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.

David Middlebrook
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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.

David Middlebrook

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.
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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.

Elaine L. Sommerville, CPA
Bio

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.

Vonna Laue, CPA
Bio

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.
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Every Church Needs an Insurance Committee

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

Richard R. Hammar, Attorney, CPA
Bio

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.
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Church Budgeting, Accounting, and Financial Reporting

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

Michael E. Batts, CPA
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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.
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Managing a Church’s Liquidity and Financial Position

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

Michael E. Batts, CPA
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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.
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The Definition of Taxable Income for Churches

Richard R. Hammar, Attorney, CPA
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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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Effective Church Budgeting Strategies for Achieving Your Mission

Discover effective church budgeting strategies to support your mission, prioritize goals, and maintain financial health.

Vonna Laue, CPA
Bio

Last Reviewed: January 27, 2025

The word “budget” can strike fear in the heart of nearly any staff member. The preparation of the budget is often either a long, arduous process or done with little thought and therefore ineffective. Either way, it is a task that leaders should carefully guide for their churches.

No organization has an infinite supply of resources. At home, a budget is necessary to make sure you have money when various expenses come up. If you don’t personally plan for your car repairs or vacation, you may be surprised or disappointed in the future. Budgeting is even more important in a church, because so many people are involved in the process. If everyone spends money without guidelines, it won’t go well!

The following considerations will help you prepare to budget, resulting in a more successful process and an effective budget that supports your church’s goals.

The budget and the mission must be linked

It is vital for your budget to be tied to the mission of your church. What are you trying to accomplish as a church? Make sure you understand this before you start because it should serve as the filter through which all budgeting decisions are made.

The budget must support the goals

Your church may have a broad vision of reaching your community with the gospel. Now it needs goals that will actually help accomplish that.

For example, you may want to have an active youth group with a 30 percent increase in attendance. Your church may also determine it should have a food pantry reaching out to low-income individuals in your area. Supporting missions also may be a critical goal, with the hope of increasing the number of short-term trips the church offers or the percentage of expenses used in support of local or global efforts.

The goals and the budget must be specific

You won’t know whether you’ve met your goals unless you specifically know what they are. In addition, the budget can’t really be a useful tool unless you are specific about how it is created and monitored.

Let’s say your church chooses to serve meals to the elderly, and at the end of the year you are under budget by $2,000. Was the program successful? You might think so, but if you’d spent the full amount budgeted, you could have possibly shared the love of Christ through a meal with 100 more people.

Establish your priorities and budget accordingly

Everyone on staff should have an idea of the church’s goals for the year ahead. This helps everyone understand how to prioritize spending in their respective areas of responsibility. There are a lot of good things we can do but we need to pick the best things. Strong leadership will be required to work through those opportunities and determine which ones to pursue first.

I strongly suggest you create the primary budget and then two contingency budgets. One would be used if contributions are lower than expected, and the other in case of a surplus. This will allow you to use the prioritization of possible ministries to its fullest, and enable you to automatically know which things to cut or add back. It eliminates much of the emotion that can be tied to the discussion of finances.

I often say that people have their hands out when there is more money than expected, but those hands quickly become fists when people think their program might get cut. If everyone is aware upfront of the funding order for your programs and understands that decisions will be made based on fulfilling the mission, then the spirit of cooperation will be more evident.

Budget considerations must include short- and long-term goals

Decisions that are short-sighted can have a very detrimental effect on the long-term health of the church. Be sure to consider whether the current budget should include items to help facilitate growth or ministry in the future (beyond just the coming year). Also, before you make a significant cut, consider whether it is something that will cost you more in the long run to correct or re-implement.

Choose your approach: top-down or bottom-up

Once you consider the budget as vital to fulfilling your overall mission, you can begin the process of actually creating the working document. Will you choose a more top-down approach, or bottom-up?

Having your church leadership—either a few key leaders or the finance committee—make the budget decisions simplifies the process significantly. However, there is seldom good buy-in from an approach like this. Staff members involved in the ministry’s day-to-day work have a much better idea of where costs can be cut and where costs are vital.

Should you choose to use a bottom-up approach, though, you will need to make sure there are guidelines in place to keep the process moving along. It’s also important for those involved to understand that not all ideas will be implemented. There are constraints they may be unaware of outside their particular realms.

Plan for a year-round process

The budget process is a year-round matter. The first six months of the year should be spent monitoring the budget and the second six months spent planning and approving the new budget. You also should be sure that people are held accountable for the budgets they are responsible for. If there are no consequences, there likely will be no compliance.

Make it a tool, not a weapon

A simple approach of “let’s add 5 percent to last year’s line items and approve the budget” is not the most effective budgeting method. Consider what needs to be accomplished and what finances that will take. With careful planning and buy-in from leaders, the budget can be used as a tool, not a weapon, and help accomplish the vision that has been set for your church.
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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Waiving Overtime Pay For Church Workers

The FLSA provides a straightforward answer.

