outline a process that allows an employee to bypass a supervisor in case the supervisor is allegedly engaged in the harassing behavior.

    While it is impossible to provide the harassed employee complete confidentiality, the information about the harassment complaint must be kept confidential on a “need to know” basis. Only the people directly involved in the investigation should know the identities of the parties.

    Lastly, the Manager should review the policy to ensure it has a non-retaliation provision. Retaliation against anyone who files a complaint of unlawful harassment and/or who participates in an investigation is strictly prohibited. The policy should include a provision stating that if a supervisor retaliates against an employee for either filing a complaint and/or participating in an investigation, the individual will be disciplined up to and including termination.


    FMLA policies and practices

    The FMLA applies to churches that have at least 50 employees within a 75-mile radius. A multi-site church could easily meet this threshold, even if it does not have all employees at one location. According to a study released by Leadership Network in 2014, almost 90 percent of multi-site campuses are within 30 minutes of the main campus.

    If FMLA applies and a church has eligible employees (employees who have worked at least 1,250 hours during the past 12 months), then a church must make sure that a general FMLA notice is conspicuously posted on its premises where it is visible to employees. An employer who has employees eligible for FMLA must:

    • Provide employees with general notice about the FMLA;

    • Notify employees concerning their eligibility status and rights and responsibilities under the FMLA; and,

    • Notify employees whether leave is designated as FMLA leave and whether the time will count against their FMLA leave entitlement.

    At the same time that a church gives an employee an eligibility notice, it must also give an employee a notice of the employee’s rights and responsibilities under the FMLA. This notice must include all of the following:

    • A definition of the 12-month period the employer uses to keep track of FMLA usage. It can be a calendar year, 12 months from the first time the employee took leave, a fixed year (such as the employee’s anniversary date), or a rolling 12-month period measured backward from the date the employee used FMLA leave;

    • Whether the employee will be required to provide medical certification from a health care provider;

    • The employee’s right to use paid leave and whether a church will require employees to use paid leave;

    • The employee’s right to maintain health benefits and whether the employee will be required to make premium payments; and,

    • The employee’s right to return to their job at the end of FMLA leave.

    A church should evaluate its FMLA policy to determine if the foregoing requirements are included in the policy. Some churches have adopted an FMLA policy as a stand-alone policy; however, if a church has implemented an employee handbook, it must include the FMLA policy in the handbook. The policy should specify that FMLA leave runs concurrently with other paid leave. Also, the policy should state that an intermittent or reduced-schedule leave is not available to care for a child after birth, adoption, or foster placement. Men and women have the same right to take FMLA leave to bond with their child but it must be taken within one year of the child’s birth or placement and must be taken as a continuous block of leave unless the employer agrees to allow intermittent leave (for example, a part-time schedule).

    Churches must maintain the employee’s group health plan coverage and benefits while the employee is on FMLA leave (the church may require employees to continue to make any normal employee contributions). The entitlement to other benefits the church may offer is determined by the employer. If a church continues to allow for the accumulation of paid time off during periods of unpaid leave, then it needs to specify this within the FMLA policy.

    Upon return from FMLA leave, an employee is entitled to return to the same position or an equivalent position with equivalent pay, benefits, and other terms and conditions of employment. Time off under the FMLA may not be held against the employee in employment actions, such as hiring, promotions, or discipline.


    ADA policies and practices

    The ADA is a civil rights law that prohibits discrimination based on disability.

    During the HR audit, the Manager should determine whether the church has a well-drafted ADA accommodations policy (either stand-alone or included within an employee handbook). The policy must explain that the accommodation process is interactive and cannot be addressed through a one-size-fits-all approach for all employees requesting a reasonable accommodation based on a disability.

    What is a disability under the ADA?

