Don't misclassify employees as contractors!

Employees misclassified as contractors can result in penalties and criminal charges

Max H Herr

6/27/20225 min read

Misclassifying Employees as Contractors can result in "wage theft"

Like a dentist probing your mouth with that pointy spear of his, challenges involving payroll matters seem to touch the same nerve! I regularly receive phone calls and emails concerning independent contractors vs. employees and employees vs. volunteers. Some churches and ministries believe paying fixed salaries instead of hourly wages will avoid overtime wages. And if everyone is considered an independent contractor, then we don't have to worry about withholding anything from their pay.

Let’s clear the air . . . the church is an employer. As an employer, it is subject to most of the same “wage and hour” laws and regulations as McDonald’s, Boeing, Apple Computers, or any other business. When the church pays wages to an employee other than its pastor and ordained ministers on staff, it must withhold federal and state income taxes and Social Security and Medicare (FICA) contributions, and it also pays the employer share of FICA. There is no religious exemption from this, and your pastor might not be exempt from overtime wages. Jesus counseled that paying taxes is the privilege of being a Christian in secular society.

Dozens of federal and state regulations have serious consequences for the church when violations occur. Churches are notorious for not documenting employees’ working hours, and openly allowing “off-the-clock” work. California has had a mandatory paid sick leave law since 2015, yet even today there are churches that still fail to provide paid leave to their eligible employees. The church is also exposed to substantial “penalty wages” and administrative fines when it fails to enforce mandatory rest and meal breaks. This is all serious stuff. Workers' compensation insurance premiums are based in part on payroll, and underreporting payroll is a crime.

Churches often insist that paying anyone a set “salary” avoids having to keep track of work hours and overtime wages.

Not true.

Some try to argue that worship musicians who are paid $25 or $50 to rehearse and play a few songs on Sunday are not employees, but are volunteers, and their payments are merely “love gifts” not wages. But the definition of a volunteer is "a person who provides services without expectation of any kind of compensation." “Volunteers” who receive compensation – particularly those “love gifts” which the IRS defines as “income” – are most likely “employees” and those “gifts” are highly likely to fail to meet mandatory minimum wage or overtime requirements.

Only certain high-level workers may be classified as "exempt" from overtime, and then only if their salary is at least the minimum requirement (two times the minimum hourly wage times 40 hours time 52 weeks = $58,240 in 2022 (and increasing to $62,400 in 2023). There is no "pro-rated" wage for part-time managerial employees who would be exempt if they worked full-time.

Although the U.S. Department of Labor or the California Department of Industrial Relations are unlikely to randomly audit most churches' payroll accounting on their own initiative – they typically react to complaints or "tips" rather than actively investigate – nothing prevents them from doing that! If either were to receive a wage complaint from an employee or volunteer or a parent, be assured they will show up and ask to see your Employee Handbook, your timekeeping records, and all policies that apply to the person's complaint.

How will your church respond? Does yours even have an Employee Handbook or Policies & Procedures Manual? Poorly written or incomplete job descriptions, employee handbooks, and policies & procedures manuals are trouble your church cannot afford. The church cannot say, “We didn’t know . . . .”

On top of all this, effective January 1, 2020, California codified a new "test" most employers must use to determine who is an independent contractor. AB 5 was signed into law by Governor Newsom in September 2019, and this legislation spells out an "A-B-C test" that defines contractors. The law assumes that all workers are EMPLOYEES unless the employer can establish that the worker satisfies all three tests. Here are the three tests:

  • (A) the worker is free from control and direction in the performance of services; and

  • (B) the worker is performing work outside the usual course of the business of the hiring company; and

  • (C) the worker is customarily engaged in an independently established trade, occupation, or business.

The reality for churches is that AB 5 really didn't change anything – it just made the problem more obvious.

So what exactly does this mean for your church or ministry?

In my experience, there are four types of paid workers that churches have historically misclassified as independent contractors in order to avoid payroll compliance: musicians, custodians, clerical staff, and childcare workers. Does this sound familiar to you? It is not uncommon to find churches are paying one or more of their worship musicians, or a worship leader, $25 to $100 or more for their services on Sunday for a few hours of work, often describing the payment as a "love gift." Some pay a member of the church to do the housekeeping and/or landscaping chores each week so that the restrooms, worship auditorium, fellowship hall, and classrooms are clean and ready for worship on Sunday morning, and the grass has been mowed. Sometimes the church needs a person to perform secretarial duties just a few hours each week and pays them $25 or $50 for their labor. The same might be true when it comes to staffing the nursery on Sunday morning or Wednesday evening with one or two childcare workers.

The reality is that each of these persons is an EMPLOYEE – none are contractors. Another way to understand this is that most contractors are paid with checks written in the name of their business, not in the name of an individual. None are "free from control and direction" of the church. All are performing work "within" the usual course of the church's business. And none of them is likely to have established his or her own independent business (if they have, is the church their only customer?). If any one of the three A-B-C tests is failed, the worker is an employee.

Now you have to look at what each person is being paid, how many hours they each work, and determine if they are receiving at least the minimum hourly wage for your community and number of employees, and whether they are receiving their rest and meal breaks, and accruing paid sick leave.

Oh! One more thing . . . are they all getting proper wage reports ("pay stub") with each paycheck?

Upon closer inspection, the church could be guilty of multiple state law offenses, beginning with wage theft and ending with workers' compensation insurance fraud, not to mention federal violations for not withholding income tax or Social Security and Medicare contributions.

For many years, I have been encouraging churches to treat their volunteers as if they were employees. Write job descriptions, policies & procedures, even develop a "personnel handbook" that covers their roles and responsibilities. But churches that misclassify employees as independent contractors are now at great risk of violating California's Labor Code and Penal Code, which means not only the possibility of fines and other penalties, but that someone could go to prison for a felony crime.

Does your church have a potential misclassification problem? Have any questions? Need some assistance? We're here to help . . . 24/7.

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