General Employment Law for Religious Organizations

Vol. 1, No. 6

Ann T. Stillman is Vice President and General Counsel of Concordia Plan Services, which administers the benefit programs for workers of The Lutheran Church—Missouri Synod (LCMS).

     

    Adapted from Guide to Representing Religious Organizations

     

    • Federal law has much to say about how religious organizations employ people.
    • Employers should clarify in writing beforehand whether a worker is an employee or a volunteer.

    Religious organizations, like other employers, are regularly beng thrust into costly and time-consuming employment disputes. These disputes can result from many factors, including 1) ignorance or a misunderstanding of employment law, 2) limited funds, 3) leniency towards issues until a “problem” arises, and 4) inadequate staffing. The importance of religious organizations understanding and appropriately applying employment law principles cannot be overemphasized. Educating supervisors about employment law, and its application to churches and other religious organizations, can help avoid such disputes by eliminating one of the factors that can lead to disputes.

    Supervisors should be aware of all levels of employment law applicable to the religious organization: federal, state and local. This article explains the application of federal employment law to religious organizations. For information on applicable state and local law, a local attorney should be consulted.

     

    The Employment Relationship

    Understanding the relationship between a religious organization and its employees is essential to an understanding of the application of employment law to such organizations. Who are the organization’s employees, though? It sounds like a simple question, but for religious organizations, which often have strained budgets, the distinction between employees and volunteers sometimes is unclear. For example, a church secretary, who is paid for his or her secretarial services, also may donate time to the church as an usher.

    The lack of clarity about employees versus volunteers is unique to nonprofit organizations. Under the Fair Labor Standards Act, employees may not volunteer services to for-profit employers.1 This prohibition does not apply to nonprofit organizations,2 which is the classification that applies to the vast majority of religious organizations.

    In addition, some individuals work for religious organizations as independent contractors, rather than as employees. Employment laws are applicable to employees (and applicants for employment), rather than to volunteers or independent contractors. Thus, it is important to understand the distinctions between employees, volunteers, and independent contractors.

     

    Employee Versus Volunteer

    In basic terms, the distinction between an employee and a volunteer is that an employee is paid for time worked, while a volunteer is not. Ideally, a religious organization should clarify a worker’s position as an employee or volunteer prior to commencement of work. Preferably, the clarification should be done in writing. The written clarification may be as elaborate as a set of employee or volunteer policies with an acknowledgment, or as simple as a short form letter confirming a volunteer relationship, or an annual volunteer thank-you letter.

    For a worker who serves both as an employee and a volunteer, the organization must separate those roles and keep records with respect to each. The volunteer time truly must be voluntary and the volunteer activities must not be the same or similar to the activities the employee is employed to perform.3 Workers whose roles change, such as from volunteer to employee, must be reclassified, effective as of the time of the role change.

    The United States Department of Labor has described volunteers as “individuals who volunteer or donate their services, usually on a part-time basis, for public service, religious, or humanitarian objectives, not as employees and without contemplation of pay.”4 This definition is a bit circular since it excludes “employees” from the category of “volunteers.” The lack of an expectation of compensation and freely given services, however, are general hallmarks of “volunteer” status.

    A worker’s description of himself or herself as a volunteer is not necessarily dispositive because, as stated by the U.S. Supreme Court, “employers might be able to use superior bargaining power to coerce employees to make such assertions.”5 Nevertheless, the expectation by the worker of pay, benefits, or other compensation is an important consideration. In applying the Fair Labor Standards Act, the Supreme Court has stated that the test distinguishing between volunteers and employees “is one of ‘economic reality’.”6 In a case involving a nonprofit religious organization, the Court found that workers were entirely dependent upon the religious organization, and “the fact that the compensation was received primarily in the form of benefits rather than cash in this context [was] immaterial.”7 The Court found that the workers were employees, which resulted in liability for the organization for violations of overtime, minimum wage, and record keeping requirements of the Fair Labor Standards Act.8

    The U.S. Equal Employment Opportunity Commission (EEOC) may consider an individual to be an employee, and subject to protection under the statutes it enforces, “if, as a result of volunteer service, he/she receives benefits such as a pension, group life insurance, workers’ compensation, and access to professional certification, even if the benefits are provided by a third party.”9 Thus, a religious organization’s attempt at recognizing the contribution of volunteers by providing such benefits could backfire, and “convert” a volunteer to an employee in the eyes of the law. Individuals also may be considered employees if the volunteer work is required for regular employment or often leads to regular employment with the same entity.10

     

    Employee Versus Independent Contractor

    A number of organizations use independent contractors in addition to or instead of employees. Independent contractors are not employees of the religious organization. No single test exists for determining whether a worker is an independent contractor or an employee. However, calling a person an independent contractor is not dispositive; if the person subsequently is determined to be an employee, penalties may be assessed against an employer that did not appropriately deduct certain amounts from pay, such as for income tax withholding and employee benefit plan contributions.

