What churches need to know about hourly versus salaried employees.
The Fair Labor Standards Act mandates that employers pay the minimum wage and overtime compensation to employees who are engaged in commerce or in the production of goods for commerce. Examples of employees who are involved in interstate commerce include those who produce goods (such as a secretary typing letters in an office) that will be sent out of state, regularly make telephone calls to persons located in other states, handle records of interstate transactions, travel to other states on their jobs, and do janitorial work in buildings where goods are produced for shipment outside the state.
Generally, employees who perform these tasks would be covered by the rules of the FLSA. This includes church workers. While there is no exception for religious organizations, there are exceptions for certain classifications of employees.
The FLSA requires covered employers to pay their employees at least the federal minimum wage, and overtime premium pay of one and a half times the regular rate of pay for all hours worked over 40 hours in a workweek. However, the FLSA includes a number of exemptions from the minimum wage and overtime requirements, including “any employee employed in a bona fide executive, administrative, or professional capacity … as such terms are defined from time to time by [Department of Labor] regulations.”
KEY POINT. The Fair Labor Standards Act exempts employees employed in an executive, administrative, or professional capacity from the minimum wage and overtime pay provisions. To be covered by one of these exemptions, an employee must perform specified duties, and be paid a salary in excess of a specified amount.
These exemptions are summarized below.
DOL regulations define an exempt “executive” employee as any employee who is:
Following are some key definitions of these regulations:
Exempt employees (not covered by the minimum wage and overtime pay rules) must be paid on a “salary basis” of at least $455 per week. Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Except for specific exceptions noted below, exempt employees must receive the full salary for any week in which they perform any work, regardless of the number of days or hours worked.
Deductions from pay are permissible when an exempt employee
KEY POINT. A church cannot make a non-exempt employee exempt by paying him or her a salary.
board and lodging The final DOL regulations specify that an exempt employee must earn the minimum salary amount ($455 per week) “exclusive of board, lodging or other facilities.” The regulations state that “the costs incurred by an employer to provide an employee with board, lodging or other facilities may not count towards the minimum salary amount required for exemption. Such separate transactions are not prohibited between employers and their exempt employees, but the costs to employers associated with such transactions may not be considered when determining if an employee has received the full required minimum salary payment.”
The final regulations define the term “other facilities” to include items similar to board and lodging, such as meals furnished by the employer; housing furnished for dwelling purposes; and transportation furnished to employees for ordinary commuting between their homes and work.
Example. A youth pastor is paid an annual salary of $20,000, and in addition is paid an annual housing allowance of $12,000 that he uses to rent a home for his family. Is a housing allowance considered in deciding if the youth pastor is paid on a salary basis of at least $455 per week ($23,660 per year)? The final regulations do not address this issue directly, but they do state that the value of “board” and “housing furnished for dwelling purposes” are not included. These terms may be interpreted broadly to include compensation that is provided to a minister to provide housing in lieu of a parsonage, meaning that the youth pastor in this example would not meet the $23,660 threshold for exempt status. This conclusion seems to be consistent with the purpose of the law to make the minimum wage and overtime pay protections of the Fair Labor Standards Act available to as many employees as possible. Note two additional considerations. First, the final regulations specify that “there are some workers, such as … clergy, who are statutorily exempt or whose exempt status is not affected by the increased salary requirement in the final rule,” and that “clergy and religious workers are not covered by the FLSA.” This language indicates that the position of the DOL is that clergy are not subject to the minimum wage and overtime pay requirements of the FLSA no matter how little they earn. Second, two federal appeals courts have ruled that the so-called “ministerial exception” prohibits the DOL from applying the FLSA to ministers.
“Primary duty” is defined to mean the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.
“Management” is defined to include, but is not limited to, activities such as:
The phrase “customarily and regularly” means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks.
The phrase “two or more other employees” means two full-time employees or their equivalent. For example, one full-time and two half-time employees are equivalent to two full-time employees.
The DOL regulations define an exempt “administrative” employee as any employee who is:
The final regulations contain two independent, yet related, requirements for the administrative exemption. First, the employee must have a primary duty of performing office or non-manual work “directly related to management or general business operations.” This requirement refers to the type of work performed by the employee. Second, the employee’s primary duty must include “the exercise of discretion and independent judgment with respect to matters of significance.”
The terms “salary basis” and “primary duty” apply equally to administrative employees. Here are a number of other key terms used to determine whether an individual meets the criteria as an “administrative employee.”
To meet the “directly related to management or general business operations” requirement, an employee must perform work directly related to assisting with the running or servicing of the business. Work “directly related to management or general business operations” includes, but is not limited to, work in functional areas such as
Many of these functions have no direct application to church employees, but they provide an excellent overview of the level of activity required to be “directly related to management or general business operations.”
In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The term must be applied in the light of all the facts involved in the employee’s particular employment situation, and implies that the employee has authority to make an independent choice, free from immediate direction or supervision. The fact that an employee’s decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment.
The regulations provide the following additional clarification:
The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources. The exercise of discretion and independent judgment also does not include clerical or secretarial work, recording or tabulating data, or performing other mechanical, repetitive, recurrent or routine work. An employee who simply tabulates data is not exempt, even if labeled as a “statistician.”