    Not everyone with a medical condition is protected by the ADA. To be protected, a person must be qualified for the job and have a disability as defined by the law. Under the ADA, a person can show he or she has a disability in one of three ways:

    1. A person may be disabled if he or she has a physical or mental condition that substantially limits a major life activity (such as walking, lifting, talking, seeing, hearing, eating, reading, or learning).

    2. A person may be disabled if he or she has a record or history of a disability (such as cancer in remission).

    3. A person may be regarded as being disabled if he or she establishes an actual or perceived physical or mental impairment—whether or not the impairment limits or is perceived to limit a major life activity—but only if the impairment is not transitory or minor. A transitory impairment is one with an actual or expected duration of 6 months or less.

    For a person to have a disability under the ADA, the individual must have a physical or mental impairment. Not everything that restricts a person’s activities will qualify as impairment.

    Reasonable accommodations

    A reasonable accommodation is any change in the workplace that will enable an employee to do his or her job despite having a disability. While some things are not considered reasonable accommodation (e.g., removal of an essential job function or the provision of a personal use item needed on and off the job, such as a hearing aid or wheelchair), reasonable accommodations are fairly expansive and include most things that would allow an individual to fulfill the requirements of a job. Common reasonable accommodations include:

    • Job restructuring;

    • Modifications to work schedules (such as allowing flex-time or a part-time schedule);

    • Providing ergonomic equipment or furniture;

    • Granting breaks; altering how or when job duties are performed;

    • Removing an architectural barrier, including reconfiguring work space; and,

    • Providing a reassignment to another job.

    Because reasonable accommodations continue to develop, it is practically impossible—and inadvisable—to include an exclusive list in an ADA policy. A policy should not state that certain things never have to be provided as reasonable accommodations. A policy also should not state that telecommuting is never allowed as a reasonable accommodation.

    Recognizing requests for reasonable accommodation

    It is important for employers and supervisors to recognize requests for reasonable accommodations. A request does not have to include any special words, such as “reasonable accommodation” or “disability.” Rather, any communication in which an individual asks or states that the employee needs the church to change something because of a medical condition constitutes a request for a reasonable accommodation. If a supervisor is unclear about an employee’s request, the supervisor should directly ask the employee if he or she seeks a reasonable accommodation under the ADA. Also, remember that a third party—such as a family member or health care provider—may make the request on behalf of the employee. This commonly occurs when an employee presents a physician’s note outlining medical restrictions. This may constitute a request for a reasonable accommodation.

    When an employee makes a request for reasonable accommodation, the church should work with the employee to ensure that an accommodation is provided that meets the employee’s disability-related needs and allows the employee to perform the essential functions of the position. This “interactive process” of finding a reasonable accommodation between the individual and the employer should be documented in writing. The interactive process requires the employer to handle requests for reasonable accommodations on an individualized basis and consider the nature of an employee’s disability, the employee’s job, and the work environment. Communication is the key to success throughout the process, particularly if the employee and supervisor have differing ideas on what would be an appropriate reasonable accommodation. The parties should work together to identify effective accommodations and the supervisor should ensure the process is documented in writing.

    The ADA allows an employer to designate an individual or department within the organization to handle requests. Given the nature of ADA compliance and the ongoing interactive process, designating a specific individual to be informed of ADA compliance could be particularly helpful for a church. During the HR audit and review of a church’s ADA policies, the Manager should make this formal designation.

    Lastly, remember that any information obtained in connection with an individual’s reasonable accommodation request must be kept confidential by a church. This information should be kept in a separate file from the employee’s personnel file and should include documentation regarding the accommodation requests and approval. This information must be kept confidential and should only be reviewed on a need-to-know basis.