Richard R. Hammar, Attorney, CPA
Bio

Q: We have a non-exempt employee who frequently works 50 or more hours per week. She is adamant that she only wants to be paid for 40 hours of work, and is waiving any right to overtime pay. Is this legal?

The overtime requirement may not be waived by agreement between an employer and employee.

An agreement that only 8 hours a day or only 40 hours a week will be counted as working time also fails the test of FLSA compliance.

An announcement by the employer that no overtime work will be permitted, or that overtime work will not be paid for unless authorized in advance, also will not impair the employee’s right to compensation for compensable overtime hours that are worked.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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How Should Churches Handle Taxes for Dual-Role Ministerial Employees?

A church employee cannot be both ministerial and nonministerial for tax purposes—here’s how to determine the correct classification.

Frank Sommerville, Attorney, CPA
Bio

Last Reviewed: January 30, 2025

Q: Our church is licensing our youth director as a youth pastor, which will change his status to ministerial for self-employment tax purposes. But he also does the mowing for the church, which is a nonministerial position. Do we pay him separately for the two functions, withholding and matching FICA for the mowing but not for the ministerial work?

For tax purposes, an employee can either be a minister or not; an employee cannot be both.

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The way to tell if an employee should be classified as a minister for tax purposes is if he or she performs ministerial duties at least 51 percent of the time.

If the majority of his or her duties are ministerial, then you must classify the employee as a minister for tax purposes. If the majority of your youth pastor’s work is indeed ministerial, then the payment for mowing the lawn, for tax purposes, should be regarded the same as payment for his ministerial work.
Frank Sommerville is both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.
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Building a Trusted Church Finance Team: Key Principles for Success

Reduce the risk of fraud by creating a team that incorporates solid internal control.

Chris Lutes
Bio

Last Reviewed: May 17, 2025

As financial secretary at Corn Mennonite Brethren Church in Corn, Oklahoma, Ginnie Warkentin understands how critical teamwork is in managing church finances.

Her conviction comes from experience—and a cautionary tale.

“I personally know of a church where one person took care of the offerings, wrote and signed the checks, and ended up embezzling a substantial amount of money,” Warkentin said.

“To reduce the chance of wrongdoing on the part of any one person, it’s important for any church to have several people handle the offerings.”

Sadly, her story is not unique. A quick search of “church embezzling” yields nearly 5,000 results. A nationwide survey of churches by Church Law & Tax revealed at least 31 percent experienced fraud of some kind over the courses of their histories.

“And those are only the cases that are leaked or made public by the media,” says CPA Vonna Laue.

Why One-Person Finance Operations Are Risky

Laue, a senior editorial advisor for Church Law & Tax, stresses the risk of consolidating financial duties with one individual.

“When you have so many duties consolidated with one person, there is always the risk of fraud,” she explained.

She cited scripture as a helpful guide:

“In the multitude of counselors there is safety. When you have a team that you can rely on, it takes the responsibility and divides it up to the point that the pressure isn’t all on one person.”

A team-based approach—combined with internal control—promotes better decisions and ensures financial reporting is accurate.

Building a Culture of Internal Control

Teamwork alone isn’t enough. Strong internal control systems are essential, says CPA Mike Batts, managing partner at Batts Morrison Wales & Lee and a senior editorial advisor for Church Law & Tax.

Batts outlines three core principles of internal control:

1. Segregation of Duties

Separate those who handle money from those who manage accounting and reporting.

“Handling money includes processing live incoming currency and checks and having signatory authority over bank and investment accounts,” Batts said.

2. Dual Control

Never allow one person to handle funds alone.

“Live funds must be processed by at least two unrelated people working together,” Batts said.

“If funds are stored in a safe or vault, it must be done in a way that doesn’t permit one person solo access.”

3. Oversight and Monitoring

A group separate from the accounting team should regularly review financial reports and flag anything unusual.

“They should compare balances in financial reports with independent documentation—like bank and investment statements,” Batts explained.

For further details, Batts explores these concepts in his book, Church Finance, Second Edition.

Who’s Responsible for What?

Churches vary in structure, but generally:
  • A board of trustees, stewardship committee, or similar group oversees financial governance.
  • The treasurer manages daily operations, including:
    • Counting and recording donations
    • Managing donor records and issuing receipts
    • Reconciling bank and digital giving accounts
    • Filing tax forms
    • Paying bills
    • Reporting regularly to the governing board

Setting Up the Right Team

The number of people needed depends on the size of the church and how duties are split.
  • Donation counters: Ideally, rotate a team of at least eight.
  • Always work in pairs: No counter should handle money alone.
  • Document responsibilities: Write down each role and what it includes.

Choosing the Right People

Finding trustworthy volunteers is essential. Look for individuals with:

1. A Heart for the Church

“First and foremost, they should fully support and endorse the vision of the church,” Batts said.

2. A Commitment to Stewardship

“You are entrusted with the finances of God’s ministry,” Laue said.
“You need to take that seriously. People are getting tax deductions, so donations must be handled properly.”

