Parachurch Organizations & Housing Allowance Wednesday, Sep 4 2013 

Contributed by Katheryn Magill, Legal Assistant

Nothing in the following article should be relied upon as legal advice.

Parachurch organizations seeking to provide an ordained minister employee with a housing allowance that is exempt from taxation should first consider the question of legal qualification and second take care to follow proper procedure.

An ordained parachurch employee may be qualified to withhold a housing allowance from their gross taxable income if they meets one of three possible tests.

First, they might qualify if the ordained employee is acting on direct assignment by their church or denomination, even if their work for the organization is other than that ordinarily considered the work of a minister of the gospel.[1]

Second, they might qualify if the parachurch organization itself has a close affiliation with a church or denomination.  An organization is deemed to be under the authority of a church or denomination if it is “organized and dedicated to carrying out the tenets and principles of a faith in accordance with either the requirements or sanctions governing the creation of institutions of the faith.”[2] Furthermore, the connection should be demonstrable by things such as input into management, the ability to remove directors, the legal right to require annual reports, and financial support.[3]

Third, an ordained parachurch employee might qualify for an exempt housing allowance even if he is not on direct assignment from his church or employed by an organization with a close affiliation to a church if his duties include services ordinarily undertaken by a minister of the gospel.  These services might include things such as administering the sacraments, leading a worship service, or preaching,[4] but the specifics will vary depending on the faith tenets and practices of the faith the particular religious body constituting his church or church denomination.[5]

If it has been determined that the employee is eligible to exclude a housing allowance from his taxable income, care must be taken to ensure the proper procedure is followed.  There must be a documented action by the parachurch organization’s Board of Directors designating the amount of money as a housing allowance in advance of payment.[6]  This amount may be designated in the annual budget or an official designation may be recorded in a board meeting’s minutes.

[1] Treas. Reg. § 1.1402(c)-5(b)(2)(v).

[2] Treas. Reg. § 1.1402(c)-5(b)(2)(ii).

[3] Toavs v. Commissioner, 67 T.C. 897, at 904-905 (1977).

[4] Mosley v. Commissioner, T.C. Memo 1994-457.

[5] Treas. Reg. § 1.1402(c)-5(b)(2)(i).

[6] Treas. Reg. § 1.107-1(b).

Minimum Wage Requirements as they Apply to Churches Saturday, Aug 1 2009 

On July 24, 2009, the federal minimum wage increased from $6.55 to $7.25 for those covered by the Fair Labor Standards Act (FLSA).  Where the state and federal minimum wage both apply but differ, the federal rate will apply when higher.  Some states have a higher minimum wage, some lower, and some mirror the federal rate.  Another major provision for employees under the FLSA is time and a half pay for work done in excess of 40 hours a week.

When does the FLSA apply?

Application of the Fair Labor Standards Act

There are two general cases under which an employee is covered by the FLSA rules:

  • Enterprise Basis – All employees working for organizations that engage in interstate commerce and that do at least $500,000 of business each year are covered.  Also included are all employees of hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies.
  • Individual Basis – All employees whose work regularly involves them in “interstate commerce” are covered.  This includes employees that regularly phone, mail, or travel out of state.  Also most “domestic service workers,” such as day workers, housekeepers, chauffeurs, cooks, or full‑time babysitters are included.

It has not always been clear to what extent the FLSA affects churches and other nonprofits.  The “Enterprise Basis” can apply to a church that brings in over $500,000 a year in activities that compete with for-profit business, such as the rental income provided from leasing their facilities to others.  Many churches run schools, which also puts them under the “Enterprise Basis.”[i] Under the “Individual Basis” church employees are regularly doing activities that can be construed as interstate commerce, such as telephoning, mailing, or traveling out of state.  In addition, most churches have domestic service workers that would be covered by the Act.

If these organizations are involved in interstate commerce, they are not exempt from the FLSA rules on the basis of their tax-free status.  The Supreme Court in Alamo Foundation v. Secretary of Labor[ii] was referring to the FLSA when it stated, “[T]he statute contains no express or implied exception for commercial activities conducted by religious or other nonprofit organizations, and the agency charged with its enforcement has consistently interpreted the statute to reach such businesses.”[iii]

But how do churches know whether they are engaging in “interstate commerce?”

One view comes from Kathleen Turpin, an expert in employment law and author of Working Together, A Guide to Employment Practices for Ministries.  She recommends asking the following questions to help churches determine if the FLSA applies to them:

  • Do we order teaching materials or other supplies from out of state?
  • Do we send newsletters or other information to people out of state?
  • Does anyone on staff travel out of state as part of their job?
  • Does our ministry have a Website where people out of state order items?

According to Turpin if the answer to any one of these questions is in the affirmative, the organization is probably engaging in interstate commerce and needs to comply with the FLSA.

Possible Exemptions for Clergy & Other Religious Workers

Even if an organization’s employees are determined to be engaging in interstate commerce, some of its employees may yet be exempt from FLSA coverage.  One exception is found in the language of the FLSA which excludes “administrative, executive, and professional employees.”  The Dept. of Labor explains that this generally includes those that would otherwise be covered by the FLSA but earn at least $455 a week on a salaried basis.  Because this category is already above the minimum wage, the only noticeable difference from being covered under the Act is the lack of required overtime pay.