    Record Retention Policy

    Various federal laws require employers—including churches—to retain employment records for a designated amount of time. Record retention is an often-overlooked area for churches, so the Manager should carefully review a church’s practices during the HR audit. The following is a summary of selected record retention obligations:

    (a) Title VII/ADA: Any personnel or employment record made or kept by an employer (including, but not limited to, requests for application forms submitted by applicants, records pertaining to hiring, promotion, demotion, transfer, layoff or termination, rates of pay or other terms of compensation, selection for training or apprenticeship, and reasonable accommodation requests) shall be preserved by the employer for a period of one year from the date of the making of the record or the personnel action involved, whichever occurs later. When a charge of discrimination has been filed against an employer under Title VII or the ADA, the employer must preserve all personnel records relevant to the charge or action until final disposition of the charge or the action.

    (b) FMLA: Employers covered by the FMLA must make, keep, and preserve certain records pertaining to their obligations under the law for no less than three years and make them available for inspection, copying, and transcription by DOL representatives upon request. The records include:

    • Basic payroll and identifying employee data;

    • Dates FMLA leave is taken by FMLA-eligible employees (leave must be designated in records as FMLA leave), including the hours of the leave (if FMLA leave is taken in increments of less than one full day);

    • Copies of employee notices of leave provided to the employer under the FMLA, if in writing, and copies of all eligibility notices given to employees as required under the FMLA (copies may be maintained in employee personnel files);

    • Any documents (including written and electronic records) describing employee benefits or employer policies and practices regarding paid and unpaid leave;

    • Premium payments of employee benefits; and,

    • Records of any dispute between the employer and an eligible employee regarding designation of leave as FMLA leave, including any written statement from the employer or employee of the reasons for designation and for the disagreement.

    (c) ADEA: Under ADEA recordkeeping requirements, employers must keep all payroll records for three years.

    (d) FLSA: The FLSA requires employers to keep records for at least three years. Most of the information is of the kind generally maintained by employers in ordinary business practice and in compliance with other laws and regulations. With respect to an employee subject to the minimum wage provisions or both the minimum wage and overtime pay provisions, the following records must be kept:

    • Personal information, including employee’s name, home address, occupation, sex, and birth date if under 19 years of age;

    • Hour and day. Nonexempt workers must be paid overtime pay at a rate of not less than one-and-one-half times their regular rates of pay after 40 hours of work in a workweek;

    • When the workweek begins;

    • Total hours worked each workday and each workweek;

    • Total daily or weekly straight-time earnings;

    • Regular hourly pay rate for any week when overtime is worked;

    • Total overtime pay for the workweek;

    • Deductions from or additions to wages;

    • Total wages paid each pay period; and,

    • Date of payment and pay period covered.

    (e) Form I-9s: Employers must keep Form I-9 for three years after the date of hire, or one year after the date employment is terminated, whichever is later.

    If a church has not adopted a document retention policy, it should do so and the Manager should include the project as an “action item” in the final HR audit report.

    Personnel Files

    During the church’s HR audit, the Manager should review all employee personnel files. Employers must keep all personnel or employment records for one year. If an employee is involuntarily terminated, his or her personnel records must be retained for one year from the date of termination. Personnel records should include the following information and may include additional information:

    • Employment applications and resumes;

    • Offer letter;

    • Job descriptions;

    • Records of promotion, demotion, and education and training records;

    • Pay and compensation information;

    • Any policy acknowledgments (e.g receipt of employee handbook), and copies of employment agreements;

    • Warnings, counseling, and disciplinary notices;

    • Performance evaluations and goal-setting records; and,

    • Termination records.

    Personnel files should contain no medical information. If an employee provides a supervisor with a physician’s note outlining medical restrictions for ADA purposes, this information is considered “medical” and should not be included in the individual’s personnel file. It instead should be included in a separate confidential file. Form I-9 should also be kept in a separate, confidential file.

    Accountable Reimbursement Plans

    Most employers reimburse expenses incurred by employees during employment activities. However, without a proper accountable reimbursement plan, some reimbursements may qualify as taxable compensation to the employee—often much to the surprise of the employee. To be an accountable plan, an employer’s reimbursement or allowance arrangement must include all of the following rules:

    • The employee’s expenses must have a business connection—that is, the employee must have paid or incurred deductible expenses while performing services as an employee of the church;

    • The employee must adequately account to the church for these expenses within a reasonable period of time; and,

    • The employee must return any excess reimbursement or allowance within a reasonable period of time.