3. A Respect for Confidentiality

“Confidentiality is so important,” said Dan Busby, former president and chief executive officer of the Evangelical Council for Financial Accountability. “If people show evidence of wanting to tell everybody everything they see, they’re not the kind of people you want handling financial information.”

4. A Clean Financial Record

“Someone facing bankruptcy is not a good person to have handling the offering,” Busby said.

He recommends background checks—just as churches screen childcare workers. These checks can uncover financial red flags. If your church performs financial background checks, especially for paid employees, make certain it complies with the Federal Credit Reporting Act (FCRA)—learn more about the act in this article about employee handbooks by attorney and CPA Frank Sommerville.

5. Basic Finance Skills

People don’t need to be CPAs, but they should be comfortable with the responsibilities.

“They need to be gifted in the faithful administration of God’s resources,” Busby said.

That sentiment resonated with Warkentin from Corn Mennonite Brethren Church.

“I really love bookkeeping, so I found my niche here,” she added.

6. Tact and Sensitivity

Laue shared a scenario many treasurers face:

“Someone’s donation check bounces—it’s awkward. You need people who can handle that with grace.”

7. Timeliness

Punctuality is a must.

“It isn’t unusual to see churches behind in reconciling accounts,” Busby noted. “That’s an open door for fraud.”

Integrity Is Part of Your Witness

A well-functioning financial team does more than protect funds—it protects your church’s reputation.

“This is important work,” Busby said. “This work is for people who are passionate about protecting the reputation of Jesus Christ.”

We’ve used a combination of AI and human review to make this content easier to read and understand.

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6 Tips on Church Nursery Safety

From anti-scald devices and changing tables to overall cleanliness, this list of helpful hints will keep your babies and toddlers safe and happy.

Robin F. DeMattia
Bio

Last Reviewed: February 14, 2025

Keep your nursery safe for children by following these suggestions:
  • Keep the cords of window blinds out of reach by hanging them at the top of the window covering. Don’t set cribs near windows.
  • Install anti-scald devices on faucets to keep water temperatures below 120 degrees Fahrenheit.
  • Use changing tables that have safety straps and have drawers or shelves that are easily accessible.
  • If you use hook-on chairs that attach to table edges, don’t place them where children’s feet can push against the table and dislodge the chairs.
  • All nursery surfaces should be washed regularly and kept dust-free.
  • If the nursery air is dry, consider using a cool-mist humidifier. This is especially helpful during winter months when children have colds. Clean a humidifier frequently to prevent the growth of bacteria and mold.
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Do Lapsed Credentials Affect a Minister’s Housing Allowance?

Discover how lapsed credentials impact a clergy housing allowance and steps to navigate eligibility.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 18, 2025

Q: Our minister’s ordained status lapsed for a few months this year due to his failure to timely renew his credentials with our denomination. How does this affect his housing allowance for the year?

How Do Lapsed Credentials Impact a Housing Allowance?

Technically, a housing allowance is only available to an “ordained, commissioned, or licensed minister.” Therefore, a housing allowance is not available while a minister’s credentials are lapsed.

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Can Reinstated Credentials Restore Eligibility?

If and when the minister’s credentials are reinstated, the reinstatement might “relate back” to the beginning of the year. While this is a plausible argument, it has not been definitively addressed by any court.

Implications for Ministerial Duties During Lapse

Even during a lapse, it could be argued that the minister retains the ability to:
  • Perform marriages and baptisms;
  • Qualify for clergy privilege in legal matters; and
  • Carry out other sacerdotal functions.

However, the validity of this position is subject to interpretation. It should therefore be discussed with a qualified tax professional or legal advisor.

Because no court has directly ruled on this issue, no definitive answer is possible. Ministers and church leaders should consult with a qualified tax professional to navigate this complex situation and ensure compliance with IRS guidelines.

FAQs About Clergy Housing Allowance and Credentials

What is a clergy housing allowance?

A clergy housing allowance is a portion of a minister’s compensation designated for housing expenses, which can be excluded from taxable income.

Can a minister with lapsed credentials claim a housing allowance?

No, during the period when a minister’s credentials have lapsed, they technically do not qualify for a housing allowance.

Does reinstating credentials retroactively restore eligibility?

It could be argued that reinstating credentials corrects the lapse retroactively, but no definitive court ruling exists on this matter.

What steps should a church take during a credential lapse?

Churches should work with a tax professional to evaluate the situation and ensure compliance with applicable tax laws and IRS regulations.

Conclusion

Lapsed credentials can impact a minister’s housing allowance eligibility, though reinstatement might provide an argument for retroactive correction. Because this issue has not been addressed by courts, seeking guidance from a tax professional or legal advisor is highly recommended. For more information, consult resources like the Church & Clergy Tax Guide.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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Liability for Diversion of Funds in Churches

Learn the legal risks for churches that divert donor-designated funds and how to handle these situations responsibly.