     

    1. Right to Control

    The Internal Revenue Service (IRS) uses a right-to-control test in determining a worker’s status as an independent contractor or employee. The crux of the IRS test is 1) whether the employer has a right to direct and control how the worker does the task for which the worker is hired (behavioral control); 2) whether the worker has the ability to affect financial decisions that impact the worker’s pay or profit (i.e., financial control); and 3) whether or not there is a contract between the worker and the organization and how it is worded (the relationship of the parties).11 This test also is used in many states to determine a worker’s status under workers’ compensation statutes.12

    Example: Ted CPA, the accountant for the religious organization, decides whether certain tax forms must be prepared, when they must be prepared, and how they must be completed. When Ted CPA renders accounting services to the religious organization, he submits an invoice to the religious organization. The relationship between the religious organization and Ted CPA is an accountant-client relationship. Ted CPA is an independent contractor, rather than an employee of the religious organization.

     

    2. Economic Realities Test

    Another test, which may be used by itself or with the right-to-control test, is the “economic realities test.” The “economic realities test” considers the worker’s economic dependence on the business. This test is used to determine employees’ status under the Family and Medical Leave Act, the Fair Labor Standards Act, the Worker Adjustment and Retraining Notification Act, and the Equal Pay Act.13 According to the United States Department of Labor, factors that may be considered in determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act are: 1) the extent to which the worker’s services are an integral part of the employer’s business; 2) the permanency of the relationship; 3) the amount of the worker’s investment in facilities and equipment; 4) the nature and degree of control by the organization; 5) the worker’s opportunities for profit and loss; 6) the level of skill required in performing the job; and 7) the amount of initiative, judgment or foresight in open market competition with others required for the success of the claimed independent enterprise.14

    Example: Bookkeeper Fred reports to work daily at the religious organization, and frequently is asked financial questions by the other employees of the religious organization. Fred has worked at the religious organization for five years, and has not purchased his computer, his reference books, his office furniture, or any of his other work supplies, all of which are provided by the organization. Pastor Dave supervises Fred and performs his annual review. Fred’s compensation is determined by the Finance Committee of the religious organization, with no input from Fred. Fred has an associate’s degree in accounting. Fred’s job requires little initiative. Fred is not in open market competition with others for success in his bookkeeping work and has no other clients. Fred is an employee, rather than an independent contractor, due to the combination of all of the above factors.

     

    3. Common Law Test

    The EEOC uses the “common law test” for determining who qualifies as an employee under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, and the Americans with Disabilities Act. The EEOC looks at numerous factors, including factors that are similar to the seven factors above, and other factors, including 1) whether the work is performed on the employer’s premises; 2) how the worker is paid: (by the hour, week, or month, rather than by the job); 3) whether the worker hires and pays assistants; 4) whether the employer provides the worker with benefits, such as insurance, leave, or workers’ compensation; 5) whether the worker is considered an employee of the employer for tax purposes; and 6) whether the employer can discharge the worker.15

    Example: Peter Painter has been hired to paint the interior of the temple. Along with two other painters, he submitted his bid for the painting job. Peter Painter was awarded the job based on his price and the references of other businesses for whom he has performed work. Peter Painter will receive the amount specified in his bid, once the job has been completed. Peter Painter has one assistant, to whom he pays an hourly wage. The religious organization provides no benefits to Peter Painter. The religious organization does not consider Peter Painter to be an employee for tax purposes and will report the payment to him on a Form 1099, rather than on a Form W-2. If the religious organization is dissatisfied with the painting job of Peter Painter, at any time during the job, it can discharge Peter Painter from the painting job, but will be required to act in accordance with the contract it signed with Peter Painter. Nevertheless, even if the religious organization discharges Peter Painter from this painting job, Peter Painter is able to paint elsewhere. Peter Painter is an independent contractor, not an employee, of the religious organization.

     

    Employment at Will

    Before a religious organization employs any employees, rather than only retaining independent contractors, or relying solely on volunteers, various employment laws and doctrines should be considered, although not all of them will be applicable. One such doctrine is the “employment at will doctrine.”

    The traditional relationship between an employer and an employee hired for an indefinite term is called employment at will.16 “[E]mployment at will is an employer-employee relationship in which workers are free to sell their skills and labor to the highest bidder and move freely from job to job and employers are free to hire and fire employees without notice and without cause.”17

    Although the employment at will doctrine exists in one form or another in most states, many exceptions to the doctrine exist that limit the employer’s right to terminate an employee. Described below are a few of the more significant exceptions to the employment at will doctrine. However, it is important to start with the premise that no reason for discharge is needed, and then to examine whether any exceptions are applicable, rather than to assume that an employee’s employment cannot be terminated.

     

    Exceptions to Employment at Will

     

    Exception One: Contract

    Written Contract. The most obvious exception to the employment at will doctrine is a written employment contract, including one arrived at through collective bargaining. If a written contract exists, the rights of both the employer and the employee are determined under the terms of the contract.