    During the HR audit, the Manager should review the church’s policies and procedures for reimbursing employees for business expenses to set clear expectations on which expenses classify as reimbursable and which do not.

    Termination Issues

    Terminating an employee is one of the most difficult actions an employer may be required to take, particularly because it is difficult to predict how the employee will respond to being terminated. Often, the emotionally charged nature of terminations makes it vitally important that a church make sure experienced legal counsel is involved throughout the entire disciplinary and termination process.

    To reduce the risk of post-termination lawsuits, the Manager should create a checklist of corrective actions and disciplinary steps that should be taken prior to termination. Any disciplinary action taken by the church, prior to termination, should be documented in writing and kept in the employee’s personnel file. This includes any disciplinary action, warning letters (or written documentation of oral warnings), notations about specific problems, such as attendance issues, and specific examples of problems, such as instances of insubordination.

    Written documentation will demonstrate a church has informed the employee of what he or she has done wrong and communicated to them the consequences if the behavior is not corrected. It also will provide objective evidence to substantiate the church’s decision to terminate resulted from the employee’s performance, attitude, or failure to adhere to the church’s code of conduct, rather than a discriminatory reason. Lastly, remember that prior to terminating an employee, the Manager should review requests for termination to evaluate the rationale and confirm the documentation in the employee’s file is in order.

    Separation Agreements

    During a church’s HR audit, the Manager should determine whether the church utilizes a separation agreement for departing employees. This agreement typically offers a certain amount of money—usually based on the length of the employee’s term with the church—as consideration for the employee’s waiver of potential legal claims. Not all legal claims can be waived, so it is vital a church consult with legal counsel before drafting and utilizing a separation agreement.

    The separation agreement will contain various provisions, such as:

    • The departing employee’s agreement to waive and release the church from all employment-related claims;

    • An agreement to submit any disputes arising from employment or related to the separation agreement to Christian mediation;

    • A non-disparagement provision;

    • A non-disclosure provision; and,

    • A confidentiality clause.

    Separation agreements often include a non-compete clause. Such a clause is subject to jurisdictional limitations but must be limited to a reasonable time and place—or risk being ruled invalid. If the church’s separation agreement contains a non-compete clause then the church should verify with legal counsel whether the non-compete provision complies with state law.

    Another red-flag area for the Manager to review during the HR audit is the terminated employee’s age. If the terminated employee is over the age of 40, and if the church is covered by the ADEA, then the separation agreement must be drafted in a certain way and the employee must be given certain notices before signing the agreement. Otherwise, the separation agreement could violate ADEA provisions.

    Know that a form separation agreement cannot adequately address all situations equally. Employment law varies from state to state and key provisions may be overlooked if you attempt to prepare a separation agreement based on a template found on the Internet. If you do not tailor your separation agreements, you risk executing an unenforceable agreement or unnecessarily exposing the church to increased liability.

    Exit Interviews

    Does your church conduct exit interviews for departing employees? If not, consider adding this step. This final meeting can provide the closure to an employment relationship needed for both the employee and the church. The exit interview should be used to collect property belonging to the church, including keys, employer-provided cell phones or laptops, and computer passwords and usernames.

    An exit interview also can determine why an employee is leaving. While the church may already know the reasons, an exit interview may yield new information, which may be helpful especially in situations involving a valuable employee who is leaving for another position elsewhere. The exit interview can also evaluate how much risk the departing employee poses to the church—comments and questions may shed light on their general disposition and views about the separation.