Richard R. Hammar, Attorney, CPA
Bio

Last Reviewed: January 24, 2025

It is common for church members to make “designated” or restricted charitable contributions to their church, specifying that their contributions be used for a particular purpose. But what happens if a church board applies such contributions to another purpose? Are there legal consequences for the church or its leadership?

A recent decision by the Mississippi Supreme Court offers critical insights into this issue. The ruling not only discusses the consequences of using donor-restricted funds for other purposes but also highlights the potential for donors to reclaim their contributions under certain conditions.

Understanding Donor-Designated Funds
  • What are donor-designated funds? These are contributions explicitly earmarked by the donor for a specific purpose, such as a building fund or community outreach project.
  • Legal implications: Churches must adhere to the donor’s restrictions when using these funds. Diverting them for other purposes can lead to lawsuits or legal penalties.

Case Study: St. Paul Catholic Church

In the aftermath of Hurricane Katrina, St. Paul Catholic Church raised funds specifically for rebuilding its church. However, the funds were later diverted when the church decided to merge with another parish and abandon rebuilding plans.

Donors filed lawsuits alleging misrepresentation and improper fund use. The Mississippi Supreme Court ruled:
  • Churches cannot use donor-designated funds for purposes other than those explicitly stated without donor consent.
  • Donors may have the legal right to reclaim contributions if the church fails to use them for the designated purpose.

Over the past 150 years, several court cases have addressed the misuse of donor-designated funds:
  • Adler v. Save: Donors successfully reclaimed funds when a charity failed to meet conditions tied to their donation.
  • Tennessee UDC v. Vanderbilt University: A university was required to either honor the original conditions of a gift or refund its current value to the donors.
  • Estate of Champlin: A Maine court ruled that unreasonable delays in fulfilling the purpose of a restricted donation could constitute grounds for refunding the donation.

Implications for Churches

Churches face serious risks if they fail to honor donor restrictions:
  • Legal liability: Donors may sue to reclaim their contributions.
  • Loss of trust: Mismanagement of funds can damage a church’s reputation and donor relationships.
  • Tax compliance: Returning contributions can have tax implications for both the donor and the church.

Best Practices for Managing Designated Funds

To avoid potential issues, churches should:
  1. Clearly document and honor donor restrictions.
  2. Seek donor consent before repurposing funds.
  3. Include disclaimers in solicitation materials, such as: “Donations may be redirected if the project is canceled or overfunded.”
  4. Consult legal counsel before making decisions about restricted funds.

FAQs on Diversion of Funds

1. What constitutes a “diversion of funds”?

Using donor-restricted funds for purposes other than the donor’s specified intention without their consent.

2. Can a church legally redirect restricted funds?

In most cases, no. Churches must use these funds as specified or seek donor consent for redirection.

3. What happens if a donor cannot be identified?

If a donor cannot be identified, the church may need to seek court approval to redirect the funds under specific guidelines like the Uniform Prudent Management of Institutional Funds Act (UPMIFA).

4. Can donors reclaim their contributions?

Yes, donors may reclaim their contributions if the church fails to use the funds for the designated purpose or abandons the project entirely.

Conclusion

Churches have a legal and ethical responsibility to honor donor-designated funds. Mismanagement can lead to legal disputes, loss of trust, and financial challenges. By following best practices and consulting with legal experts, churches can ensure compliance and maintain donor confidence.

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

Effective Strategies for Church Missions Fundraising

Learn effective church missions fundraising strategies to inspire generosity and connect your congregation with impactful global projects.

Ruth Moon
Bio

Last Reviewed: January 25, 2025

1. Let your congregation see where their money is going. “People love to give to something they can see,” says Dan Crane, missions pastor at First Evangelical Free Church in Fullerton, California. Crane finds that supporting projects like wells, orphanages, and other tangible programs, and telling donors exactly which projects are supported, encourages continued giving.

2. Tailor missions investment to projects your community is passionate about. If no one in your church is interested in supporting a missions organization, consider something more development- and humanitarian-focused. “I try to find out what God wants our church to do, because there are so many needs,” said Crane. “I spend a lot of time in prayer, thinking and talking and pondering.”

3. Invest in relationships. “Key factors in giving are the role model of the senior pastor and a church’s relational connection with teams around the world,” says Tim Crouch, vice president of international ministries for the Christian & Missionary Alliance. Congregations who know the people their money supports, either from vision trips or visits from missionaries, are more likely to keep giving.

4. Diversify your investment. Some people might want to buy goats for a community in Rwanda; others might want to run to raise money for water. “We try to support a wide swath and a lot of different places,” says Mark Wilson, senior pastor of Hayward Wesleyan Church in Hayward, Wisconsin. “We’re hoping there will be something to connect with everybody in our faith promises.”

For further insights into funding and administering your church’s missions budget, see these articles:
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Key Considerations for Maintaining Financial Integrity in Churches

Protect your church’s financial integrity with practical strategies for governance, financial controls, risk management, and transparent decision-making.