The term “matters of significance” refers to the level of importance or consequence of the work performed. An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly. Similarly, an employee who operates very expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of the employee’s duties may cause serious financial loss to the employer.
Example. A church wants to avoid the FLSA overtime pay requirements for its custodian (who often works more than 40 hours per week) and so it pays her an annual salary of $15,000 instead of an hourly wage. This common technique will not work under either prior law or the final regulations that took effect in August 2004. First, the custodian receives a salary of less than $23,660 per year. With few exceptions, no employee who is paid a salary of less than $23,660 can be treated as exempt from the FLSA overtime pay requirement. Second, the custodian does not meet the current definition of an exempt “administrative” employee since her primary duty is not the performance of office or non-manual work related to the management or general business operations of the employer and her primary duty does not include the exercise of discretion and independent judgment with respect to matters of significance.
Example. Same facts as the previous example, except that the church increases the custodian’s salary to $25,000 in order to avoid the overtime pay requirement. This will not work. While the salary test is met, the custodian still does not meet the “duties” requirement summarized in the previous example.
Example. A church treasurer has heard about the new DOL definitions of exempt “administrative” employees. He would like the church secretary to be an exempt employee because she works so many hours of overtime. He tells the senior pastor that if the secretary is paid a salary of at least $23,660, then the church can treat the secretary as an exempt administrative employee and avoid having to pay overtime. This advice is probably incorrect. It is possible in some cases that a secretary will meet the new definition of an administrative employee, or even an executive employee, but this will not be true in most cases. The final regulations specify that an administrative employee is one whose primary duty is performing “office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers,” and whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Most secretaries will not meet this test and so they would be nonexempt workers under the new rules. This means that they are legally entitled to overtime pay for all hours worked in excess of 40 during the same week.
DOL regulations define an exempt “professional” employee as follows:
The terms “salary basis” and “primary duty” apply equally to professional employees. The following additional key terms also help define what is meant by “professional employees”:
“Work requiring advanced knowledge” means work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment. Professional work is therefore distinguished from work involving routine mental, manual, mechanical or physical work. A professional employee generally uses the advanced knowledge to analyze, interpret or make deductions from varying facts or circumstances. Advanced knowledge cannot be attained at the high school level.
Fields of science or learning include law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in a field of science or learning.
The learned professional exemption is restricted to professions where specialized academic training is a standard prerequisite for entrance into the profession. The best evidence of meeting this requirement is having the appropriate academic degree. However, the word “customarily” means the exemption may be available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction.
KEY POINT. This exemption does not apply to occupations in which most employees acquire their skill by experience rather than by advanced specialized intellectual instruction.
The regulations create an exemption for “creative professionals” if the following conditions are met:
The terms “salary basis” and “primary duty” apply equally to creative professional employees. Other key terms include:
This requirement distinguishes the creative professions from work that primarily depends on intelligence, diligence and accuracy. Exemption as a creative professional depends on the extent of the invention, imagination, originality or talent exercised by the employee. Whether the exemption applies, therefore, must be determined on a case-by-case basis. The requirements are generally met by actors, musicians, composers, soloists, certain painters, writers, cartoonists, essayists, novelists, and others as set forth in the regulations. Journalists may satisfy the duties requirements for the creative professional exemption if their primary duty is work requiring invention, imagination, originality or talent. Journalists are not exempt creative professionals if they only collect, organize and record information that is routine or already public, or if they do not contribute a unique interpretation or analysis to a news product.
This includes such fields as, for example, music, writing, acting and the graphic arts.
Teachers are exempt if their primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity as a teacher in an educational establishment. Exempt teachers include, but are not limited to, regular academic teachers; kindergarten or nursery school teachers; teachers of gifted or disabled children; teachers of skilled and semi-skilled trades and occupations; and vocal or instrumental music teachers.
KEY POINT. The salary and salary basis requirements do not apply to bona fide teachers. They are considered professional employees regardless of the form or amount of compensation they are paid.
The final regulations state:
The possession of an elementary or secondary teacher’s certificate provides a clear means of identifying the individuals contemplated as being within the scope of the exemption for teaching professionals. Teachers who possess a teaching certificate qualify for the exemption regardless of the terminology (e.g., permanent, conditional, standard, provisional, temporary, emergency, or unlimited) used by the state to refer to different kinds of certificates.
Example. A church-operated elementary and secondary school employs several full- time teachers. Some are state certified, but others are not. Most are paid an annual salary of less than $22,100. Are any of these teachers exempt employees under the proposed regulations? The answer is yes. The regulations provide that teachers are exempt whether or not they are state-certified or licensed, and regardless of the amount of their salary.
Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.
Q: How does the FLSA treat ministers?
A: Professional employees are exempt from FLSA, and this would include ministers so long as they meet the minimum salary test ($455/week).
Q: What about ministers who earn less than $455/week, or who are not paid on a salary basis?
A: Ministers not compensated on a salary basis, or who earn a salary below the salary test, may not be covered by the Act. Department of Labor regulations suggest that the Act does not apply to any ministers, and a few federal courts have ruled that the so-called ministerial exception prevents the application of the Act to ministers.
This article first appeared in Church Finance Today , November 2008.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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