In April 2018, the California Supreme Court issued a sweeping opinion that forever changed the “rules” concerning independent contractors and employees. The common law (rules established by court rulings in the absence of legislated law) in California has always presumed that a paid worker is an employee rather than an independent contractor. There have been several different “tests” established by the US Department of Labor, the Internal Revenue Code and California law, each of which differs from the other in various ways, but all of which seek to establish how independent contractors are differentiated from employees. Of all church workers, only pastors and certain “ministerial” employees are exempt from the tests because they have dual status under the law as both employees and self-employed.
In a case known as Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018; 4 Cal.5th 903), when on appeal to the California Supreme Court, the justices broke new ground in the common law by creating yet another “test” to determine who is an independent contractor. In 2019, a bill was introduced into the Assembly which would codify and expand the definitions of who is an employee in the state of California.
The bill will not alter the playing field for churches as it stands today. However, most churches have long been violating California and federal law by paying certain workers via “love gifts” and “honoraria” or what, by any other name, is considered wages, which those churches believe are non-taxable. The usual reason is the church’s desire not to have to pay the employer’s share of FICA (Social Security Retirement and Medicare contributions, equal to 7.65% of gross wages).
Churches are exempt from paying other employment taxes such as unemployment insurance or collecting state disability insurance premiums from employees, but they do not get a pass from paying minimum wage. Frequently, churches violate state or local minimum wage laws when they pay musicians or other church workers (typically custodians, maintenance workers or volunteers who serve as clerical or nursery staff) nominal amounts that do not equate to minimum wage for the number of hours worked.
Of great concern are those churches that compensate volunteers for their efforts. A volunteer is a person who performs services on behalf of the church “with no expectation of compensation” whatsoever. When a church announces that, “All who show up for the work day on Saturday will receive a $20 gift card” or something similar other than an on-site meal, those volunteers are now coming to the church on Saturday with “an expectation” of being compensated in exchange for their labor. The church has just hired employees who must be paid minimum wage, be covered for workers’ compensation claims, have FICA deducted from wages and paid to the federal government along with the church’s portion as their employer, and the church is responsible for obtaining a signed and verified USCIS Form I-9, as well as an IRS Form W-4 from each new “employee.” The same is true for each member of the worship team who is paid to perform on Sunday.
“But they are volunteers” or “We consider them independent contractors” are the most common responses. And they’re wrong. Even before the Supreme Court’s new “ABC” test last spring, those statements were generally wrong. Today, they are more clearly wrong.
Any person who fails one or more of ALL THREE PARTS of the test is considered an employee. Simply put, the three-part ABC test established in the Dynamex decision is:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
Here’s why your church musicians are not independent contractors. First, they are NOT “free from the control and directions” of the church. They cannot choose when to show up to play music, they (typically) are not free to choose what music will be played or how, and they are not free to leave whenever they wish.
Second, the work musicians are performing for the church is NOT “outside the usual course” of the church’s “business,” which is worship. I know of no church that does not consider music to be an integral part of its Sunday worship service.
Truly independent contractors are in control of the work they perform, their choice of methods and time to complete the work, and usually have an established business, such as a plumber, painter, landscaper, caterer, etc. They are not “dependent” solely on the church for their income. Because church musicians fail tests A and B, it makes no difference if they are professional musicians, that they are using their own instruments or that they routinely perform together as a band in other venues.
When you give those musicians $25 or $50 to perform each Sunday, are you counting the number of hours they are on site? Are those dollars greater than minimum wage for the number of hours worked? For example, the musicians must arrive around 8 a.m. to set up in order to be ready for rehearsal at 8:30, which lasts an hour, and will be on stage when worship begins at 10:30, which means they must report prior to 10:30. They will perform for 15 or 20 minutes, and return to the stage at 11:20 for the final set, which lasts 10 minutes, then they must break down their set-up and pack up their instruments before they can leave.
To be considered a “rest break,” time not working must be “duty-free.” Are the musicians free to roam from 9:30 to 10:20, or are they expected to be in a Sunday School class? If they are not free to roam, they remain “on the clock” for purposes of compensation. During the worship hour, between sets, are they free to roam or are they expected to sit in the auditorium? If they are not free to roam, they remain on the clock.
If, by the time everything is packed up and the musicians are free to leave, it is noon, the musicians may have been on the clock for up to four hours (technically, they are also owed a 30-minute meal break, but that can happen at the end of their “workday” without being subject to an hour of “penalty pay”). At $11 per hour (the minimum wage in most of the state), if their compensation was less than $44, the church has violated minimum wage law. If you paid them $50, you might be OK as far as the amount they were “owed.” But you still need to deduct FICA from their pay, and pay that and the church’s portion as well to the IRS. Each musician’s net pay would be $46.17, and the total FICA bill would be $7.65 per musician.
Did they get a 10-minute duty-free rest break? If not, they are each owed an additional $11 as “penalty pay.” Now the $50 they were paid as gross wages is $5 short of what they were owed, another “wage theft” violation. Is the church reporting those wages as part of its workers’ compensation premium audit? If not, that can be considered workers’ comp fraud, a criminal and civil offense.
Does the church pay one of its members to clean up the facilities before or after worship and other events? That person is an employee unless he or she owns a janitorial service and has contracted to provide those services to the church. Keeping the church clean is part of the “usual course” of the business of running a church. A person who performs landscaping services for the church is not dissimilar. Are you paying nursery workers to watch the kiddies during worship? They are employees. In each of these circumstances, you must be keeping track of time worked, rest and meal breaks, and making sure the amount you are paying equals minimum wage. And, of course, there is FICA to be collected and paid.
Churches are the perfect place for volunteers to serve … as long as they remain volunteers.
Does your church have a benevolence fund? Do you offer benevolence in exchange for service to the church? If so, you have created an employee, and both the benevolence and the compensation due for the time worked are taxable wages. This quid pro quo is a dangerous game, and the church will lose every time it chooses to play. If you did not pay minimum wage, you employed a slave – something outlawed in the US more than 150 years ago.
There is no way to side-step this ABC test. There is no way to “recharacterize” taxable wages as some sort of tax-free payment. “Love gift” does not work. “Honorarium” does not work. “Token of appreciation,” unless it truly is a one-time, unexpected thing, may not work. (We want our churches to get out of the “love gift” business altogether – most have abused the term by not recognizing the payments as taxable income for the recipient, particularly when the recipient is an employee of the church, including the pastor.)
Your church cannot report employee compensation on Form 1099. Every employee must receive a Form W-2 at year-end, and the church must file Form W-3 and copies of each W-2 with the Social Security Administration. Every true independent contractor who is not incorporated (or organized as an LLC or LLP) must receive a Form 1099-MISC if the total amount they were paid by the church in a calendar year is $600 or more, and the church must file a copy of the 1099 with the IRS. There are substantial financial penalties for failure to furnish and file these forms.
Your church’s board of directors/trustees is responsible for making sure the church is compliant with all state and federal laws. Each officer and board/trustee member can be held personally liable for the church’s civil and criminal malfeasance. This is serious stuff, and the CSBC Human Resources and Church Compliance Ministry is here to help keep your church out of trouble. If there is anything in this article you do not understand, please do not hesitate to contact us!