Gregg Capin
Bio

Last Reviewed: January 25, 2025

Amidst the daily duties and demands church leaders encounter, it is not easy to maintain perspective on factors that can protect or diminish integrity. But consider the immeasurable benefit of maintaining integrity—and the cost of compromising it.

To help protect and maintain the financial integrity of your church and leadership, this checklist contains five key areas of considerations built on a framework of:
  • Consistency with faith and values: “For we are taking pains to do what is right, not only in the eyes of the Lord, but also in the eyes of man.” (2 Cor. 8:21)
  • Conformity with laws and regulations: giving “back to Caesar what is Caesar’s…” (Mark 12:17)
  • Clarity of message: avoiding impropriety or the appearance of wrongdoing; being transparent and truthful to avoid even the appearance of impropriety.

The following checklist does not cover all areas but is meant to help focus your thinking about financial integrity. Keep in mind that accountability is paramount at all levels, and even one oversight can result in a significant failure.

Responsible Governance

___ Have a high regard for legal parameters, tax forms, and status (charter, corporation, registrations, etc.) in order to support the church’s operations and vision through appropriate structure, legal position, and tax compliance.

___ Understand fiduciary responsibilities (duties of loyalty, care, and obedience).

___ Define the roles and responsibilities of the board and its members. This starts with a governance framework that is defined and set forth in board policies. The most effective boards know their role and execute their position.

___ Know exempt organization responsibilities so you can identify potentially problematic areas that can negatively reflect on character and competence.

___ Maintain active board oversight and monitoring of financial policies, operations, and controls, including ongoing risk assessments.

It is often said that tone at the top is everything and permeates an organization. There is ample evidence that this is true, and responsibility starts with leaders, especially those on an organization’s board.

As with our Christian witness, actions speak louder than words. A governing board leaves the door open to failure when it does not empower accountability by rigorously fulfilling its fiduciary duties and exercising effective oversight and monitoring. It’s also imperative for boards to define appropriate conduct and misconduct.

To be effective, boards must ensure accountability by understanding the cost/benefit of controls and what can go wrong without them.

Effective Financial Control

___ Establish written policies and procedures that include a clear delineation of the roles, functions, and duties of all people, positions, and groups, and then monitor those to ensure they are working.

___ Maintain segregation of duties, with multiple people involved to prevent and detect problems and monitor the effects of change on people, processes, and systems. These basic controls (checks and balances) should be an ongoing priority.

___ Monitor internal and external fraud risk and know how to respond to suspected fraud.

___ Consider internal audit procedures, which can be performed in any size church, as well as independent financial audits and legal evaluations, which can be right-sized for your church.

Financial integrity is dependent on financial control that prevents and detects problems. Control goes beyond exercising care with financial assets to stewarding and protecting people as well.

Wise Financial Management

___ Ensure that you receive timely, accurate, and reliable financial reporting, including key financial indicators, trends, and ratios. Your board and management need this information to make effective decisions and to anticipate and avoid problems.

___ Monitor church-specific, local, regional, and national giving trends, such as annual giving and budget survey findings. Understand the factors behind these trends.

___ Establish and maintain dynamic budgetary controls that are responsive to changing circumstances.

___ Maintain adequate financial reserves to weather unforeseen circumstances.

___ Adhere to strict guidelines for the acceptance and appropriate use of offerings and restricted contributions that avoid conduit of funds (funds that are received but then passed on to other individuals or organizations) and other concerns (including tax areas such as benevolence and scholarships).

The decisions your church makes and the way it conducts operations merit careful consideration. This requires good organization, clear core values, having the right people in the right positions, effective systems and processes, strong controls, and an uncompromising commitment to accountability.

Appropriate Compensation and Benefits

___ Increase human resource awareness and skills of all staff by providing guidelines and training in areas such as hiring, supervision, and compensation and benefits. Maintain personnel files with required tax and legal information, including periodic evaluations. This is an area of significant risk for churches, and mistakes can lead to litigation and can affect a church’s reputation.

___ Manage intellectual property ownership through clear guidelines and consistent practices, including a general church policy of ownership absent specific identification and agreement. This should provide a clear understanding for all individuals, whether personnel, leaders, or board members.

___ Perform careful retirement planning. Options and resources are limited, so time is critical. This is particularly an area of concern for start-up and nondenominational churches.

___ Document the reasonableness of compensation and the ministry’s compliance with excess benefit rules.

This is an area that can stretch the bounds of trust and transparency. There is an inherent conflict of interest that cuts to the core of integrity and values. What constitutes appropriate compensation and benefits to one person can be different in the eyes of another. The key is to understand the perspective of stakeholders and to base decisions on compensation studies that identify comparability with other churches.

Risk Identification and Management

___ Maintain an intentional and formal risk assessment process that is monitored by the board.

___ Monitor legal and regulatory developments, such as in religious hiring, ministerial status, and tax law.

___ Watch the horizon to be aware of developments that can affect your church. This includes fraud and financial failures, economic changes, giving trends, technology security, and many more.

