Whether a church, as an employer, is in California or any other state, there is no bright-line test to determine when a worker should be classified as an employee rather than an independent contractor.
Pastors, in particular, may be employees and, at the same time, considered self-employed for tax purposes under federal and state laws. For example, the federal Internal Revenue Service and the U.S. Department of Labor use different, although similar, analyses. In fact, the array of tests defining independent contractor status applied across federal and state laws makes it possible for a worker to be classified as an independent contractor under one law and an employee under another. To minimize legal risk, churches should ensure that classification as an independent contractor satisfies every test that may be applicable where the organization does business.
In California, several state agencies are involved with the determination of independent contractor classification, including the Employment Development Department, which is concerned with employment-related taxes; the Division of Labor Standards Enforcement (DLSE), which is concerned with the application of wage and hour laws; the Franchise Tax Board; the Division of Workers’ Compensation; and the Contractors State Licensing Board. Since different laws may be involved in any given situation — for example, a termination of employment — it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law.
There is no set definition of the term “independent contractor,” and churches must look to the interpretations of the courts and enforcement agencies to decide if a worker is an employee or independent contractor in each situation. California’s DLSE starts with the presumption that the worker is an employee. However, the actual determination of whether a worker is an employee or an independent contractor depends on a number of factors, all of which must be considered and none of which is controlling by itself.
In 2018, a groundbreaking decision by the California Supreme Court dismissed the former “economic realities” test adopted in S.G. Borello & Sons Inc. v. Dept. of Industrial Relations (1989) and issued a new “ABC” test in Dynamex Operations West, Inc. v. Superior Court.
The Court’s new ABC test requires all three of the following to be met for an individual to be classified as an independent contractor:
(A) Free from the control and direction of the church regarding the performance of the work
This is a common standard used by many enforcement agencies and one with which churches may or may not be familiar. A worker who is subject to the same type and degree of control over work performed as an employee would likely also be considered an employee.
(B) Outside the usual course of the hiring entity’s business
Simply allowing an individual to set his or her own hours and place of work is not sufficient to justify independent contractor status if the worker’s role would “ordinarily be viewed by others as working in the hiring entity’s business” rather than the worker’s own independent business. The court provided examples such as a plumber or electrician performing repairs in a retail store as unrelated to the store’s usual course of business. In contrast, a clothing manufacturer hiring a seamstress to make dresses from home using cloth and patterns provided by the company, or a cake decorator working on custom-designed cakes for a bakery, are clearly part of each company’s usual business operations.
(C) Customarily engaged in an independently established trade, occupation or business
Independent contractors will generally be in business for themselves and will perform similar work for different companies using special expertise and/or equipment the hiring company does not possess. A worker must make the independent decision to be self-employed through incorporation, licensure, advertisements, etc., rather than labeled as such by a hiring company. A church member who is paid to handle the church’s accounting, but who does so at home, is likely to be an employee unless he/she also provides accounting services for other businesses as a home-based occupation.
In addition, when determining whether a worker is an employee or independent contractor in California, the existence of a written agreement purporting to establish an independent contractor relationship is not determinative; the fact that a worker is issued a 1099-MISC form rather than a W-2 form is also not determinative with respect to independent contractor status.
Churches are placing themselves at risk by misclassifying workers, including certain volunteers, as independent contractors when they pay musicians for performing during Sunday worship, or persons working in the church nursery, or an unemployed church member to perform “handyman” or janitorial jobs around the church. These are not likely to pass all three ABC tests, and are, instead, employees of the church. Musicians, in particular, even though they use their own instruments, are typically not independent contractors because they are under the direct control of the church – they are not free to show up at any time of their choosing and they are frequently told what music they will be playing, and they are performing during the “usual course of the employer’s business” … worship.
Additionally, volunteers can inadvertently become employees when there is an expectation of compensation that comes along with the work. Using the example of an unemployed church member, the church might want to provide some form of benevolence in exchange for the person’s labor. Don’t!
This quid pro quo arrangement creates an employment relationship subject to minimum wage and other laws governing employment, such as rest and meal breaks. On the other hand, the church can buy lunch for a volunteer work crew, or pay for meals and lodging for a volunteer mission team, without creating an expectation of compensation for the work they perform.
Nursery workers should never expect to be paid – by the church or by parents – for their service. The church should not take a “love offering” to be given as compensation, and parents should never be “encouraged” to “give a gift” to the nursery workers, because this creates an expectation of compensation and most likely makes the workers employees of the church. A parent is not prohibited from voluntarily giving a nondeductible personal gift to a nursery worker, so long as there is no expectation on the part of parent or worker that it will (or must) be given in exchange for watching a child.
Anyone receiving compensation who must be classified as an employee is subject to federal and state income tax withholding, FICA and workers’ compensation, in addition to California minimum wage laws and other requirements, and the church is responsible for the employer’s share of FICA contributions. The church must have I-9 and W-4 forms on file for each employee, and issue W-2 wage statements.
Churches are encouraged to review all volunteer positions, any independent contractor relationships, and reclassify any worker as an employee accordingly.
For more information or assistance, contact the HR & Church Compliance ministry at 559-256-0858 or firstname.lastname@example.org.
Certain content in this article is posted with permission from SHRM.