How do ministerial exemptions apply to nonprofit employment? Three legally distinct “ministerial exemptions” exist: (1) housing for ministers, whether provided as parsonages or a dollar-amount housing allowance: (2) an employer’s constitutionally grounded right to handle ministerial employment matters free from claims of unlawful discrimination; and (3) wage-related exclusions for ministers based on related considerations for avoiding government involvement in religious maters. Significantly, these ministerial exemptions overlap to some extent but are neither identical nor co-extensive. Additional legal analysis may be warranted for employers’ and ministers’ legal compliance.
The term “minister” is commonly used in statutory references, but it broadly applies to all clergy. Within the ministerial housing allowance context, it includes religious leaders who are ordained, licensed, or commissioned. The term “minister” is likewise used in this article, but it applies more extensively for legal purposes to other clergy members as well as certain other religious workers. The following sections provide an overview of the ministerial exemption’s legal contours, each exemption’s legal framework and distinctives, best practices for applying each type of ministerial exemption, and potential pitfalls to be avoided.
Overview
Ministry work implicates state and federal laws in some surprising and perhaps not so surprising ways. With respect to housing, Section 107(1) of the Internal Revenue Code (“Code”) permits “ministers of the gospel” (i.e., ministers, per above) to exclude “the rental value of a home furnished to him as part of his compensation.” As a counterpart, Section 107(2) of the Code permits ministers to exclude a comparable housing allowance similarly paid “as part of his compensation.” In other words, ministers need not pay income tax on the economic value of their housing, however it is provided by their religious organization (although they do owe Social Security/Medicare taxes). That is quite an economic benefit, and one that has repeatedly withstood constitutional and other challenges.[1] Employees involved in religious activities thus may want this substantial economic benefit, and employers in turn may seek to provide this tax benefit to them.
While all of the exemptions concern employment, the parsonage and housing allowances concern income tax benefits. In contrast, the two other ministerial exemptions focus on employers’ freedom from government interference with employment-related decisions and wage practices. As a prime example regarding employment decisions, the First Amendment allows houses of worship to select, discipline, and fire their ministers based on doctrinal qualifications, adherence to religious beliefs, and violations thereof. Properly applied, this constitutional legal doctrine thus operates to bar claims of discrimination. Correspondingly, houses of worship are not legally required to pay overtime or minimum wage to ministers, based on the wage-related ministerial exemption recognized under the federal Fair Labor Standards Act and its state counterparts.
But what about other employees, like teachers, administrative staff, or ministry support workers? And what about other employers, like schools, daycare organizations, social service agencies, and other nonprofits, who may be involved with religious organizations and religious training? Just because one type of ministerial exemption may apply does not mean that the others apply too.
When and to whom these ministerial exemptions apply is a matter of considerable importance for ministry employers and employees alike. Employers should be mindful of the varying legal standards, potential liability issues, and how to properly classify their employees accordingly - whether all, none, or some of the exemption apply to each ministry worker context. The next sections walk through each of the ministerial exemptions’ scopes, applicability, and resulting practical implications.
Ministerial Housing Allowance (and Parsonage Allowance)
Ministers employed by churches (or organizations classified as such under the Code Section 170(b)(1)(A)(i), may be eligible for certain benefits including the ministerial housing allowance.[2] If an employee is eligible under applicable tax law to be classified as a minister, irrespective of religious or faith tradition, then he or she should be eligible for housing-related clergy benefits such as income tax free use of organization-provided housing (i.e., a parsonage) or an amount of money excluded from gross income for income tax purposes to be used for his or her own housing (rented or owned). Two key requirements apply: (1) the worker must fit within the “Minister of the Gospel” definition, as described below; and (2) the worker must engage in work “under the authority of a religious body constituting a church or church denomination,” per available guidance from the Internal Revenue Service (“IRS”). Such tax classification also means that the clergy worker should be treated as self-employed for purposes of Social Security and Medicare taxes and employed for purposes of state and federal income taxes (the legal compliance and reporting obligations of which are beyond the scope of this article).
“Minister of the Gospel” Qualification
Section 107 of the Code provides for housing-related federal income tax exemptions for “Ministers of the Gospel.” The Code divides the housing-related exemption into two categories. The first category is found in Section 107(1) and excludes from gross income the rental value of a home furnished to a minister as part of their compensation. The second category is found in Code Section 107(2) and excludes from gross income a minister’s “rental allowance paid to him as part of his compensation to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.” While the clergy housing allowance’s constitutionality has been the subject of much debate, it was upheld by the federal Seventh Circuit Court of Appeals in 2019 and has not been significantly challenged since then by any other courts.[3]
The benefit encompassed by such housing allowance is substantial because, subject to the “fair rental value” limitation, it includes an income tax exemption for the following types of expenses: mortgage payments (including principal and interest); improvements to the home; utilities; down payments on the home; furnishings; repairs; real estate taxes; and maintenance.