Beyond reliance on God and a commitment to core values, avoiding problems is difficult without continually identifying risks and evaluating the potential effects of taking appropriate action.

Although there is a lot to monitor, it’s vital to be aware of, and respond to, these crucial areas in order to maintain financial integrity and protect the reputation and standing of your church leadership.

Gregg Capin is a partner at CapinCrouse and has over 30 years of experience managing audit and advisory services for a wide range of not-for-profit organizations both nationally and internationally. He has participated in national organizations involved in not-for-profit initiatives such as AICPA, ECFA, FASB and others. CapinCrouse offers a tool, The Church Financial Health Index™, to help with not-for-profit financial management and is available at CapinCrouse.com .
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7 Essential Guidelines for Church Missions Funding

Learn 7 critical guidelines to ensure compliant and effective church missions funding, from tax rules to donor contributions.

Chris Lutes
Bio

Last Reviewed: January 27, 2025

Missions is an essential component of any church budget. But the ins-and-outs of supporting missions and missionaries are fraught with potential tax and legal issues. By following these seven guidelines, you can avoid many financial headaches and more easily navigate the often tricky area of missions funding.

1. Donors give to missions, not to missionaries

Zach wants to give to his niece’s summer missions trip, so he writes a check in her name and drops it in the offering plate. But Zach might be jeopardizing his chances of receiving a deduction.

Why? Donations must be given to a specified fund and not to an individual.

CPA Elaine Sommerville explains: “The church can allow the donors to indicate the particular participant they wish to support. However, a church must convey to the donor that it may use the donation for other participants, other missions trip expenses, or even future missions trips in the event the selected participant receives excess designated funds or the indicated participant does not go on the trip. This message should be contained in any fundraising material.”

See “Designated Contributions” in Church Finance (pages 72-76). For specific insights on fundraising, see “Rule 3—individual quid pro quo cash contributions of $75 or less” and “Rule 4—individual quid pro quo contributions of more than $75” (pages 81-83).

2. Fund foreign activities through missions agencies

While on a business trip, Lindsey, one of your elders, visits a small, struggling church in a developing country. She is impressed by the pastor’s efforts to reach out to his impoverished community. When she returns home, Lindsey talks to her pastor and fellow elders about providing funds to help this pastor and his church.

While Lindsey’s heart is in the right place, Frank Sommerville, an attorney and CPA, says such funding ventures are extremely risky.

“The IRS rules require that you maintain something called ‘expenditure responsibility’ over the funds that you send outside of the United States,” says Sommerville. “What that means is your church is responsible for how those funds are spent. So when you’re sending funds overseas you need to make sure the lumber that you paid for actually goes into building the church and not building the house for someone who’s over there.”

Then there’s the problem of funds inadvertently falling into the wrong hands.

“If any of those funds end up in a terrorist state, or in a terrorist organization, or supporting a terrorist or even a suspected terrorist,” says Sommerville, “that’s a criminal offense and the church treasurer and the missions committee that approved the transfer [of funds] could be looking at prison time.”

Sommerville strongly advises churches to work through their denominational missions agency or a well-established nondenominational missions organization.

See “Contributions made to or for the use of a qualified organization” in Church Finance (pages 70-71).

3. A church must justify compensation for missionaries it supports

Tyler has attended your church from infancy and is now graduating from college with a degree in missions studies. Within the next 18 months, he hopes to head out to a foreign missions field. Your church is excited to support him and makes plans to do so. But how much support should he receive?

Frank Sommerville says that funds given must further the “exempt purpose” of your missionary endeavors and they must also add up to a “reasonable amount” of compensation.

“The church has a responsibility for determining what a reasonable amount of compensation would be,” says Sommerville. “The church also needs to determine whether or not other churches are involved in supporting this missionary. If you had 20 churches sending $1,000 a month, that’s $20,000 in income. In most places in the world, taking even $10,000 a month is going to be considered excessive. So you have to be aware of all of the funds coming from U.S. churches and how those funds are spent.”

Sommerville says that careful records must be kept of all expenditures, and he suggests that the missionary keep a daily activity log to help justify his or her compensation.

See “Missionaries” in the annual Church & Clergy Tax Guide (Chapter 8).

4. Distinguish ministry days from personal days

A group of adults from your church is heading off to Ecuador for a three-week missions trip this summer. At the end of the volunteer ministry work, the group plans to spend a couple of days seeing the local sites. Before the group leaves, this question comes up: “Will all our travel expenses be deductible?”

The answer: Only those days spent in actual ministry are deductible.

“A ministry day is where you are ministering for the benefit of others,” says Frank Sommerville. “A personal day is a vacation day. And the expenses related to a personal day are not tax-deductible.”

To validate actual ministry days, Sommerville encourages the missions team to keep a daily log of missions-related activities.