    Implied Contract. Like an express written contract, an implied contract is an exception to the employment at will doctrine. A common source of implied contracts is the employee handbook. For example, a religious organization’s employee handbook may state that employees can be terminated “only for just cause after a thorough investigation and an opportunity to improve performance,” and describe steps to be taken before termination. If, due to budget constraints, the organization decides to lay off an employee with good job performance, a court could interpret the handbook as an implied contract entitling the employee to remain on the payroll. Other examples of implied contracts include a “welcome letter” or other document that classifies an employee as “permanent” or “a member of our church family.” “Full-time” is a better choice because it does not imply a long-term contractual employment relationship.

    In some religious denominations, the call of a pastor to ministry may be viewed by the pastor as including an implied contract for lifetime employment at a particular church or religious organization, since it may be believed that the call to ministry is for life. However, the permanency of the call should not translate to a contract for permanent employment.

     

    Exception Two: Public Policy

    Another exception to the employment at will doctrine is discharge contrary to public policy, such as termination for refusing to falsify a record. Some states have a restrictive definition of what constitutes a violation of public policy, limiting it to a violation of a statute or regulation. Employers should check the specifics of state law to determine whether a public policy exception may apply to a particular situation. In addition, the federal Sarbanes-Oxley Act provides certain protections to whistleblowers.18

     

    Exception Three: Arbitrary and Capricious Discharge

    An employee should not be discharged when other employees in similar situations have been disciplined less severely for the same or similar conduct. Otherwise, in some states such a discharge could be found to be arbitrary and capricious, even when a consideration of the conduct of the particular employee, in isolation, appears to be sufficient for discharge. For example, it is appropriate for a church to insist that its employees conduct themselves in accordance with the firmly held religious beliefs of the church. However, if they allow one employee who has violated a specific religious belief to remain, it will be difficult to justify a subsequent firing of another employee for the same behavior.

     

    Exception Four: Discharge in Violation of a Statute

    Discharge in violation of a statute is the most common exception to the employment at will doctrine. This category includes termination constituting unlawful discrimination, such as termination on the basis of age, sex, race, color, national origin, military status, religion,19 or disability. Importantly, some of the statutes that restrict employment at will apply differently to religious organizations than they do to other employers.

     

    Endnotes

    1. Dep’t of Labor, Fair Labor Standards Act Advisor, available at http://www.dol.gov/elaws/esa/flsa/scope/er16.asp (last visited Jan. 8, 2012).

    2. Id.

    3. Dep’t of Labor Op. Ltr. FLSA 2005-33 (Sept. 16, 2005).

    4. Fair Labor Standards Act Advisor, supra note 1.

    5. Tony and Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 302 (1985).

    6. Id. at 301.

    7. Id. The workers received food, shelter, clothing, transportation, and medical benefits from the Tony and Susan Alamo Foundation.

    8. Id. at 306; accord, Coes v. World Wide Revival, M.D. Fla., No. 6:05-cv-563-Orl-DAB, 9/26/07.

    9. Equal Employment Opportunity Comm’n, EEOC Compliance Manual § 2-III A-1.c., available at http://www.eeoc.gov/policy/docs/threshold.html#2-III-A-1-c (last visited Jan. 8, 2012).

    10. Id.

    11. Internal Revenue Service, Fact Sheet 2007-27: Employment Taxes and Classifying Workers (Dec. 2007).

    12. Susan N. Houseman, Flexible Staffing Arrangements § 9.1 (Aug. 1999), available at http://www.dol.gov/oasam/programs/history/herman/reports/futurework/conference/staffing/9.1_contractors.htm.

    13. Houseman, supra note 12, at § 9.1; 29 C.F.R. § 1620.8.

    14. Dep’t of Labor, Fair Labor Standards Act Advisor, available at http://www.dol.gov/elaws/esa/flsa/scope/er14.asp (last visited Jan. 8, 2012).

    15. EEOC Compliance Manual, § 2-III A.1, available at http://www.eeoc.gov/policy/docs/threshold.html#2-III-A-1 (last visited Jan. 8, 2012).

    16. John F. Buckley IV & Ronald M. Green, 2006 State-By-State Guide To Human Resources Law § 5.01 (2006).

    17. Mark R. Filipp & James Ottavio Castagnera, Employment Law Answer Book 2-6 (6th ed. 2006).

    18. BoardSource, The Sarbanes-Oxley Act and Implications for Nonprofit Organizations, available at http://www.boardsource.org/clientfiles/sarbanes-oxley.pdf (last visited Jan. 8, 2012).

    19. See “Exceptions to Title VII” for employers generally and specifically for religious organizations, in Section III.A.4 of the Guide to Representing Religious Organizations, 2009, ed. Lisa A. Runquist et al., published by the American Bar Association Business Law Section.

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    Guide to Representing Religious Organizations

     

    Pages 115–22 from Guide to Representing Religious Organizations, 2009, ed. Lisa A. Runquist et al., published by the American Bar Association Business Law Section. Copyright © 2009 by the American Bar Association. Reprinted with permission. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Click here to order the book.

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