Who is a “Minister of the Gospel”?
The threshold question in determining whether an employee may claim the housing allowance exemption under Code Section 107 is whether the employee may be classified as a Minister of the Gospel – another term of art, applicable irrespective of religious tradition. Most authorities agree that ministers have certain ministerial functions or characteristics as follows:
1. ordination, licensure, or commission;
2. authority to administer sacraments;
3. conducting religious worship;
4. controlling, governing, or maintaining a church or other religious organization; and
5. recognition as a religious leader by the minister’s church or denomination.
Notably, the law and related cases do not squarely match on what measure of these ministerial functions must be present for an individual to qualify as a Minister of the Gospel, as explained below.
The Narrow View
The IRS and some reviewing courts have adopted a restrictive view of who qualifies as a Minister of the Gospel. This restrictive view has been described by the IRS as follows:
Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination.
If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister…[4]
The above IRS interpretation of “Minister of the Gospel,” includes only those persons who:
1. are ordained, licensed, or commissioned; and
2. may conduct substantially all of the ministerial functions performed by ordained pastors.
The Broad View
Other courts have adopted a broader definition of “Minister of the Gospel.” These courts have also required ordination, licensure, or commissioning. But under the broader scheme, a reviewing court will balance the presence or absence of each of the other ministerial functions listed above. Applying the balancing test, an individual who is involved with most of the ministerial functions and who has the proper credentials, discussed below, will qualify as a Minister of the Gospel for housing allowance purposes.
Credentialing Requirement
Significantly, both the narrow and broad definitions of “Minister of the Gospel” include ordination, licensure, or commissioning as a basic requirement for the classification. Neither the IRS nor reviewing courts to have considered the issue state specific educational or other qualifications for such credentialing to pass muster. However, such authorities have at least implicitly affirmed that ordination, licensure, and commissioning must convey to credentialed individuals the authority to conduct specific ministerial functions in a way, or in some measure, that non-credentialed individuals are not permitted to conduct.[5]
Assessing Qualifications
Based on the above considerations, a qualifying organization’s employees seeking clergy tax benefits must at a minimum be ordained, licensed, or commissioned, and either: (1) be involved with most of the ministerial functions listed above (under the broad view); or (2) conduct substantially all the ministerial functions (under the narrow view). Thus, for purposes of clergy housing benefits, a qualifying organization and its ministry workers should carefully consider whether the workers perform such duties as would support their entitlement to the ministerial housing allowance.
Employment Decisions: Ministerial Exemption as a Bar to Discrimination Claims
This ministerial exemption, sometimes referred to instead as a “ministerial exception” is typically invoked within the context of employment litigation arising from adverse employment action claims. While the word “minister” figures prominently in applicable legal analysis, its meaning and scope may differ significantly from the ministerial housing and parsonage allowance context.
Judicial Recognition of Constitutional Rights
As the Seventh Circuit Court of Appeals recognized in 2021, “[t]he First Amendment ministerial exception protects a religious organization’s employment relationship with its ministers, from hiring to firing and the supervising in between.”[6] The ministerial exception requires courts to “stay out of employment disputes involving those holding certain important positions with churches and other religious institutions.”[7] The ministerial exception is not a creature of statute. Rather, the ministerial exception is a long-standing judicial application of the First Amendment religion clauses. “The Free Exercise Clause rationale for protecting a church’s personnel decisions concerning its ministers is the necessity of allowing the church to choose its representatives using whatever criteria it deems relevant.”[8] “Indeed, the ministerial relationship lies so close to the heart of the church that it would offend the Free Exercise Clause simply to require the church to articulate a religious justification for its personnel decisions.”[9] Similarly, “applying [a] statute to the clergy-church employment relationship creates a constitutionally impermissible entanglement with religion [in violation of the Establishment Clause] if the church’s freedom to choose its ministers is at stake.”[10]
Stated differently, application of the ministerial exception doctrine will preclude certain employees (i.e., “ministers”) from pursuing certain claims against their employers. Courts will defer to such employers concerning their employment decisions, effectively closing the door to wage and employment discrimination claims raised by ministers, because “[r]eligion permeates the ministerial workplace.”[11] So, “[t]he contours of the ministerial relationship are best left to a religious organization, not a court.”[12]
Affirmative Defense for Religious Employers
The ministerial exception thus operates as an affirmative defense for church or ministry employers against discrimination claims brought by current or former employees. The U.S. Supreme Court recognized the ministerial exception in its 2012 Hosanna-Tabor Evangelical Lutheran Church & School v. EEOC[13] decision. There, a parochial schoolteacher sued her employer, claiming that the church/school had violated her rights under the Americans with Disabilities Act. The Court ultimately barred the teacher’s claim, recognizing that the church’s right to select and control its own ministers was a matter “strictly ecclesiastical,” and, thus, protected under the First Amendment.