See “Principle 3: no significant element of personal pleasure” in the Church & Clergy Tax Guide (Chapter 8).

5. Participants must actually participate

Tim, your church’s youth pastor, wants to take his wife and young children on a summer missions trip. Although he’s pretty sure funds raised for his family’s travel are tax-deductible, he admits that his wife will be busy taking care of the kids and that she’ll have little involvement with “doing ministry.” Is Tim’s assumption correct?

“No,” says Richard Hammar. “Contributions given toward the travel expenses of the youth pastor’s wife and children would not be tax-deductible, because their travel is not primarily for ministry purposes.”

See “Principle 3: no significant element of personal pleasure” in the Church & Clergy Tax Guide (Chapter 8).

6. Serving is not deductible

Your missions team has enlisted three carpenters for a summer trip to India. During early planning meetings, one of the carpenters asks: “Will we be able to deduct the time we spend using our skills?”

Church Finance says, “No deduction is allowed for contribution of services. Church members who donate labor to their church may not deduct the value of their labor.”

See “Donated services” in Church Finance (page 66).

7. Travel expenses must be ministry-related and correctly documented

During prep meetings for an upcoming missions trip, the missions pastor assures participants that all “reasonable travel expenses” will be deductible.

The missions pastor is most likely correct. The Church & Clergy Tax Guide says, “Travel expenses incurred during a short-term missions trip which may qualify as a charitable contribution include air, rail, and bus transportation; out-of-pocket car expenses; taxi fares or other costs of transportation between the airport or station and your hotel; lodging costs; and the cost of meals.”

But remember: The travel must be for ministry and not for fun. And for expenses exceeding $250, the participant must keep a record of travel expenses, such as a copy of the plane ticket, and have written documentation from the church. This documentation should detail the services provided by the participant and should state that the participant received no goods or services in return for his or her volunteer work.

For a list of four specifics that should be in the church’s document, see “Unreimbursed expenses” in the Church & Clergy Tax Guide.
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Creating an Effective Church Dashboard Report

Simplify church financial reporting with an effective dashboard. Use visuals and key metrics to guide better discussions and decisions

Vonna Laue, CPA
Bio

Last Reviewed: January 25, 2025

Have you ever been driving and run out of gas? If so, it’s unlikely that you have done it more than a few times. It usually only takes one or two instances of the inconvenience, concern, and sometimes even embarrassment to help people remember to keep a closer eye on the fuel gauge.

The dashboard of your vehicle provides vital information. In addition to monitoring how much gas you have, the dashboard helps you ensure that you’re not speeding and that all of your car’s major systems are working properly.

A dashboard report serves the same purpose for a church. It takes pages of reports and summarizes the key data into one page of information, mostly in the form of graphs and charts. This report helps you keep an eye on essential information and alerts you when things begin to deviate from the norm. When prepared properly, it can also engage board members who may have been disinterested in operational or “business” matters.

Getting started

While there are software programs available to facilitate the creation of dashboard reports, Excel is all you need to get started. The simple graphing feature in Excel will allow you to create graphs or charts of various data and select the size and location you desire on a page.

Start by identifying the information you want to include. Keep in mind that this will change over time, so it doesn’t need to be perfect at the beginning. Consider the types of key financial and nonfinancial data your board and leadership ask for or monitor, as well as the information you believe they should focus on.

What information is needed?

Here are some pieces of financial and nonfinancial information you may choose to include:
  • Cash availability. It is imperative for church leaders to have a clear understanding of the difference between the cash balance and the cash available for use. This can be done simply by reflecting the cash balance less any current amounts due (including upcoming payroll), as well as amounts that are held for restricted purposes.
  • Budget versus actual amounts. A bar graph can provide an easy, visual way to show the budgeted and actual amounts of revenues and expenses and can help readers see if the church is ahead or behind where they expected to be financially.
  • Categories of expenses. A pie chart displaying what percentages of total expenses have been used for personnel costs, facilities, ministry, interest, or other areas may be useful for many.
  • Average contribution per attendee. Monitoring this data may enable you to budget for the future more effectively or encourage the congregation by showing what they have given.
  • Key ratios. This could include information such as days of cash on hand or current assets compared to current liabilities.
  • Attendance trends. How many people attended last week, last month, or last year?
  • Decisions for Christ. Monitoring the numerical growth or decline of the church is just one indicator of success. You may choose to keep leaders informed of the number of lives that have been changed.
  • Missions trips. If your church is heavily involved in missions, you may want to show the number of missions trips that have occurred or how many individuals from the church have participated.