    Results of an Audit

    Once the HR audit is complete, the Manager should use legal counsel and generate an audit report that communicates the findings. This report should identify potential areas of legal liability or legal exposure and identify areas within the church’s employment practices that need improvement. The report will illuminate important issues. This will allow the Manager and church leadership to identify recommendations to implement so that the church establishes best practices and ensures it is complying with all applicable laws.

    Act Now

    Now, more than ever, church employers face increased regulatory pressure. Besides traditional concerns about the safety of congregants and maintenance of buildings and property, churches must also be mindful of overseeing its workforce—the people who make it possible for church ministry to occur. By committing the resources to complete a comprehensive HR audit, churches can identify inadequacies and lapses in employment policies and practices, causing corrective action to be taken and thereby reducing the risk of unwanted employment-related claims and litigation.

    Should Noncash Contributions Be Included in Donor Statements?

    Discover the proper way to handle noncash contributions in donor statements with these IRS-compliant best practices.

    Last Reviewed: January 24, 2025

    Q: Before the beginning of each school year, our church holds a back-to-school backpack drive where members purchase new backpacks for children in need. If a member spends $100 on backpacks for the drive, should the church include this noncash donation on the donor statement?


    Noncash contributions should not be included in regular donor statements. Instead, qualifying receipts for noncash donations should be issued separately. This ensures compliance with IRS guidelines and provides donors with the appropriate documentation for their records.

    Guidelines for Issuing Noncash Donation Receipts

    1. Separate Noncash Receipts from Cash Statements

    Noncash donations require their own receipt, separate from regular cash donation statements. Mixing noncash contributions with cash receipts can lead to incomplete or inaccurate records.

    2. Include a Complete Description

    Receipts for noncash donations must provide a full description of the donated items. Courts have ruled that insufficient descriptions can disqualify a donation from being claimed as a deduction. For example, describe the items as “10 new backpacks” instead of “school supplies.”

    3. Exclude Monetary Values

    Noncash donation receipts should not include a dollar value, even if the donor submits a receipt showing the purchase price. Determining the value of noncash donations is the donor’s responsibility.

    4. Include the “No Goods or Services” Statement

    Like cash donation receipts, noncash donation receipts should include a statement confirming that no goods or services were provided in exchange for the donation. This is a required element for tax-deductible contributions.

    Best Practices for Churches

    To streamline the process and ensure compliance:

    • Use separate systems or templates for noncash donation receipts to accommodate the detailed descriptions required.
    • Train staff and volunteers on the specific requirements for issuing noncash donation receipts.
    • Encourage donors to retain their purchase receipts and provide a copy for church records if needed.

    For more details on charitable contributions, visit the IRS Charitable Contributions page or explore the guidelines provided by the Evangelical Council for Financial Accountability.

    FAQ: Charitable Contribution Statements

    • Can noncash donations be included in regular donor statements?
      No, noncash donations should be issued separate receipts with detailed descriptions.
    • What should a noncash donation receipt include?
      A complete description of the donated item(s) and a statement confirming no goods or services were received in return.
    • Should the receipt show the monetary value of the noncash donation?
      No, it is the donor’s responsibility to determine the value of noncash contributions.
    • Why are detailed descriptions important?
      Courts have disallowed deductions for donations with insufficient descriptions, making this a critical compliance requirement.
    Elaine L. Sommerville is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.

    Understanding Key Church Expense Ratios for Financial Health

    Discover four key expense ratios every church should monitor to enhance financial health and ensure better stewardship of resources.

    Last Reviewed: January 25, 2025

    Does your church track its expense ratios? This can help you identify key trends in the outflow of resources between years. It also provides the opportunity to compare with other churches and check the reasonableness of your expenses. These ratios represent important indicators every church should understand.