In reaching this conclusion, the Court looked to several factors to determine whether the ministerial exception applied:
1. the employee’s formal job title, as reflecting ministerial aspects and any associated religious training or credentialing;
2. the substance reflected in such title, consistent with the organization’s religious functions;
3. the employee’s own use of such title (how the person holds himself or herself to others); and
4. the important religious functions the employee performs for the church, such as communicating religious teachings to others.
As one appellate court previously determined, “[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.’”[14] In summary, no one factor is determinative for ministerial status, but the person’s job duties, title, and related training should all have a heavy religious emphasis for the ministerial exemption’s applicability.
Applying the Ministerial Exemption - Examples
As explained above, the applicable legal definition of ministers in the employment context differs from the clergy tax context, although significant overlapping elements are involved. For example, a parochial schoolteacher whose teaching responsibilities include religious aspects may be barred from bringing a unlawful discrimination claim against her employer by the ministerial exception because she is a “minister” in that context, and yet not be eligible for a clergy housing allowance, because she is not ordained, licensed, or commissioned as required under Internal Revenue Code Section 107 and related law. On the other hand, a pastor who preaches each Sunday will be barred from bringing an adverse employment claim as a minister and is at the same time likely eligible for a clergy housing allowance as a minister.
In considering the ministerial exception’s contours in this employment context, the proper focus is on the employee’s duties. For example, the Supreme Court strongly enforced the ministerial exception in Our Lady of Guadalupe School v. Morrissey-Berru[15] and its companion case, St. James School v. Biel. In these cases, the Court held that the focus should be on what the employee does and how close their activities are to the central purpose of the religious institution. Specifically, the Court said, employees of religious organizations whose jobs “lie at the core of the [religious organization’s] mission”[16] are likely “ministers” for purposes of the exception and, therefore, may not sue their employers for adverse employment actions. Under Our Lady of Guadalupe, courts must not judicially scrutinize religious employers’ hiring, disciplinary, or termination decisions that concern any employee whose job it is to carry out religious activities as part of the employer’s religious mission.
Courts have also considered whether “hostile work environment” employment discrimination claims are barred by the ministerial exception. A notable case is the Seventh Circuit’s en banc 2021 decision in Demkovich v. St. Andrew the Apostle Parish, Calumet City, quoted above. In that case, the plaintiff alleged that his church supervisor subjected him to extensive harassment before he was fired for being married to another man. On initial appeal, the Seventh Circuit ruled that the ministerial exception did not apply to hostile work environment claims, distinguishing between “claims challenging tangible employment actions” and “hostile environment claims that do not challenge tangible employment actions.” On rehearing en banc, the Seventh Circuit reversed, concluding that the ministerial exception applies more broadly to bar hostile work environment claims based on constitutional religious freedom grounds:
Religion permeates the ministerial workplace in ways it does not in other workplaces. Ministers, by their religious position and responsibilities, produce their employment environment. From giving a rabbinic sermon on a Jewish holy day to leading a mosque in a call to prayer, ministers imbue a religious organization with spirituality. Given a minister’s role in the religious organization’s practice of the faith, allowing hostile work environment claims here “intrudes upon more than a mere employment decision.” Put differently, analyzing a minister’s hostile work environment claim based on another minister’s conduct is not just a legal question but a religious one, too.[17]
The Seventh Circuit further expressed deep concern for the court’s “civil intrusion and excessive entanglement — that the ministerial exception prevents,”[18] and thereby, recognized that the First Amendment “gives special solicitude to the rights of religious organizations.”[19]
Employment Practices: Ministerial Exemption as a Bar to Wage Claims
The ministerial exemption has been extended beyond discrimination claims, as addressed above, to wage claims too. More specifically, the U.S. Department of Labor has consistently treated ministry workers as categorically excepted from the federal Fair Labor Standards Act, which governs overtime and other wage claims.[20] Parallel state legislation also includes such categorical exclusions. For example, Illinois law closely tracks this definitional exclusion from state minimum wage and overtime requirements, likewise without any salary threshold requirement.[21]