The 4th Circuit Court has also recognized a “ministerial exemption” to the FLSA, first argued in Shenandoah Baptist Church[iv] and discussed more fully in the 2004 case of Shaliehsabou v. Hebrew Home of Greater Wash., Inc.[v] The exemption can exclude a member of the clergy from being an “employee” within the FLSA meaning.  The notion of this exemption derived from a debate on the floor of Congress that was later delineated in some guidelines issued by the Dept. of Labor’s Wage and House Administrator.[vi] The relevant portion of those guidelines provides:

“Persons such as nuns, monks, priests, lay brothers, ministers, deacons, and other members of religious orders who serve pursuant to their religious obligations in schools, hospitals, and other institutions operated by their church or religious order shall not be considered to be ‘employees.’”[vii]

The 4th Circuit went on to use Title VII descriptions of “ministerial duties” to come up with the “primary duties” test to determine whether the exception applies.  They focused on “the function of the position,” rather than whether the person was formally ordained.  “[A]s a general rule, if the employee’s primary duties consist of teaching, spreading the faith, church governance, supervision of a religious order, or supervision or participation in religious ritual and worship, he or she should be considered ‘clergy.’”[viii]

Therefore, even though the clergy of a church are not covered by the FLSA due to the “ministerial exemption,” exemptions to the general rule are construed narrowly, and other employees may be covered by the FLSA.  Thus regarding these employees, the church is obliged to comply with minimum wage and overtime regulations.

Volunteers Not Covered by FLSA

Although the definition of “employee” under FLSA (found in Title 29 § 203 of the U.S. Code[ix]) is more sweeping than its use in other government regulations (such as ERISA), it does not include those who volunteer their time to a charitable organization.

There is not a specific exemption mentioned in the FLSA for church or charity volunteers in the private sector but the enforcers of the FLSA have interpreted it as if there was such an exemption.[x] But it is important to note that even if workers consider themselves “volunteers,” their intent alone will not exclude them from FLSA rules if they are accepting some other form of compensation.  In the Alamo case, former drug addicts who were working for free for the organization, considered themselves volunteers, but they were also residing there for free.[xi] This benefit transformed the workers from the “volunteer” category to “employee status.”[xii]

Churches thus need to be aware of the ramifications associated with rewarding volunteers for their labors.  Volunteers may be compensated for reasonable expenses directly associated with their work (gas money, etc) and accept small conveniences on the job (such as meals) as long as benefits in lieu of compensation do not exceed $500 a year.   If an organization is overly compensating its volunteers, it becomes seen as an employer in the eyes of the government, and the organization could face actions by the worker or the Dept. of Labor for not complying with FLSA wage laws.

[i] Dole v. Shenandoah Baptist Church, 899 F.2d 1389 (4th Cir. 1990).

[ii] Alamo Foundation v. Secretary of Labor, 471 U.S. 290.

[iii] Id. at 296-7.

[iv] Shenandoah Baptist Church, 899 F.2d 1389 (4th Cir. 1990)

[v] Shaliehsabou v. Hebrew Home of Greater Wash., Inc., 363 F.3d 299

[vi] Shaliehsabou, at 305.

[vii] Id.

[viii] Id., quoting Bruce N. Bagni, Discrimination in the Name of the Lord: A Critical Evaluation of Discrimination by Religious Organizations, 79 Colum. L. Rev. 1514, 1545 (1979).

[ix] Fair Labor Standards Act – Title 29 § 203(e)(1) Except as provided in paragraphs (2), (3), and (4), the term “employee” means any individual employed by an employer;  (g) “Employ” includes to suffer or permit to work.

[x] Walling v. Portland Terminal Co., 330 U.S. 148 at 152, stating “Section 3(g) of the Act defines ’employ’ as including ‘to suffer or permit to work’ and § 3(e) defines ’employee’ as ‘any individual employed by an employer.’ The definition ‘suffer or permit to work’ was obviously not intended to stamp all persons as employees who, without any express or implied compensation agreement, might work for their own advantage on the premises of another. Otherwise, all students would be employees of the school or college they attended, and as such entitled to receive minimum wages. So also, such a construction would sweep under the Act each person who, without promise or expectation of compensation, but solely for his personal purpose or pleasure, worked in activities carried on by other persons either for their pleasure or profit. But there is no indication from the legislation now before us that Congress intended to outlaw such relationships as these. The Act’s purpose as to wages was to insure that every person whose employment contemplated compensation should not be compelled to sell his services for less than the prescribed minimum wage. The definitions of ’employ’ and ’employee’ are broad enough to accomplish this. But, broad as they are, they cannot be interpreted so as to make a person whose work serves only his own interest an employee of another person who gives him aid and instruction.”

See also Alamo, at 295 stating, “An individual who, without promise or expectation of compensation, but solely for his personal purpose or pleasure, works in activities carried on by other persons either for their pleasure or profit, is outside the sweep of the Fair Labor Standards Act.”

[xi] Alamo, at 293, stating “[T]he associates who worked in these businesses were ‘employees’ of the Alamos and of the Foundation within the meaning of the Act. The associates who had testified at trial had vigorously protested the payment of wages, asserting that they considered themselves volunteers who were working only for religious and evangelical reasons. Nevertheless, the District Court found that the associates were ‘entirely dependent upon the Foundation for long periods.’  Although they did not expect compensation in the form of ordinary wages, the District Court found, they did expect the Foundation to provide them ‘food, shelter, clothing, transportation and medical benefits.’”

[xii] Alamo, at 290, stating “The Foundation’s associates are ‘employees’ within the meaning of the Act, because they work in contemplation of compensation. Walling v. Portland Terminal Co., 330 U.S. 148, distinguished.  The fact that the associates themselves protest coverage under the Act is not dispositive, since the test of employment under the Act is one of ‘economic reality.’  And the fact that the compensation is primarily in the form of benefits rather than cash is immaterial in this context, such benefits simply being wages in another form.”