    1. Personnel and Mandatory Debt Service Payments to Total Expenses (Excluding Depreciation Expenses)

    The ratio of “ Personnel ( Salaries + Benefits ) + Mandatory Debt Service Payments (Principal + Interest Expense)” to “Total Expenses – Depreciation Expense

    The largest expense on the financial statements of most churches is salaries and benefits. This is understandable, as a church is not in the business of selling products or manufacturing items. It provides services performed by individuals, paid and volunteer. Debt service payments—which are a reduction of a liability and not an expense—represent the second largest outlay. Together, these items represent a majority of resource outflows from the local church.

    Therefore, it is essential to continually monitor these levels as a percentage of cash expenses. Cash expenses are total expenses less (minus) depreciation, the most significant noncash expense recorded. It is also important to promptly follow up on changes in trends or unusual variances from peers to ensure that your ministry resources are continually maximized.

    This ratio, which can be split into two separate pieces, allows your church to look at two of its largest outflows and determine the portion of the operating budget that will be used. Often a growth cycle results in an amount of debt the church anticipates being able to pay off as more people are able and encouraged to attend. However, the church needs to be able to pay the bills and provide the services that will attract new people with the current budget. Reviewing this ratio in advance of any major debt decisions will help you analyze the feasibility of your facility expansion goals.

    Reasonable benchmarks for these ratios, both individually as separate pieces and in the aggregate, are reflected in how churches actually spend their money. Those benchmarks are:

    • Personnel costs (salaries and benefits) should fall between 40 percent and 55 percent of expenses.
    • Mandatory debt service payments, including interest, should be no more than 15 percent of total expenses.
    • Total personnel and debt service costs should be no more than 40 percent to 70 percent of total church expenditures.

    2. Expenses (Excluding Depreciation) per Average Adult Attendee and Giving Unit

    The ratio of “Total Expenses (Excluding Depreciation Expense)” to “Average Adult Attendees and Giving Units”

    Has your church ever wondered what the cash cost is to the church for each adult attendee or giving unit? This measure provides the answer. It takes total cash expenses and divides that total by the average adult attendees or giving units.

    This measurement uses the concept of a giving unit: a group of family members, or any recurring supporters of the ministry, that contribute jointly to the church. This excludes individuals who make a smaller, one-time gift supporting a specific event, such as a short-term mission trip. To identify only the regular recurring giving units, you must set a minimum dollar threshold, such as giving units that contribute more than $250 annually.

    The power of this measure is in the peer group comparison. This allows your church to see if your cash expenses are high or low compared to your peers. Analyzing trends between years is also important.

    Another benefit of this measure is that it can be subtracted from total contributions per attendee and giving unit to show if contributions are high enough to cover the monetary cost per individual. In other words, are you taking in enough contributions to cover the costs of having people attend your church?

    3. Total Missions Categories to Total Expenses

    The ratio of “Total (Local and Global) Outreach Expenses” to “Total Expenses”

    This ratio looks at the combined total of local and global outreach (outside missions and benevolence) expenses as a percentage of total expenditures. Congregations report expenses for local and global outreach differently. Some churches tithe for their missions budget based on the offerings received.

    This ratio can be separated into two pieces and calculated by local and global activities. Global activities include actual outside expenditures for cross-cultural missions activities in the United States and other countries. This includes direct support to missionaries; outside agencies, including national partners; and cross-cultural mission trips. It specifically excludes internally allocated costs and salaries of church employees included within missions for some church budgets. This is because internal allocations vary significantly between churches.

    Local outreach includes actual outside expenditures for local missions activities not classified as “global.” This includes direct support of community-based church ministries, local missionaries and agencies, and benevolence given to local individuals. It also excludes internally allocated costs and salaries of church employees included within missions for the same reason as stated above.

    Churches may find this ratio useful in benchmarking their total outreach expenditures with other churches. But more importantly, when a church experiences economic difficulties, the ministry and mission expenses are usually the first to be decreased as debt service payments are not discretionary and personnel costs are difficult to reduce. Declines in this ratio can allude to other issues within the church. Monitoring these ratios over time will allow the church to identify any significant changes.