Tips for creating an effective report

Here are a few key points to remember in implementing or maintaining a dashboard report:
  • Keep it succinct. The saying “less is more” applies here. Including too much information will defeat the purpose of this report.
  • Keep it visual. You may decide to include a couple of items in numeric format, but this should not be a sheet of facts and figures. People often respond better to visual information and will likely be more engaged in any ensuing discussion as a result.
  • Keep it clutter-free. There are many fancy things you can do with color and lines and graphics. Don’t! This will just become a distraction. Make sure there is ample white space throughout the page and that any text is large enough to easily read.
  • Keep it trendy. This doesn’t mean you need to use the newest gadget or social media to present the information. This means you can tell a lot about where a church is going and what the financial needs and resources will be by monitoring trends. Consider how you can include this type of information to assist in the decision-making process.
  • Keep it relevant. Make sure you ask the users of the dashboard report for input. It should include the information they find helpful. This will change over time as the needs of the church change as well as the people and personalities on the board or committees.

Give it a try, give it time

I encourage you to give this reporting method a try. As with anything new, it will take time to get the report exactly the way you want it and to train the readers. The end result, however, is likely to be better discussion, with more focus on the key areas of church management and less on inconsequential items. You’ll also save a lot of time and effort previously spent on printing and preparing lengthy board packets!
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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When to Postpone or Cancel Church Events

Guidelines for when safety and prudence trump the church’s schedule.

Matthew Hoxsie Mead
Bio

Last Reviewed: February 10, 2025

I live one hour north of New York City, an area where our church and the local population endure hurricanes, blizzards, ice storms, and a wide variety of other dangerous weather conditions. Our area is also affected by power outages that can go on for days, sometimes more than a week. Sometimes we cancel gatherings and sometimes we just press on. But how do you know which to do?

Do you cancel that board meeting? The Sunday service? That special program you’ve been planning for months?

I have a few rules that I have developed over the years which have thus far served me well as a rubric for cancelling or postponing church events.

Cancelling a Sunday service on Saturday night due to a weather forecast is usually a bad idea.

There are obviously exceptions—Hurricane Irene hit us on Sunday morning and we cancelled Sunday services that day—but there are many times when a predicted blizzard never materializes or it arrives with a whimper. Don’t cancel or postpone an event if your only worry is the chance of bad weather.

Follow the local and state government suggestions.

If the local officials have declared a state of emergency and told people to stay home, then you should cancel, too.

If you have no running water, heat, or lights, then cancel the event or send everyone home.

As I noted above, we have frequent power outages in the Northeast. At our Christmas Pageant this year, the power went out. For us, that meant no lighting, no heating, and no running water (we have a well). We were about to sit down to a post-pageant potluck, when suddenly the lights went out. Within two minutes of the power going out, several children were crying and the older kids were running around like it was Halloween.

After checking with the power company and being informed it would take hours to restore power, I sent everyone home. I know some people weren’t happy, but if you keep the event going and someone gets hurt, you risk serious liability. Even though in this case, the power came back on 30 minutes later, it was still the right thing to do given our inability to predict when it might be safe again.

If it is dark and cold when you’re without power, shut it down.

My church can temporarily supply running water to the church via a backup generator at the rectory. That allows us to finish a daytime, warm weather event that is still in progress because we can just go outside or see by the daylight and we can still use the bathrooms with the running generator. That said, if it is dark and cold, we shut down immediately.

Cancel every upcoming event when you have an extended power outage.

Each time we have an extended power outage, a committee leader or the head of the boy scouts or the AA liaison insists that “we can bring in candles and lanterns.” But that is asking for a fire hazard and even liability. No dice—safety first!

Design events with a secondary “rain date” in mind.

Some events can theoretically be postponed, like a Christmas pageant or a bake sale. Admittedly, we don’t do it enough, but I think a prudent way of scheduling any event includes having a predetermined rain or snow date. You can avoid a lot of handwringing if you have a rain or snow date.

Other events cannot be postponed – like a Christmas Eve midnight service. Thankfully, the church has seasons, so if Christmas Eve service is wiped out due to a snow storm, then the odds are good that the Sunday after Christmas will be packed.

Have reliable, accessible communication methods.

If you are affected by weather related postponements and cancellations, then it is important to have updated and accessible communication methods. We use a user opt-in/opt-out email list. Essentially, it is a blog and anyone can sign up for it. Once you are signed up, you receive every post. I can send out a newsfeed blast to everyone from my office computer, my home computer, my smartphone, tablet, or any device that is connected to the Internet. Because it is a blog format, the posts are public, and that means you need to refrain from sending out personal information to everyone (you shouldn’t do that anyway!).

Add an alternate service in lieu of a canceled one.

If you have good communication with the congregation, you can cancel one service and add an alternate one. When Hurricane Irene hit, we offered a Saturday afternoon Eucharist and cancelled our Sunday services. I sent out an email to the congregation on Saturday morning noting what we were doing. We had a 17-minute service including the Eucharist, singing three a capella hymns, and a homily. We had more than 50 people present and they all appreciated the fact that they were able to come together for prayer and worship despite the irregular circumstances.

Matthew Hoxsie Mead is an Episcopal priest and Rector of the Church of the Good Shepherd in the Episcopal Diocese of New York. This post first appeared on FatherMatt.com and is adapted with permission.
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