This approach is consistent with appellate court decisions interpreting the ministerial exemption for purposes of wage claims, in specific jurisdictional regions as follows. First, in Schleicher v. Salvation Army, 518 F.3d 472 (2008), the Seventh Circuit Court of Appeals (covering Illinois, Indiana, and Wisconsin) analogized the plaintiffs’ position to that of monks who take a vow of poverty.[22] The court then rejected the plaintiff employees’ wage claims as barred by the ministerial exemption, concluding that “the best way to decide a case such as this [consistent with the evidence], is to adopt a presumption that clerical personnel are not covered by the Fair Labor Standards Act.” Second, in Alcazar v. Corporation of the Catholic Archbishop of Seattle, 627 F.3d 1288 (2010), the Ninth Circuit Court of Appeals (covering California, Alaska, Arizona, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) similarly ruled that a seminarian who was paid $225 for working eight hours a day, seven days a week, was barred by the ministerial exemption from asserting any overtime claim under Washington law.[23] Third, in Shaliehsabou v. Hebrew Home of Greater Washington, Inc., 363 F.3d 299, 307 (4th Cir. 2004) the Fourth Circuit Court of Appeals (covering Virginia, Maryland, North Carolina, and South Carolina), barred an employee’s wage claim under the ministerial exception, based on the employer’s status as a religious institution and the primarily religious nature of the employee’s job as a kosher food supervisor.[24]
Notably, no salary threshold requirement applies within this context. This exemption is distinct from other potentially applicable FLSA exemptions, such as the “white collar” executive, professional, and administrative exemption.
The wage-related ministerial exemption Thus does not sweep all employees of a house of worship or other religious organization into ambit. Yes, a person whose job title is “Pastor” or “Minister” and carries out religious activities—such as leading worship, preaching, or providing spiritual direction—may well qualify for the ministerial exception. Such worker probably qualifies the ministerial housing allowance and parsonage allowance too, per the above legal framework. Such workers would therefore be legally precluded from asserting any discrimination or wage claims against their employers. But other employees engaged in related ministry work such as clerical support, childcare, and facility maintenance may not qualify for this particular exemption.
This legal area is also continuing to evolve, with new court decisions periodically issued and covering specific jurisdictions. A legally conservative approach would be to stay well within the contours of the ministerial exemption. A more legally aggressive position involves some legal risk of liability and therefore should be carefully evaluated before any employer broadly applies the ministerial exemption to all (or many) of its employees.
Getting Practical
Based on these extensive considerations, church and other ministry employers should be mindful of the implications of classifying an employee as a minister for one purpose but not another. The applicable legal paradigms vary; someone who qualifies as a “minister of the gospel” for purposes of the ministerial housing allowance may or may not qualify for other ministerial exemptions, and vice versa. The IRS standard for income tax benefits is different from the employment discrimination and wage contexts. And while all three types of exemption may enjoy constitutional foundations in the First Amendment and its religious freedom rights, the outworkings may look different – as interpreted by courts and government agencies.
It is thus quite possible to have incongruous applications, such as a ministry worker who is barred by the ministerial exemption from asserting an unlawful discrimination claim (e.g., as in Hosanna Tabor and Our Lady of Guadalupe, both involving teachers at religious organizations) yet not qualified for a ministerial housing allowance. Each “ministerial” type of designation thus should be carefully evaluated, documented, and communicated as appropriate.
In practical terms, a ministerial housing allowance must be determined and approved prospectively by an employer in order to be legally valid. Similarly, a ministerial exemption for wage-related purposes should likewise be identified prospectively by an employer, particularly to avoid liability for any potentially owed overtime pay. On the other hand, the applicability of a ministerial exemption for purposes of barring an employment discrimination claim may not be needed unless and until an employer is faced with such a claim. Such evaluation is sometime best warranted when an employer is headed toward employment termination and needs to consider whether (or to what extent) a potential discrimination claim could be legally asserted (as in Demkovich, per above).
Correspondingly, employers should communicate well to employees when a ministerial housing allowance is available and, if so, the dollar amount of such designation as well as related tax implications (and/or the importance of getting accompanying tax guidance from an accountant or other professional). Additionally, employers should clarify and document which jobs are “exempt” from overtime pay obligations, such as when the ministerial exemption applies (or perhaps the white collar or other exemptions, per above). When an employee may be subject to job loss for disciplinary or other reasons (e.g., reduction in force, financial issues), even if the employee has “at will” employment, the employer may need to take a two-fold approach: (a) taking a fair-minded approach toward addressing such matters with the employee, to minimize the employee’s concerns about any unlawful adverse action; while also (b) determining whether the employee would be legally barred from a discrimination claim.[25]
Attentiveness to these income tax, wage compliance, and litigation-related risk management aspects can well equip ministry organizations as they seek to attract and retain ministry workers. A ministerial housing allowance or parsonage can provide an extremely attractive and beneficial employment benefit, when properly structured and prospectively documented. Other ministerial exemption matters should serve to protect and preserve religious liberty interests of employers, as they remain mindful too to care well for all their employees – ministers and otherwise!