    4. Facility Cost per Square Foot (Excluding Interest Expense)

    The ratio of “Total Facility Costs (Excluding Interest Expense on the Debt and Depreciation)” to “Total Facility Square Footage”

    This measure answers the question “How much does it cost to operate my church building?” Total facility costs include building and grounds maintenance, personnel salaries and benefits, outside contract labor, utilities (excluding telephone), security, liability insurance, and rent or mortgage payments. It should also include the cost of general repairs to the facility and other facilities-use expenses, but not equipment purchases or the cost of major renovations. This overall expense excludes both vehicle-related expenses and interest expense on debt and depreciation.

    Keep in mind that facilities expense measures can vary, depending on whether the church has new or older facilities and is in one or multiple locations. Facilities expense measures can also vary by geographic area. The most accurate comparison would be against churches with buildings of a similar age as yours (e.g., built within a decade of your own).

    Monitoring Your Church’s Financial Health

    Measuring and monitoring expense ratios and other key financial data will help your leadership team assess your church’s financial health, identify areas for improvement, and be good stewards of your resources. The four ratios and measurements outlined above provide a good starting point for monitoring trends in expenses, and additional metrics have been discussed in other columns.

    Related articles:

    Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.

    Every Church Needs an Insurance Committee

    Sound financial decisions include regular reviews of coverage options by a team.

    For most churches, the choice of insurance involves little consideration and is based almost entirely on price, or in some cases on familiarity with an insurance agent who attends the church. Churches can and should do better. The choice of insurance should be the result of an intentional and rational process, and this can be facilitated through the use of an insurance committee.

    The Bible says that “there is safety in having many advisers” (NIV). A church is almost always better served when a committee of three or more members explores and recommends insurance coverage options. This is especially true when members of the committee reflect business and financial expertise. The committee makes its recommendations to the governing group, such as the board or congregation, which then makes the final decisions.

    Here are five important tasks any insurance committee should perform.

    1. Choose an insurance company

    One of the main tasks of an insurance committee is to select an insurer. The committee should obtain quotes from two or three insurers. A final decision should be made on the basis of several factors, including but not limited to cost. It is often helpful to deal with an insurer that specializes in the church market.

    If an insurance agent or broker is a member of your congregation, feel free to consider this person for the committee. But, be aware of a potential conflict of interest if the person is a member of the church board. Even if not a board member, be wary of doing business with this person’s company since this may not be the best option when viewed objectively.

    2. Identify risks to insure

    Another valuable function of an insurance committee is to identify risks to insure. If one or more committee members are on the church board, they will be familiar with the full extent of the church’s programs and activities and be able to provide invaluable input for selecting coverages. When evaluating risk coverage, here are some valuable tasks an insurance committee can perform.

    Property risks

    • Check to see if unique items—such as stained glass windows, pipe organs, handbells, artwork, and sound equipment—require special “endorsements.”
    • Obtain appraisals of unique items to be sure they are adequately insured.
    • Conduct periodic inventories of property to prove claims in the event of loss or destruction.
    • Check to see if coverage is limited to the market value of damaged or destroyed property. If so, consider obtaining replacement cost coverage.
    • Check to see if boiler heating systems require a special endorsement.
    • Check the exclusions under the policy. Some risks—such as earthquakes, mold, and sewer or drain backup—may be excluded and require special endorsements.
    • Check to see if your policy contains a “coinsurance clause.” If so, you are required to insure your property for a specified percentage of its market value. If you don’t, you become a “coinsurer,” meaning that your policy will pay less than the stated limits in the event of a partial loss. The committee members should review the policy every year to carefully evaluate coinsurance clauses.

