Misclassifying employees exposes an employer to fines payable to the state, and unpaid wages and penalties payable to current and former employees. Churches are not immune from prosecution for “wage theft” that occurs when employees are not properly paid for their work. This can include misclassification of an employee as an independent contractor, or misclassification of an employee as exempt from overtime.
If found guilty of wage theft, an employer will likely have committed a felony and may be sentenced to state prison. For a church, the criminal sanction could be applied to any member of the board of directors, possibly the church treasurer, or whomever else is held responsible. So far, the state has only prosecuted one business owner for wage theft. Your liability insurance generally provides no protection against criminal acts, including providing a defense.
Independent contractors vs. employees
A church cannot simply classify a person as an independent contractor and issue a 1099-MISC at year-end instead of treating him or her as an employee. There are strict tests used to determine the difference. An instant test, which can prove useful in most situations, is the answer to this question: On whom does the individual rely for his or her economic security?
- Independent contractor
An independent contractor is normally dependent on himself for his income – he bears the risk of not being paid for his work. He seeks jobs, uses his own tools, has discretion to choose what work to perform and when to perform it, and frequently exercises independent judgment in determining the best methods and materials for completing the work and where to purchase them. If he doesn’t work, he doesn’t get paid. When he does work, he can often charge whatever he wants. Although his services could be terminated if he fails to perform satisfactorily, no one can “fire” him. He probably doesn’t pay into the federal unemployment insurance system or the state disability insurance system, and is not covered under workers’ compensation laws. If the company failed to pay for services rendered, the contractor can take a breach of contract claim to court. The state has no direct interest in the outcome of the matter.
- Church Employee
An employee is economically dependent on her employer and normally has no freedom to determine her own schedule. Her employer tells her what days she must be at work and when, and perhaps what to wear (or not wear). She normally uses tools and equipment provided by her employer at her employer’s place of business, or at her employer’s direction when not at the company’s principal place of business. She is told how much she will be paid for her work, and she might earn more or less than a coworker performing the same functions and tasks. She may have a set of rules or procedures to follow, some of which are optional, but choosing the options is not really exercising discretion or independent judgment. She might supervise several other employees, but essentially does the same work as they do more than half the time.
- Paid Musicians
In the context of the church, paid worship musicians are almost certainly employees and not independent contractors. They report for rehearsal at the time they are told and play the songs the worship leader has selected; they perform on stage at the time the church has determined it will worship, and despite the fact that they may be using their own guitars, trumpets, drums, keyboards or other instruments, they are probably plugged into the church’s sound system. They do not exercise discretion or make independent judgments. They must be paid the prevailing minimum hourly wage, and receive rest and meal breaks depending on the number of hours "on the job."
Custodians can be problematic. If the church hires someone to clean the floors, vacuum, empty the trash, tells the person when to do it, and provides all the tools and supplies, that person is probably an employee who needs to be paid at least the minimum hourly wage and must be covered for workers’ compensation claims. If the church simply hands the person a key and says, “We expect everything to be clean and ready to go by 8 a.m. on Sunday morning. Here is the list of things we want done,” and the two parties agree on the amount of work and compensation, but the individual determines for himself when to perform the work and uses his own tools and equipment, that custodian is almost certainly an independent contractor.
- Paying church members
Paying church members to perform odd jobs around the church, as a temporary vacation substitute for a full-time employee, or to work in the nursery on Sunday mornings, will almost always be considered employment, not independent contracting, primarily because the work is under the direction and control of the church, without discretion or independent judgment, and the worker will need to file Form W-4, Form I-9, and will receive a Form W-2 at year end. And any employee paid an hourly wage is NEVER exempt from overtime.
What is an exempt employee? One who is not subject to payment of overtime wages. So who is an exempt employee of the church? There are only a few who meet and satisfy the executive or administrative tests for exemption from overtime. Directing or supervising the work of two or more [full-time] employees will almost always be considered a requirement, as is exercising independent judgment and discretion. Failure to meet the test will typically hinge on not directing two or more employees (the state will ask, "Who is doing the nonexempt work?"), not having a role in hiring or firing for the executive test, or the list of duties the employee is expected to perform for the administrative test.
Executive & Administrative Exemptions
In order to qualify for the “executive” exemption, an executive is one:
- Whose duties and responsibilities involve the management of the enterprise in which he or she is employed or of a customarily recognized department or subdivision thereof; and
- Who customarily and regularly directs the work of two or more other employees therein; and
- Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees will be given particular weight; and
- Who customarily and regularly exercises discretion and independent judgment; and
- Who is primarily engaged in duties which meet the test of the exemption.
- An executive employee must also earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Full-time employment means 40 hours per week as defined in Labor Code Section 515(c).
To meet the test of an “administrative” exemption, one’s duties and responsibilities involve either:
- The performance of office or non-manual work directly related to management policies or general business operations of his or her employer or his or her employer’s customers, or
- The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and
- Who customarily and regularly exercises discretion and independent judgment; and
- Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity, or
- Who performs, under only general supervision, work along specialized or technical lines requiring special training, experience or knowledge, or
- Who executes, under only general supervision, special assignments and tasks, and
- Who is primarily engaged in duties which meet the test for the exemption.
- An administrative employee must also earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Full-time employment means 40 hours per week as defined in Labor Code Section 515(c).
Pay particular attention to the words “customarily and regularly exercises discretion and independent judgment” – these have special meaning. This phrase means the comparison and evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered.
The employee must have the authority or power to make an independent choice, free from immediate direction or supervision and with respect to matters of significance.
According to the state Department of Industrial Relations’ Division of Labor Standards Enforcement (DSLE), with respect to the administrative exemption, this phrase has been most frequently misunderstood and misapplied by employers and employees alike in cases involving:
- Confusion between the exercise of discretion and independent judgment, and the use of skill in applying techniques, procedures or specific standards.
- Misapplication of the phrase to employees making decisions relating to matters of little consequence.
- Perhaps the most common misapplication is the application of the exemption to employees engaged in production aspects of the employer’s business as opposed to administrative functions.
Understand also that job titles mean little or nothing to the State when it comes to classifying an employee as exempt under the executive or administrative exemption. The church can name anyone a “minister” but that doesn’t mean they perform ministerial duties, and, even then, only some ministers will qualify as executives or administrators according to the five-part or four-part tests above.
To be classified as exempt, an employee must be paid a salary; however, any salaried employee who fails to meet the minimum compensation requirement will not be exempt. There is no "pro-rata" reduction in the Minmum Annual Wage paid to an exempt employee who does not work a 40-hour week. For example, a church administrator who satisfies all of the administrative employee tests, but who only works 30 hours per week, must still be paid at least $43,680 or $45,870 in wages in 2018. If paid less than the required annual amount, the employee is NOT exempt from overtime.
Here is the chart of state minimum wages based on the number of employees (full and part-time combined) from 2018 to 2023. The minimum annual wage is the amount required to be paid to an exempt employee:
|Minimum Hourly Wage||Minimum Annual Wage|
|Year||25 or fewer||26 or more||25 or fewer||26 or more|
Future Increases will be tied to inflation.
Certain cities and unincorporated areas of some counties have higher minimum hourly wage rates -- there are 19 different minimum wages throughout California in 2018. Local minimum wages do not alter the state minimum annual wage for exempt employees which is based solely on the applicable state minimum hourly wage.