[1] For a reflection on the Seventh Circuit’s 2019 landmark Gaylor v. Mnuchin ruling, upholding the clergy housing allowance’s constitutionality, see our law firm’s “Play Between the Joints” article. Gaylor astutely recognized that the fundamental questions in this case fall in a jurisprudentially gray area between the First Amendment’s Free Exercise and Establishment clauses. Between these two foundational pillars of our country’s liberal democracy, the court’s constitutional interpretation rightly respects the independence of institutions for a free society but further implicates the interplay between tax subsidy theory and religion.
[2] Such additional income tax matters include ministers’ “self-employment” tax treatment for purposes of social security and Medicare taxes (aka FICA or SECA) and their corresponding ability to opt out therefrom, which fall beyond the scope of this article.
[3] Gaylor v. Mnuchin, 919 F.3d 420 (7th Cir. 2019); see also Hammer, R., Parsonages and Housing Allowances in Church Law & Tax 199 (2024); and the Church and Clergy Tax Guide’s comprehensive analysis of this highly-anticipated decision, republished by permission.
[4] IRS Publication 517 (2024), Social Security and Other Information for Members of the Clergy and Religious Worker, p. 3.
[5] U.S. Treasury Regulation § 1.107-1(a); IRS Publication 517, supra n. 2; IRS, Ministers Audit Techniques Guide (Apr 2009), available here.
[6] Demkovich v. St. Andrew the Apostle Par., 3 F.4th 968, 985 (7th Cir. 2021) (en banc).
[7] Our Lady of Guadalupe Sch. v. Morrissey-Berru, 51 U.S. 732, 746 (2020).
[8] Bollard v. Cal. Province of the Society of Jesus, 196 F.3d 940, 947 (9th Cir. 1999), overruled in part by Markel v. Union of Orthodox Jewish Congregations of America, 124 F.4th 796, (9th Cir. 2024).
[9] Id. at 946.
[10] Id. at 948-49.
[11] Demkovich, 3 F.4th at 978-79.
[12] Id. at 979.
[13] 565 U.S. 171 (2012).
[14] Rayburn v. Gen. Conference of Seventh-Day Adventists, 772 F.2d 1164, 1169 (4th Cir. 1985)).
[15] 591 U.S. 732 (2020).
[16] Id. at 738.
[17] Id. at 979, n.12.
[18] Id, at 985.
[19] Id. at 977. See also Behrend v. San Francisco Zen Ctr., Inc., 108 F.4th 765 (9th Cir. 2024), in which the appellate accorded wide deference to an employer’s characterization of a worker’s status as “ministerial,” rejecting the employee’s assertion that he performed mostly menial tasks. Relying heavily on Our Lady of Guadalupe, the Court ruled for the employer particularly given “no genuine dispute that “[w]ork itself is an essential component of Zen training and is indistinguishable from other forms of [religious] practice.”
[20] See U.S. Department of Labor, FLSA 2018-29 (Dec 21, 2018) (ministry workers as outside of the “traditional employment paradigm covered by the Act); and See U.S. Department of Labor, FLSA 2021-2 (Jan. 8, 2021) (ministerial exception applied to teachers of church-controlled religious daycare and preschool).
[21] 820 ILCS 105/3(d).
[22] Schleicher v. Salvation Army, 518 F.3d 472 (7th Cir. 2008).
[23] Alcazar v. Corporation of the Catholic Archbishop of Seattle, 627 F.3d 1288 (9th Cir. 2010).
[24] Shaliehsabou v. Hebrew Home of Greater Washington, Inc., 363 F.3d 299, 307 (4th Cir. 2004).
[25] Further considering practical implications, an employee may nevertheless bring such a claim against an employer, with resulting costs and potentially detrimental harm. Consequently, it may be quite important for an employer to carry “EPL” (employment practices liability) insurance coverage, as well as to consider whether and when to provide severance pay in exchange for a full release of employment claims. See our firm’s related blogs on nonprofit severance pay and a judicial cautionary tale about the importance of strong religious protections.