    Liability risks

    • Check to see if sexual misconduct coverage is limited, and if higher amounts can be obtained by complying with specific prevention procedures.
    • Every policy excludes intentional or criminal misconduct. Some insurers take the position that this exclusion precludes any coverage for a church that is sued on the basis of negligence for the molestation of minors by an employee or volunteer. The church’s argument in such cases is that the intentional and criminal conduct exclusion does not apply since the church has not engaged in such conduct. However, it is being sued for its alleged negligence in selecting or supervising the perpetrator.

      One of the most important tasks of an insurance committee is to ascertain, in writing, the insurance company’s position on this essential question.

    • Some policies provide only minimal medical benefits to persons injured on church property. Make sure this risk is adequately covered.
    • Check to see if your property or general liability policy contains coverage for church-owned vehicles. If not, obtain a separate endorsement for this coverage.
    • Determine if the church needs employment practices coverage. Liability policies typically exclude coverage for claims made by current or former employees against the church, including wrongful termination. Employment claims can present a substantial uninsured risk to churches.

    3. Help determine coverage amounts

    In general, the amount of coverage should be based on two primary considerations: (1) the nature and frequency of your activities, and (2) the net value of the church’s assets. Once again, if one or more committee members are on the church board, they will be familiar with the full extent of the church’s activities and assets and will be in the best position to make informed decisions regarding coverage amounts.

    To illustrate the first consideration, if your church has a youth program that has frequent meetings involving minors, or provides counseling or hosts community activities, then your liability risks increase and you should look for higher insurance limits.

    Regarding the second consideration, and as a general rule, liability insurance should have limits in excess of the net value of the church’s assets, so that the assets are protected in the event of litigation.

    An insurance committee also should periodically review all church insurance coverages to be sure they are adequate and periodically obtain appraisals of church property (real property, personal property, and fixtures) to be sure the church possesses adequate coverage.

    4. Assist with compliance of insurance policy conditions

    An insurance committee can assist with compliance of the conditions in a church’s insurance policies.

    To illustrate, church insurance policies generally require that the church notify the insurance company in writing and within a specified period of time concerning any property damage or personal injury that occurs. Failure to do so can relieve the insurance company of any duty to defend the church in a lawsuit or pay a settlement or jury verdict as a result of the damage or injury.

    The duty to notify your insurance company of an injury or loss arises when the injury or loss occurs and not when a lawsuit is filed. The purpose of the notice requirement is to give the insurance company sufficient time to investigate the incident and provide a defense.

    Church treasurers should be familiar with the notification requirements in all of the church’s insurance policies. If you change insurance companies, be sure to review the new insurance policy. Do not assume that it will contain the same “notice” provisions as the previous policy.

    In addition, liability insurance policies require churches to cooperate with any investigations conducted by the insurance company into losses or injuries. A failure to cooperate may result in the denial of insurance coverage. Churches should never decline an insurance company’s request for information without the advice of an attorney.

    5. Review exclusions

    An exclusion is a loss that is not covered under an insurance policy. In some cases, excluded losses can be covered by a separate “endorsement” or “rider” by paying an additional premium. An insurance committee should carefully review all exclusions under the church’s insurance policies and obtain special endorsements as necessary.

    Choosing committee members

    In many churches, the tasks described in this article are handled by one person, typically the lead pastor or church treasurer. But there are so many tasks, and so important, that it is far better to entrust them to a group rather than any one person.

    The church board may fill this function in some churches, but an insurance committee often makes more sense if it includes individuals with insurance or financial experience. The committee does the legwork, and makes recommendations to the governing board. This eliminates the need for the board to become bogged down with addressing the many tasks involved in evaluating insurance coverages, and allows for the input of persons with financial and insurance expertise.

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

    Church Budgeting, Accounting, and Financial Reporting

    CPA Mike Batts offers advice and insights on church budgeting, accounting, and financial reporting processes.

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    Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.

    Managing a Church’s Liquidity and Financial Position

    CPA Mike Batts weighs-in on how to protect and deepen your church’s financial liquidity.

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    Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.

    The Definition of Taxable Income for Churches

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