The vast majority of the time, when a church is involved in a lawsuit, it is an employment law case. Yet, churches continue to discount compliance with employment laws to their peril. This article discusses three common ways churches run afoul of employment laws.

1. Ministerial exception

Since 2012, the United States Supreme Court has ruled that federal and state employment laws do not apply to employees involved in spiritual or religious matters for a religious organization. This doctrine is called the ministerial exception. While most churches recognize that employment laws do not apply to clergy, they fail to realize that anyone involved in communicating the church’s message and doctrine may also be exempt from such laws. The ministerial exception covers positions that do not require a ministerial credential, unlike the qualification for a housing allowance. The church’s children’s director, youth director, and many other positions are usually subject to the ministerial exception. For example, childcare workers might be subject to the ministerial exception if the church requires them to be believers and requires them to teach children about Jesus in an age-appropriate manner.

Although there is no rigid formula for determining whether the ministerial exception applies, courts consider various factors, including the nature of the employee’s duties and their importance to the church and its religious functions.

Compliance Steps: The church should review the job descriptions for all its employees involved in ministry. It should correctly identify them as ministerial exception positions. They should not be classified as exempt or nonexempt because the Fair Labor Standards Act does not apply to them. The job description should include specific religious duties rather than generic ones, like living a Godly lifestyle.

The church should revise its employee handbooks to reflect and explain the ministerial exception status.

2. Contract labor versus employee

Since it is administratively more convenient, churches frequently treat workers as contract labor, though they are employees. Some churches treat any short-term worker as contract labor, even when the law does not set a minimum work period for employee status. Frequently, churches classify musicians and childcare workers as contract laborers because they are temporary. The case law clearly establishes that musicians are employees, even if they work for one service a year. The case law also clearly establishes that childcare workers are employees. We have seen churches assessed amounts ranging from $112 to over $650,000 for misclassifying workers as contract labor instead of employees. If a church issues more than a handful of Form 1099s to contract laborers, it is likely misclassifying workers.

Worker misclassification is important for the church because it can lead to unintended consequences. Besides the payroll tax consequences of up to 39% of the amount paid to workers, misclassification of workers can render other employee benefits non-compliant. For example, misclassification may result in substantial penalties under the Affordable Care Act because the church did not include the contract workers in its coverage. One church paid over $400,000 in hospital bills for a contract worker who should have been treated as an employee and included on its group health insurance. The church’s retirement plan may fail because it did not properly enroll its workers. This omission could render the plan non-compliant, making employer contributions taxable to employees, and resulting in substantial penalties. Microsoft paid $97 million in back benefits, penalties, and interest for classifying temporary workers as contract labor instead of employees. One church paid more than $100,000 in back retirement plan contributions, penalties, and interest because it misclassified childcare workers as contract workers.

In February 2026, the Department of Labor adopted a new simplified test to distinguish employees from contract laborers. The first test looks at who controls the details of how the work is being performed. The second test examines whether the worker is actually in business for themselves. Stated as a question, can the worker lose money from this engagement? If the answer to the first test is that the church controls the details of how the work is performed, the worker is an employee. Under the second test, if the worker does not perform similar services for others, the worker is an employee. Failing either test will likely make the worker an employee. If the determination is not clear from these two factors, the examiner may consider the following subfactors. These subfactors are (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer; and (3) whether the work is part of an integrated unit of production. The examiner may also consider additional factors in the analysis, depending on the facts and circumstances.

Compliance Steps: The church should review its vendor list at least annually and, when adding a new vendor, determine whether the vendor qualifies as an employee under the new DOL test. If the church believes an existing vendor should be treated as an employee, it should consider participating in the IRS Misclassification program before making any changes. See https://www.irs.gov/forms-pubs/about-form-8952.

3. Misclassifying Workers for Overtime

Churches often pay workers a flat salary to control costs and require minimal recordkeeping. So they classify them as exempt employees. But most workers are not exempt employees. If the DOL examiner reclassifies them as nonexempt, the church will owe back pay, penalties, and interest. The church will also owe penalties because it lacks detailed timesheets for its nonexempt employees. Under these circumstances, the DOL will accept the employee’s testimony regarding the number of hours they worked. In other words, the employee determines how much the church owes them in back overtime pay. Employees also have a strong incentive to want overtime because they can deduct up to $25,000 in overtime pay from their taxable income. The employees may even report the misclassification to the DOL. The church may owe much more overtime pay than it would have cost to classify them correctly.

To correctly classify employees, the church must first determine who is subject to the ministerial exception. Since exempt or nonexempt classification does not apply to ministerial exception positions, the church can remove these employees from further consideration.

The church must pay the minimum salary required for exempt classifications, or at least $684 per week. Five states have a higher minimum salary requirement for exempt classification, topping out at $1,541.70 per week in Washington State.

The church must pay the employee’s salary regardless of the number of hours worked within a week. If the employee works fewer than 40 hours in the workweek, the church cannot reduce their compensation for that absence, unless an exception applies, such as a disciplinary action.

Assuming the salary requirements are met, the employee must have qualifying job duties and responsibilities. The current DOL uses familiar exempt status names. The workers are classified as exempt if they are (1) an executive (sometimes called the management exemption), (2) an administrative worker, (3) a worker in a recognized profession, or (4) a computer worker. In all cases, these workers should be located at higher levels of the church’s organizational chart and have the ability to make substantive decisions on behalf of the church.

1. The executive exemption requires that the worker meet the following tests:

• Their primary duty must include managing the organization or some distinct department or division of the organization.
• They must direct the work of at least the equivalent of two full-time employees. Please note that volunteer supervision is not included in the test.
• Either they have the authority to hire or fire employees, or their input on a decision carries significant weight.

1. The administrative exemption requires that the worker primarily perform office work or non-manual labor related to the organization’s management. They must exercise discretion and independent judgment concerning matters of significance to the organization.
2. The professional exemption requires that a worker perform work that requires advanced knowledge; the work must be primarily intellectual and require regular exercise of discretion and judgment. Their work must be in a recognized scientific or advanced field of learning.

The vast majority of workers in non-ministerial positions at a church should be nonexempt.

Compliance Steps:    At least annually, the church should review its exempt workers to determine whether they still qualify as exempt. Employees should sign an annual statement confirming they have been correctly classified for overtime and minimum wage purposes or challenging their exempt status.

Final Review

Any of these areas of noncompliance can become costly to the church. If the church lacks expertise, many consultants exist to assist with compliance. The church should retain an employment attorney to assist with employment compliance matters.