By David O. Middlebrook
For church leaders, finances are often a stressful topic — usually not an issue pastors enjoy talking about. Add to that stress numerous Department of Labor (“DOL”) and IRS regulations that drive up the cost and hassle of employment, and sometimes conducting formal ministry seems all but financially impossible.
Because of the tedious nature of ever-evolving employment laws, ministries and churches often adopt a far too simplistic approach: pay everyone a stagnate salary the organization can afford, regardless of time worked. Thoughts about clocking in and out — and paying overtime — are overlooked or disregarded because they are burdensome and not seen in the spirit of “doing what it takes.”
The Department of Labor’s Wage and Hour regulations affect almost every employer, regardless of finances. The Fair Labor Standards Act (the “Act”) is the main legislation that effects wage and hour rules and gives authority to the DOL to enact and enforce regulations regarding wage and hour rules (such as the payment of minimum wage) and requires overtime pay for nonexempt employees working more than 40 hours in a set week. All employers — even churches — must be aware that the DOL takes the default position that all employees are nonexempt. This means they are eligible for minimum wage and overtime pay unless the employer can demonstrate that an exemption outlined by the DOL and the Act applies.
So, when does the Act apply?
The Act applies only in cases of employment and does not apply to independent contractors. To understand whether the person you are paying is an employee, the DOL looks at the following factors:
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 their equipment and facilities in which the work is performed. While an independent contractor may use the facilities of the employer, often the contractor will bring their own equipment, and maintain it themselves.
4) “The worker’s skill and initiative.” While employees might 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.
6) “The nature and degree of control by the employer.” This factor focuses on the control of the employee’s schedule and their method of work.
None of these factors alone can tip the scale in favor of an employee or independent contractor. However, the DOL analyzes each factor individually, and in each given case determines whether employee benefits or overtime should be extended to those the employer improperly classified as independent contractors. Remember: the DOL’s default position is all workers are employees, and the burden is on the employer to demonstrate the individual worker is actually an independent contractor.
If you determine that an employment relationship exists, you can now ask whether your employee qualifies for a FLSA exemption, meaning they are not entitled to minimum wage, nor are they eligible for overtime, regardless the number of hours they work. Once the worker is determined to be an employee, they must meet the following three-point test to be exempt:
- Paid at least $455 per week — subject to change to $951 with possible upcoming regulations;
- Paid on a salary basis; and …
- The job duties must fall into one of the following exemptions:
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.”
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.”
Computer Employee: “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.”
Many ministerial positions are exempt from the Act; but, if you have questions about the Act and ministerial positions, contact legal counsel as several appellate courts have laid out specific requirements for the ministerial exception to apply to the Act.
Regardless of an organization’s size, the Act affects almost every employer. Failing to comply with the Act can result in stiff monetary penalties.
Organizations should take heed of the rules affecting their employees, conduct an internal review to determine if the organization has any trouble spots — such as the misclassification of workers and failing to properly keep time records for non-exempt employees; and consult experienced legal counsel to resolve questions or issues regarding these employment issues.
The materials in this article are provided for informational purposes only and do not constitute legal advice. This article is intended, but not promised or guaranteed to be current, complete or up-to-date and should in no way be taken as an indication of future results. Transmission of the information in this article is not intended to create — and the receipt does not constitute — an attorney-client relationship between sender and receiver.
David O. Middlebrook is a founding shareholder of Anthony & Middlebrook and the Church Law Group in Grapevine, TX. His clients include high-profile charitable and religious organizations, both domestic and international.